In 2025, the United States imposed tariffs of up to 50% on Indian exports, targeting sectors like textiles, gems, jewelry, and auto components, which account for approximately 55% of India’s $87 billion US-bound exports. This policy, driven by geopolitical tensions over India’s oil trade with Russia, threatens a GDP reduction of 0.3% to 0.8%, equivalent to $23 billion, and risks job losses in labor-intensive industries. To counter this external shock, India has introduced strategic Goods and Services Tax (GST) reductions, aiming to bolster domestic market resilience. This blog post examines the effects of these GST cuts on consumer spending and business operations in tariff.

System: hit sectors, using econometric models and sales data analysis to highlight potential GDP contributions and inflation trends.

GST Reductions: A Strategic Response

India’s GST Council, in its 2025 meetings, proposed rationalizing the four-tier GST structure (5%, 12%, 18%, 28%) into a streamlined two-slab system: 5% for essential goods and 18% for standard items, with a 40% rate for luxury goods. This reform, expected to be implemented by Diwali 2025, reduces the tax burden on 99% of items in the 12% slab and 90% of those in the 28% slab, including consumer durables like air conditioners and refrigerators. The goal is to stimulate domestic consumption and offset export revenue losses from US tariffs, which affect sectors contributing 2.5% to India’s GDP.

Quantitative Impact on Consumer Spending

Econometric models, such as those based on consumer expenditure surveys from the National Sample Survey Office (NSSO), suggest that GST reductions significantly enhance purchasing power. For instance, lowering GST on consumer durables from 28% to 18% could increase demand by 8-12% in urban markets, where India’s 150 million-strong consuming class resides. Sales data from the Retailers Association of India indicates a 5% uptick in consumer electronics sales following similar tax cuts in 2019, a trend likely to repeat in 2025. This boost in spending is projected to contribute 0.2-0.4% to GDP growth, partially offsetting the tariff-induced export decline. However, the festive season starting in September 2025 will be critical to maximizing this impact, as consumer spending peaks during this period.

Business Operations in Tariff-Hit Sectors

For businesses in tariff-affected sectors like textiles and auto components, GST reductions alleviate operational costs. The correction of inverted duty structures, where input taxes exceed output taxes, frees up working capital, enabling small and medium enterprises (SMEs) to maintain production levels despite reduced US demand. Data from the Confederation of Indian Industry (CII) shows that a 10% GST cut on raw materials could reduce production costs by 3-5%, enhancing competitiveness against lower-tariff countries like Vietnam. Additionally, digital compliance tools, such as e-invoicing, introduced alongside GST reforms, reduce administrative burdens, saving exporters an estimated $2 billion annually. These measures support SMEs, which dominate textiles and leather, in pivoting to domestic markets or alternative export destinations like the EU.

Case Studies: Real-World Applications

To illustrate the practical effects of GST reductions in the context of 2025 tariffs, we examine two case studies from key sectors, drawing on historical data and recent analyses for quantitative insights.

Case Study 1: The Textile Sector – Raymond Ltd.

The Indian textile industry, employing over 45 million people and contributing 2% to GDP, faces severe challenges from US tariffs, with potential job losses of up to 150,000 in garments and fabrics alone. A case study of Raymond Ltd., a leading textile manufacturer, highlights how GST rate cuts can build resilience. Pre-GST (before 2017), the company faced a complex tax regime with cascading effects, leading to higher costs. Post-GST implementation and subsequent rate reductions (e.g., from 18% to 12% on certain fabrics in 2018), Raymond’s financial performance improved significantly.

System: shows net sales grew by 15% annually, with input tax credits reducing effective tax burdens by 4-6%. In the 2025 context, similar cuts to 5-18% slabs are projected to lower production costs by 5%, enabling a 10% increase in domestic sales as per econometric models using NSSO data. This pivot helped Raymond offset a 20% drop in US exports due to tariffs, with rural textile segments showing a 7% demand uptick amid lower prices. Overall, these reforms could contribute 0.1% to GDP from the sector while curbing inflation by 0.3% through cheaper fabrics.

Case Study 2: The Automobile Components Sector – TVS Motors

The auto components sector, valued at $70 billion and exporting $15 billion annually, risks a 25% export decline to the US under 2025 tariffs, endangering 100,000 jobs. TVS Motors, a major player in two-wheelers and components, serves as a compelling case study. A 2019 study on GST’s impact showed that rate unification reduced vehicle prices by 3-5%, boosting sales by 8% in the first year post-reform. With 2025 GST cuts lowering rates on components from 28% to 18%, production costs dropped by 4%, as per CII data analysis. This enabled TVS to enhance domestic market share, with sales data indicating a 12% rise in two-wheeler demand amid tariff pressures. Econometric modeling predicts a 0.15% GDP contribution from increased consumer spending on affordable vehicles, while inflation in transportation costs stabilizes at 2%. However, challenges like supply chain disruptions persist, underscoring the need for complementary policies.

Inflation Trends and Economic Implications

GST reductions are expected to lower the Consumer Price Index (CPI) by 0.5-1%, as cheaper goods curb imported inflation from a weakening rupee, which has faced pressure due to tariffs. Jefferies’ analysis predicts that lower GST on cement and two-wheelers could reduce construction and transportation costs, further stabilizing prices. However, fiscal constraints pose risks, as GST cuts may reduce government revenue by ₹200-250 billion. To balance this, India is leveraging $20 billion in GST compensation savings, ensuring fiscal space for these reforms.

Conclusion

India’s GST reductions are a data-backed countermeasure to US tariffs, enhancing domestic consumption and business resilience. Econometric models and sales data suggest a modest GDP boost and controlled inflation, though implementation delays and global trade dynamics require vigilant monitoring. By prioritizing domestic demand, India is strategically navigating a protectionist global landscape.