Amid escalating US tariffs, India lowers taxes on basic necessities to stimulate consumption

Indian Finance Minister Nirmala Sitharaman announced cuts to the goods and services tax (GST) on Wednesday, marking a significant step towards greater self-reliance in India as called for by Prime Minister Narendra Modi.

The GST panel simplified the structure from four rates to a two-rate structure of 5% and 18%, with the latter applied to hundreds of everyday products including soap, toothpaste, small cars, and televisions. This move is expected to boost consumption in India, whose economy grew at an unexpectedly higher pace of 7.8% in the quarter to June.

The rush to cut the tax was triggered by Modi's vow last month to lower the GST by October to counter the US tariffs of up to 50%. Automakers such as Maruti, Toyota Motor, and Suzuki Motor are expected to be big winners due to the GST rate rationalisation, with the automobile manufacturers Maruti Suzuki, Hyundai Motor India, and Tata Motors expected to become more profitable. Japanese manufacturers like Toyota Motor and Suzuki Motor will benefit from reduced taxes on small hybrid cars from 28% to 18%.

The move is also expected to boost sales of consumer electronics companies such as Samsung Electronics, LG Electronics, and Sony, while fast-moving consumer goods firms such as Hindustan Unilever and Godrej Industries are estimated to benefit as well.

In a positive sign for small traders and businesses, Modi stated that the reforms will improve the lives of citizens and ensure ease of doing business. The consumption boost in India due to the GST rate rationalisation is expected to more than neutralise any possible revenue impact, according to Soumya Kanti Ghosh.

However, taxes on "super luxury" and "sin" goods such as cigarettes, cars with engine capacity exceeding 1,500 cubic centimetres, and carbonated beverages will be increased to 40%. Additionally, the federal and state governments are estimated to lose 480 billion Indian rupees ($5.49 billion) due to the cuts.

The impact on fiscal deficit due to the GST rate cuts is expected to be almost insignificant or even positive, according to Soumya Kanti Ghosh, chief economist at SBI. The GST will be removed from all individual life insurance policies and health insurance, providing relief to consumers in these areas.

Overall, the GST rate rationalisation is a positive step towards promoting self-reliance in India and boosting consumption, with the potential to benefit a wide range of industries and consumers.

Amid escalating US tariffs, India lowers taxes on basic necessities to stimulate consumption