India’s goods and services tax (GST) council meeting on 3rd September unveiled what was billed as the most radical simplification of the levy since its introduction in 2017. From 22nd September, the country will move to two broad slabs—5% and 18%—with essentials such as foodgrains and fresh produce exempted and hundreds of other goods shuffled into lower brackets. The changes followed Narendra Modi’s Independence Day promise of reform. Will these benefit the Indian consumer and the economy?
Lower indirect taxes, in theory, should spur demand. And since private final consumption expenditure (PFCE) contributes 60% to the gross domestic product (GDP) growth, a boost to consumption would push GDP higher.
In practice, the cuts will touch only about 11% of consumption—mainly processed food and consumer durables shifting from 12% or 28% into lighter buckets. The boost to spending, reckons one estimate, will be 0.2%–0.3% of GDP, showing up in the latter half of FY25-26. That is more of a statistical rounding-off than a growth engine.
One of the best ways to judge the impact of any policy is to check the impact on the stock prices of companies supposedly benefiting. The market had two full days to judge the impact of GST cuts and here is the verdict. The main market index, the NIFTY, barely moved from 24,715 on Wednesday to 24,741 at Friday’s close. Nestlé’s stock price was flat while that of Hindustan Lever fell; consumer-durable firms from Voltas to Whirlpool got no lift.
In fact, all these stocks and the overall market, opened high on Thursday on the GST announcement and gave up all their gains. Only car-makers, notably Maruti and Hyundai, clung to gains chalked up since Mr Modi’s 15th August speech. In my previous piece, I had suggested that GST 2.0 is an improvised fix and will not help much. Turns out that investors think so too. The up move on Monday owed to a perceived thaw in India-US relations as the leaders seem to be reconciling via social media.
Let’s step back and assess what the GST rate cut was for. There were two objectives: First, to pep up growth amid grumbling and sarcasm on social media about 'tax terrorism' (GST, tolls, cess and other taxes). Second, to counter-balance Donald Trump’s 50% tariff wall, imposed on 27th August, which threatens US$50bn (billion) of Indian exports to America.
The idea was to lean on domestic demand—India’s supposed shield—just as exports falter. It was not just economic; boosting domestic consumption was part of India’s Aatmanirbhar policy, coloured in nationalistic hues, meant to score political points.
But GST 2.0 will manage neither. The dent to India’s exports has to be met with targeted responses to affected industries, which could be temporary, and not by a mild, overall consumption increase. Also, raising consumption beyond its already hefty 60% of GDP is hard without far steeper tax cuts which the state cannot afford. After all, the main economic strategy of this government has been to tax heavily and spend it on infrastructure, railways, defence and social schemes. Also, much of the consumption leaks abroad through imports from China.
The Longer, Harder, Obvious Option
The answer to the virtuous cycle of higher GDP growth, higher wages and higher consumption is not a cut here and tweak there. It is decades of export boom. This obvious solution propelled Japan, Taiwan, South Korea and Singapore to prosperity between the 1950s and 1980s, turning poor farmers into rich consumers, followed by Thailand and Malaysia. China adopted it in the 1990s and turbocharged it; today, 30% of global manufacturing capacity, largely export-driven, is in China.
It is surprising that, despite a large pool of educated and English-speaking people and the eye-popping success of one country after another—all next door—India never made exports its top national mission; not even under Mr Modi, economically the most activist leader in decades.
When Trump tariffs started to roil the world, East Asian tigers and China seemed particularly vulnerable, given their export-oriented economies. India appeared safer. The irony is that East Asia quickly signed deals to protect their markets. India, by contrast, now faces a 50% duty with little leverage.
Some experts think that India should not try to emulate East Asian countries because that ship has sailed. This is nonsense. The model endures because prosperity itself reshapes competitiveness. When countries prosper, wages rise and labour-intensive businesses become uncompetitive. These businesses are then picked up by other lower-wage countries for exports. Japan ceded textiles to Korea, then to China, which now passes them to Bangladesh and Vietnam. Each rung up the ladder frees space below.
In fact, India can be competitive at both ends of the spectrum. At one end, it can be a bigger exporter of lower-value items like textiles, steel, footwear and plastics. At the other end, India can be a major exporter of chemicals and an even bigger powerhouse in pharmaceuticals.
All the ingredients are in place. It needs a series of dedicated, focused and goal-oriented steps—exactly what was behind the rise of Taiwan, South Korea and China. In 10 years, India can be an export powerhouse.
At the Shanghai Cooperation Organisation summit last week, Mr Modi posed beside Xi Jinping, striking a note of defiance towards America. Many Indians were proud. But defiance is not power. China’s clout rests on decades of relentless investment in technology, production at scale and exports.
India will win respect abroad not through posturing and slogans, but through large factories humming at home, producing quality products for world markets.
(This article first appeared in Business Standard newspaper)
very well written. compared to past times, when india faced sanctions and was not affected, today much of the consumption is leaking to china, is a very eye opening observation. so what can be done?
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
