Trump’s staggering 50% tariffs have impacted about 70% of India’s goods exports to the U.S., valued at ~$60.85 billion. These exports span labor-intensive sectors—textiles, gems & jewellery, garments, auto parts, shrimp, furniture, etc., with export losses ranging from $5 billion to $40 billion, and a potential reduction of 0.4 to 0.6 % of India’s GDP growth with debilitating hits on seafood, steel, diamonds, vehicles, electronics, carpets, etc. NIPFP warns of up to $14 billion in export losses (0.38% of GDP), while also noting potential spillover effects on services.
Strategic Vulnerabilities
Exporters, especially MSMEs in affected sectors, face immediate pressure from lost orders, thinning margins, surplus inventories, and job risks. The current exemption of some sectors like pharmaceuticals and semiconductors is helpful but inadequate to offset broader damage.
Small Steps, Big Direction-Catalytic GST Reforms
The Indian government has proposed simplifying the GST structure- moving from four tax slabs to just two standard rates (5% and 18%), plus a higher “luxury” tier (~40%) for sin goods like cigarettes to lower tax burdens, make compliance easier, reduce administrative friction, and spur consumption by making essential goods more affordable.
State-Level Concerns
Several states (Tamil Nadu, Kerala, West Bengal, Jharkhand, Karnataka, etc.) are raising alarms over revenue losses, projecting shortfalls ranging from ₹2,000 crore annually (Jharkhand) to upwards of ₹2 lakh crore collectively over five years.
They are seeking compensation mechanisms—either via extended cess or new levies—to offset those losses.
Beneficial GST Reforms-How?
The GST overhaul can serve as a powerful countermeasure, but it must be adroitly managed to maximize impact.
A. Lower GST → Reduced Cost Pressures
By slashing GST rates on essential goods, India effectively reduces production and compliance costs, enabling exporters to adjust pricing and preserve competitiveness amidst higher U.S. tariffs.
These savings may offer space, provided exporters can pass them on. At a minimum, they can mitigate margin erosion.
B. Simplifying Compliance → Faster Response & Flexibility
Fewer tax slabs reduce administrative overhead for businesses, facilitating invoicing, filing, and logistics. In a volatile export scenario, faster operations aid in pivoting strategies quickly, whether switching markets, adjusting inventory, launching new pricing, or diversifying markets and products.
C. Boosting Domestic Consumption
The proposed GST reforms could enhance consumption by Rs 1.98 lakh crore by raising the disposable income of households. A healthier internal market, less reliant on U.S. exports, reduces overall exposure to external shocks, reinforcing economic resilience.
D. Freeing Fiscal Space for Relief Measures
Simplified GST yields lower transaction costs, potentially allowing the government to redirect administrative savings and political goodwill generated by tax cuts towards targeted relief for distressed exporters (e.g., rebates, incentives, credit facilities).
Complementary Strategies: Transcending GST
GST needs to be reinforced by:
A. Trade Diversification & Agreements
Diversifying away from the U.S. is critical. India should accelerate FTAs with the EU, UK, and EFTA, explore deepening relations under CPTPP, and expand trade with Africa, ASEAN, the Middle East, and Brazil to help absorb displaced exports and build alternative revenue streams. The government has identified 40 countries with significant textile and apparel imports, offering vast opportunities for India to enhance its market share.
Export Promotion: The government has extended the import duty exemption on cotton until December 31, 2025, to help the Indian textile industry place long-term cotton import orders.
B. Smart Negotiation & Diplomatic Leverage
Engage the U.S. in targeted negotiations for relief or exemptions, especially since sectors like apparel, jewellery, and shrimp face a disproportionate hit.
Consider strategic concessions, e.g., energy or defence cooperation, or leveraging India’s broader diplomatic clout to relieve trade pressure.
C. Export Incentives and Supply-Side Strengthening
Offer temporary GST waivers, interest-free loans, freight subsidies, and capital support to vulnerable sectors.
Strengthen “Make in India” initiatives, scale PLI-linked manufacturing, boost infrastructure (ports, logistics), and reduce export turnaround time (TAT).
D. Electronics & High-Value Exports
With electronics manufacturing expanding (via Apple/Samsung, PLI schemes), exports could be boosted if input costs fall (e.g., import duties on U.S. components reduced).
Targeting high-margin, less tariff-vulnerable sectors like pharma, semiconductors, and electronics enhances resilience.
Potential Risks and Mitigation
A. State Revenue Crisis
States reliant on GST may face significant fiscal stress, potentially impacting their ability to invest in social programs, infrastructure, or provide supplementary export support.
Mitigation: Use compensation mechanisms, like loans/cesses or phased revenue sharing, especially for fiscally weaker states to smooth the transition to agreed reform settlement dates (e.g., beyond October).
B. Short-Term Lags vs. Long-Term Gains
GST trimming boosts consumption and profitability but has a lagged effect. Tariff shocks are immediate, and short-term gaps persist.
Mitigation: Combine GST reform with temporary direct fiscal relief to exporters and MSMEs, closing the gap while market realignments take shape.
C. Limited Scope of GST
GST cuts help domestically, but without trade diversification and more competitive positioning, exporters remain exposed.
Mitigation: Ensure cohesive policy integration across trade, macroeconomics, infrastructure, and industrial strategy.
D. Economic Growth: The GST reforms are expected to stimulate economic growth by boosting consumption and investment.
Concluding Observations
India is confronting a potent external shock: 50% U.S. tariffs targeting major, labor-intensive export sectors. A sharper focus on simplifying slabs and lowering GST rates attempts to counterbalance the tariff pressure. By reducing cost burdens, streamlining compliance, boosting internal demand, and unlocking administrative savings, GST restructuring offers critical relief and structural support to the economy.
Yet, given the magnitude of the challenge, GST must be complemented by targeted relief schemes, aggressive export diversification through FTAs and new markets, negotiations for tariff relief, strengthening supply chains and manufacturing competitiveness (especially in electronics and high-value sectors), and financial measures to alleviate state fiscal instability.
With these synergistic measures integrating domestic tax relief with international trade strategy and industrial policy, India can reshape its economic trajectory toward greater self-reliance, resilience, and global competitiveness.
ABOUT THE AUTHOR
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
