On 21 September, a day before Navratri – the auspicious nine-night Hindu festival – India’s Prime Minister Narendra Modi addressed the nation over the overhaul of the goods and services tax (GST). Dubbed GST 2.0, the reform collapses five tax slabs (0%, 5%, 12%, 18% and 28%) into a simpler regime: 5% and 18% for most goods, with a higher 40% rate reserved for ‘sin’ goods, such as cigarettes, tobacco, aerated drinks and luxury cars. Essential goods are now taxed at 0% or 5%.
The timing, just ahead of festival spending, was deliberate. On the first day of Navratri, car manufacturers Maruti Suzuki and Hyundai Motor India recorded sales of around 30,000 and 11,000 units respectively. Hyundai described it as its highest single-day performance in the past five years. Most firms promptly passed the benefit of lower GST to consumers.
Earlier in the year, the government had also raised the income tax exemption limit; individuals earning up to 1.2 million rupees (US$13,516) are exempt from paying income tax. For salaried taxpayers, the effective threshold is 1.27 million rupees (US$14,304), owing to the standard deduction of 75,000 rupees (US$844).
In Q1 of 2025/26, India’s real GDP was surprisingly impressive
These twin tax cuts reflect a broader strategy: to stoke consumption demand, trigger private investment activity and accelerate economic growth.
Strong headwinds
In Q1 of 2025/26, India’s real GDP (the economy’s output after removing the effects of inflation) was surprisingly impressive, growing by 7.8% compared with 6.5% in Q1 of 2024/25. The unemployment rate, according to India’s Periodic Labour Force Survey, came down to 5.2% in July from 5.6% in June.
Moreover, food inflation has been consistently coming down – from 8.9% in Q1 of 2024/25 to 0.6% in Q1 2025/26. And there are projections of India hitting a US$5 trillion GDP by 2027 (and overtaking Germany by 2028).
Despite these feel-good numbers, challenges persist. Private sector capital expenditure has cooled for the past two years. According to a government survey, released in April, private investment is expected to be 26% lower in 2025/26.
On the fiscal front, the government’s capital expenditure is holding firm
The bigger threat, though, comes from exports. In August, the US slapped a 50% tariff on a broad range of Indian exports. The worst hit are agricultural and processed foods. The US tariffs are also impacting labour-intensive sectors such as handicrafts, leather and textiles that employ financially vulnerable craftsmen and artisans. As a result, India’s manufacturing Purchasing Manager’s Index (PMI) slipped from 59.3 in August to 58.5 in September.
However, V Anantha Nageswaran, India’s chief economic adviser, has argued that the GST cuts can partly absorb this shock, as lower indirect taxation will stimulate domestic demand, thereby offsetting export pressures.
Focus on self-reliance
On the fiscal front, the government’s capital expenditure is holding firm. From April to July, capital outlays rose to 3.47 trillion rupees (US$39bn), up from 2.61 trillion rupees (US$29.3bn) during the same period last year. But the private sector remains cautious amid volatile global conditions, with finance minister Nirmala Sitharaman recently urging industry to ‘shed caution’ and invest boldly.
In his address, Modi dubbed GST cuts as a ‘savings festival’ and called on citizens to prioritise buying goods made in India, reinforcing the push towards self-reliance and emphasising the role of micro, small and medium-sized enterprises (MSMEs).
The 50% US tariff could shave about 0.3 percentage points off India’s growth
However, there are potential tradeoffs. Lower GST could incentivise consumers to migrate from unbranded local producers to branded goods, placing small firms at risk. Price cuts must also be steep enough to stimulate discretionary demand in a society that is traditionally known for its high savings rates.
Then again, Indians’ saving habit is fading away and household indebtedness is on the rise. Reserve Bank of India data suggests that per capita debt for individual borrowers grew from 390,000 rupees (US$4,392) in March 2023 to approximately 480,000 rupees (US$5,406) in March 2025. While India’s apex bank regards this as manageable, increased debt may divert savings (from tax reductions) to pay off loans, rather than indulge in fresh investments.
Festive gift or gamble?
Taken together, the GST and income tax reforms deliver immediate relief to India’s middle class. But whether this will lead to a virtuous cycle of increased demand, investment and production, thereby leading to higher economic growth, is still not clear.
The external environment is fraught. The US tariffs are already delivering disruption. The Asian Development Bank has revised India’s growth forecast downwards to 6.5% (as against the 7% it had projected in April). Meanwhile, Moody’s has suggested that the 50% US tariff could shave about 0.3 percentage points off India’s growth.
The Indian government, on its part, remains optimistic, and Nageswaran sees only transient damage from tariffs.
A few months from now, we’ll know whether the festival-timed tax cut set off a growth rocket for India’s economy turned out to be a damp squib.
