Why IMF Says GST Rate Cuts Will Shield India From The Impact Of Rising US Tariffs
The International Monetary Fund (IMF) has expressed confidence that India’s Goods and Services Tax (GST) rate cuts will help balance the adverse impact of higher US tariffs. Backed by strong second-quarter growth and domestic demand, the IMF believes the positive effect of tax reforms will outweigh short-term trade challenges.
India’s economy has shown remarkable resilience amid rising global trade barriers. According to the IMF, India’s proactive fiscal and tax measures have improved consumption trends and supported small and medium enterprises. Although tariff effects will take time to surface, the overall macroeconomic picture remains positive.
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The IMF’s regional economic outlook notes that India’s GDP is projected to grow at 6.6% in FY2025-26, an improvement from 6.5% in FY2024-25. This upward revision is attributed to strong domestic consumption and reform progress under GST. Growth could ease slightly to 6.2% in FY2026-27 as the global slowdown and tariff effects begin to weigh in, but India will continue to outperform most Asian peers.
The IMF identifies three key transmission channels through which GST reforms and tariffs interact:
- Demand Boost — GST rate cuts reduce the cost of goods and services, supporting consumer spending and stimulating retail demand.
- Trade Competitiveness — Higher US tariffs may temporarily weaken India’s export performance, especially in labor-intensive sectors like textiles and engineering goods.
- Inflation Control — Lower indirect taxes help moderate CPI inflation, giving the central bank flexibility to maintain an accommodative stance.
Here’s a summary of the IMF’s key indicators and expectations:
| Indicator | Value / Forecast | Change / Observation |
|---|---|---|
| India GDP Growth FY2025-26 | 6.6% | Revised upward from 6.5% |
| Projected Growth FY2026-27 | 6.2% | Moderation expected due to tariff impact |
| Key Reform | GST Rate Cuts | Supports domestic consumption and reduces inflationary pressure |
| Primary External Risk | US Tariffs | May dampen export growth temporarily |
Sectoral impact varies — consumption-driven industries like FMCG, autos, and retail are likely to benefit most from GST cuts, while export-dependent sectors such as engineering goods and textiles could see margin pressure until tariff clarity improves.
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Lower inflation due to GST cuts could help sustain consumer confidence and encourage further investment activity. Policymakers, however, need to ensure fiscal prudence so that lower tax collections do not compromise capital expenditure plans.
Investor Takeaway
Indian-Share-Tips.com Nifty Expert Gulshan Khera, CFP®, who is also a SEBI Regd Investment Adviser, explains that India’s growth story remains intact despite global uncertainties. The GST cuts will likely boost consumption, offsetting the drag from US tariffs. Investors can focus on domestic-oriented sectors while keeping an eye on export-driven stocks for re-entry once tariff effects stabilize.
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Related Queries On India’s Growth And Trade Outlook
- How will GST cuts influence inflation and retail prices?
- Which sectors face the highest exposure to US tariffs?
- Can India maintain 6.6% growth amid global protectionism?
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
