The International Monetary Fund (IMF) has said that India’s Goods and Services Tax (GST) rate cuts will more than offset the adverse effects of higher US tariffs on Indian exports, helping the economy sustain its growth momentum.
In its latest Regional Economic Outlook released this week, the IMF projected India’s economy to expand by 6.6 per cent in FY 2025-26, up from 6.5 per cent in FY 2024-25. The multilateral agency attributed the improvement to strong second-quarter growth and the government’s tax reform measures, which it said would outweigh the negative impact of the recent trade action by the US.
“The forecast has improved since April 2025 as strong Q2 growth and the goods and services tax reform are expected to outweigh the negative effects of higher US tariffs on demand for Indian goods,” the IMF said. Growth, however, is expected to moderate to 6.2 per cent in FY 2026-27, it added.
The United States imposed a 50 per cent tariff on Indian goods on 27 August, a move that raised concerns over India’s export competitiveness. In response, the GST Council in September approved a major rate overhaul, replacing the four-slab structure of 5, 12, 18 and 28 per cent with a simplified two-slab system of 5 and 18 per cent, along with a new 40 per cent rate for sin and luxury goods. The revised rates took effect from September 22 for most products and services, except tobacco-related items.
Chief Economic Advisor V. Anantha Nageswaran recently said that the combined effect of the US tariffs and GST reforms would have only a marginal impact on growth. “If you take the GST into consideration, the impact of tariffs and the compensating effects of GST, rate reductions and process reform could probably give us a 0.2–0.3 per cent on a net basis, in terms of drag on the GDP estimates that we have of 6.3 to 6.8 for the current financial year,” he said.
According to a recent reports, GST rate rationalisation is likely to reduce prices across employment-intensive sectors such as textiles, consumer electronics, automobiles, healthcare and food products. The report added that agriculture-linked industries—including fertilisers, agri-machinery and renewable energy—are also expected to benefit from lower input costs, translating into higher disposable incomes and stronger domestic demand.
“By lifting disposable incomes and boosting consumption, the reforms are expected to offset short-term revenue shortfalls, strengthen demand and support the growth base,” reposts said.
The Finance Ministry has also expressed optimism that the GST rate cuts will help cool retail inflation, measured by the Consumer Price Index (CPI), as domestic demand picks up. The IMF, in its assessment, noted that while inflation remains below target in many Asian emerging markets, India is among the few where demand pressures have kept price levels relatively firm.
At the same time, the IMF cautioned that the full impact of the US tariffs on India and other Asian economies will take time to assess. “Higher US tariffs and increasing protectionism will likely reduce demand for Asian exports and eventually weigh on growth in the near term,” the report said.
Despite these headwinds, the Fund said that the Asia-Pacific region has shown resilience, with most economies posting stronger-than-expected growth in the first half of 2025. It added that continued structural and fiscal reforms will be key to sustaining momentum amid rising trade tensions and domestic challenges.
Source from: https://www.businessworld.in/article/imf-says-gst-reforms-to-cushion-us-tariff-impact-on-india-576787
