Revitalizing India's Economy: GST Reforms, Domestic Market Focus, and Job Creation

India is implementing GST reforms, consolidating tax slabs to 5% and 18%, to boost consumption and ease compliance. Labour-intensive sectors like textiles and leather may benefit from lower rates. The Pradhan Mantri Viksit Bharat Rozgar Yojana aims to create 3.5 crore jobs with ₹1 lakh crore in funding. Amid U.S. tariff hikes, India is focusing on its domestic market, providing credit support to businesses and promoting competitiveness. These efforts aim to strengthen resilience and drive sustainable economic growth.

In a concerted effort to bolster India’s economy amidst global trade challenges, the government is taking significant steps to encourage domestic consumption, streamline tax structures, and support employment generation. These initiatives aim to mitigate the impacts of external uncertainties, such as tariff hikes, while strengthening the country’s economic resilience.

Simplifying GST for Economic Growth

Prime Minister Narendra Modi, during his Independence Day address, announced plans for goods and services tax (GST) rationalization by Diwali. This reform promises to reduce the cost of everyday items, thereby stimulating consumption. The government is reportedly working toward simplifying the tax structure by consolidating GST slabs into just two rates—5% and 18%. This move is expected to enhance compliance, expand the tax base, and improve ease of doing business.

According to government sources, proposals have been made to shift most items currently taxed at 28% (except "sin goods") to the 18% slab. Similarly, nearly all goods in the 12% slab may be moved to the 5% category. Labour-intensive industries, such as leather and textiles, are likely to benefit significantly, with potential reductions in GST rates to promote growth in these sectors. Items like textiles, fertilizers, medical devices, and auto parts stand to gain from these changes.

Boosting Domestic Consumption and Employment

Complementing the GST reforms, Modi unveiled the Pradhan Mantri Viksit Bharat Rozgar Yojana, a flagship initiative aimed at creating over 3.5 crore jobs within two years. With an allocation of ₹1 lakh crore, the scheme offers incentives to both employers and newly employed youth, including subsidies of up to ₹15,000 for workers and ₹3,000 per month for employers for each new hire.

India’s projected GDP growth of 6.5% for the current financial year, supported by robust government capital expenditure, reflects optimism. Analysts believe the GST rationalization, coupled with job creation initiatives, could further fuel domestic demand.

Challenges in International Trade and the Push for Diversification

India faces mounting challenges on the trade front, particularly from the United States' tariff hikes. President Trump recently raised tariffs on Indian goods to 50%, with a 25% levy already in effect. This has made Indian exports, particularly in sectors like pharmaceuticals and electronics, less competitive in the U.S. market. While certain products, such as semiconductors and smartphones, remain exempt, over half of India’s merchandise exports to the U.S. are subject to these higher duties.

Ajay Sahai, director general of the Federation of Indian Export Organisations, highlighted the limitations of diversifying into alternative export markets in the short term, given India’s price disadvantage in global markets. However, he emphasized the strength of the domestic market as a viable alternative, citing examples like ceramics and textiles that have successfully absorbed global trade shocks.

Strategies for Empowering Domestic Producers

To support domestic producers and boost consumption, experts advocate measures to reduce costs and improve competitiveness. Ajay Srivastava, founder of the Global Trade Research Initiative, stressed the importance of focusing on product quality and reducing production costs. “A high-quality product doesn’t need a trade agreement to sell; it finds its market naturally,” he noted.

Tax experts have also suggested exempting units in special economic zones (SEZs) from basic customs duty for supplies to the domestic tariff area. This would align them with imports made under free trade agreements, lowering costs and enabling exporters to tap into local demand effectively.

Building a Resilient Domestic Market

The government is actively engaging with stakeholders to facilitate the transition toward a stronger domestic market. This includes providing credit support and financial incentives to businesses. As part of this strategy, the Reserve Bank of India may increase the limit of collateral-free loans for micro and small enterprises to ₹20 lakh under the Credit Guarantee Scheme, doubling the current threshold.

Although the U.S. tariffs pose a significant challenge, the government’s focus on domestic consumption and structural reforms offers a pathway to economic stability. By leveraging the vibrancy of the local market, India can cushion the impact of global trade uncertainties and drive sustainable growth.