Tax reform could fuel consumption growth

Hello, I am Ayushi Jindal, producer of CNBC’s TV namesake of this newsletter, writing from Singapore.

This week I look at how India’s proposed Goods and Services Tax overhaul will boost consumption and what young consumers feel about it. Enjoy!

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

The big story

At a time when U.S. trade tariffs on India have been making headlines, Prime Minister Narendra Modi’s tax relief plans have stolen some of the media limelight.

Modi last week announced a major goods and services tax revamp by October — a move seen as a significant step toward boosting consumer spending as global economic pressures pile on. The final blueprint is likely to be discussed at the next GST Council meeting expected in September.

GST, which currently has four slabs — 5%, 12%, 18%, 28% — is expected to be simplified into a two-rate structure — 5% and 18% — according to Reuters.

This push to simplify the tax regime comes as India braces for an additional 25% U.S. tariffs to kick in later this month, taking the total duties on Indian exports to 50%. The simplified code would mean reduced taxes for Indians, likely boosting domestic consumption — and, to some extent, absorbing the hit from Trump tariffs, expert say.

India’s economy is heavily reliant on consumption. Private consumption accounted for 61.4% of India’s nominal GDP in financial year ending March 2025, according to the finance ministry’s monthly report published in June. It was the highest in two decades.

Anubhuti Sahay, head of India economic research at Standard Chartered Bank, estimates the GST reform could boost India’s economy by 0.35 percentage point to 0.45 percentage point in fiscal year ending March 2027.

“This was much needed,” Saurabh Mukherjea, founder of Marcellus Investment Managers, told CNBC’s “Inside India.” “Net-net, I think it’s a $10 billion boost to consumption … but Donald Trump’s tariffs do twice as much damage to India. A sweet spot will be if tariffs are rolled back, and GST reforms are implemented by October-November.”

Even before tariff concerns surfaced, the Indian government had been trying to stimulate demand. In its annual budget presented in February, the country exempted annual incomes up to 1.2 million Indian rupees ($13,800) from tax. And, on the policy front, the Reserve Bank of India has slashed rates by 100 basis points so far this year, reducing borrowing costs. 

The urgency for reforms has only intensified amid possible tariff-related challenges. 

“With many export sectors potentially shut out of the U.S. — India’s largest market — the government has no choice but to accelerate domestic growth,” said Shumita Deveshwar, senior director of India research at TS Lombard.

Mukherjea, however, added that deeper reforms must follow and hopes the government does not stop at just GST.  “Once the government sees proof that this GST cut, the indirect tax stimulus is working, there will hopefully be more [reforms]. India desperately needs a consumption and jobs revival. One won’t happen without the other. The government and central bank must work in tandem.”

The urgency is underscored by high youth unemployment. Government data this week showed a 19% jobless rate among urban youth, up from 18.8% in July.

Prime Minister Modi also announced a 1 trillion rupee youth employment scheme during his Independence Day address on Aug. 15, with the aim of creating 35 million jobs.