Economists See GST Cuts Cushioning Trump Tariff Impact, May Lift GDP by 0.5%

Economists believe that the proposed reduction in Goods and Services Tax (GST) rates could help soften the blow of fresh U.S. tariffs on Indian exports and spur domestic consumption, potentially lifting growth by up to half a percentage point this financial year.

The GST Council is set to discuss the two-rate structure in its meeting in early September. If approved, the revision could move nearly 90% of goods currently taxed at 12% and 28% into the lower 5% and 18% slabs. Officials have indicated that any cuts would likely come into force by the fourth week of September.

Growth Outlook with GST Relief

Several economists told Moneycontrol that the rate cuts, if passed through effectively, may boost India’s GDP growth by 30–50 basis points in FY26. This could lift overall expansion to around 6.5% or slightly above, despite the drag from Trump’s import tariffs, effective August  27, which have hit India’s export prospects.

The first quarter GDP data for FY26 will be watched closely for signs of a slowdown. A poll of 15 economists by Moneycontrol suggested growth could moderate to 6.6%, down from 7.4% in the previous quarter.

“Lowering GST rates on essential items and consumer durables will ease prices and stimulate demand, which is vital when external demand is under pressure,” said Arun Singh, global chief economist at Dun & Bradstreet. He added, however, that the relief will not fully offset the tariff impact.

Consumption at the Core

Private final consumption expenditure (PFCE) — which accounts for more than half of India’s GDP — is expected to play a central role. India Ratings and Research (Ind-Ra) projects PFCE growth at 6.9% in FY26, about 40 basis points higher than overall GDP growth. “GST cuts would be a key factor supporting this pace,” said Paras Jasrai, Senior Economic Analyst at Ind-Ra.

Acuite Ratings estimates PFCE growth could rise to as much as 7.4% if GST reductions are implemented from September. Without them, consumption may hover around 6.8–7%.

Gaura Sen Gupta, chief economist at IDFC FIRST Bank, noted that tariffs could reduce growth by 40 basis points if maintained until March 2026. “Timely rate cuts could add around 30 basis points back, partially cushioning the impact,” she said.

Speed of Transmission Matters

Experts caution that the pace at which companies pass on lower tax rates to customers will determine the actual boost to consumption. Larger firms with streamlined systems are expected to adjust quickly, while smaller businesses with longer inventory cycles and complex supply chains may take longer.

“Compliance work such as relabelling products, updating packaging and recalibrating systems will also influence how fast the benefits reach consumers,” said Pratik Jain, Partner at Price Waterhouse & Co.

High-value product makers like automobile and tractor manufacturers may be forced to cut prices immediately, even at the cost of thinner margins, to avoid unsold inventories, said Bipin Sapra, Partner at EY India. By contrast, fast-moving consumer goods (FMCG) firms may take up to a month to reflect the lower rates in retail prices.

Government sources also indicated that the GST anti-profiteering framework could be reintroduced in a limited form to ensure the timely transmission of tax relief.

Conclusion

While GST cuts alone may not fully counter the drag from U.S. tariffs, economists broadly agree that the move could revive consumer spending, strengthen domestic demand, and keep India’s growth momentum intact at a time of global headwinds.