Indian Prime Minister Narendra Modi has introduced his most significant tax cuts in eight years, which are expected to put pressure on government revenues.
However, the moves have drawn praise from businesses and political commentators, who say they could enhance his standing amid ongoing trade tensions with Washington.
In the largest overhaul of the goods and services tax (GST) system since 2017, Modi’s government announced on Saturday a series of sweeping changes. These reforms, effective from October, will lower prices on everyday essentials and electronics, benefiting consumers and major companies.
In his Independence Day address on Friday, Modi also encouraged Indians to buy more domestically produced goods, reflecting calls from his supporters to boycott US products after President Trump raised tariffs on Indian imports to 50% starting 27th August.
While the tax cuts aim to stimulate growth, they come at a significant cost, since the GST is a major source of government revenue, Reuters reports.
IDFC First Bank estimates that the reforms could lift India’s GDP by 0.6 percentage points over the next 12 months, but at an annual cost of $20 billion to both state and federal budgets.
However, Rasheed Kidwai, a fellow at the New Delhi-based Observer Research Foundation, noted that the move is likely to boost the struggling stock market and deliver political benefits for Modi ahead of a crucial state election in Bihar.
“GST reduction will impact everyone, unlike cuts to income tax, which is paid by only 3%-4% of the population. Modi is doing this as he is under a lot of pressure due to U.S. policies,” Kidwai commented.
“The move will also help the stock market, which is now politically important as it has a lot of retail investors.”
India introduced its nationwide GST in 2017, consolidating local state taxes into a single system to unify the country’s economy for the first time. However, the largest tax reform since India’s independence has faced criticism for its complicated structure, which levies taxes on goods and services across four different rates, 5%, 12%, 18%, and 28%.