Tariff hit on GDP growth at 0.2-0.3% in FY26; GST reforms to negate impact: CEA

New Delhi: The goods and services tax (GST) reforms will help offset some of the adverse impacts of steep tariffs of 50 per cent imposed by the US on Indian shipment and the net impact of this on the GDP growth would be 0.2-0.3 per cent in the current financial year, Chief Economic Adviser V Anantha Nageswaran said on Wednesday.

On the positive side, he said, the GST reforms will play a very good offsetting role by substituting domestic demand for whatever export demand that may not materialise from the United States.

The GST Council last week decided to overhaul the tax regime by tweaking the four-slab GST structure of 5 per cent, 12 per cent, 18 per cent, and 28 per cent to a two-slab structure of 5 per cent and 18 per cent. The council also introduced a new GST rate of 40 per cent, to be imposed on sin and luxury goods.

Nearly 400 products -- from soaps to cars, shampoos to tractors and air conditioners -- will cost less when the rejig of the GST is effective from the first day of Navaratri on September 22.

GST reforms will help alleviate the second and third round effects by creating domestic demand and therefore removing the uncertainty that will come in the way of capital formation, he said while addressing an event organised by AIMA.

"Although you must remember that for the first five months of the current financial year, exports of goods to the US have almost already achieved half the number of last year. So in other words, in this financial year, the impact may be relatively limited, depending on the assumptions one makes, but the more important thing is the second and the third round effects of the uncertainty of tariff, provided they last longer," he said.

He exuded confidence that the tariff situation will turn out to be transient and short-lived, rather than long lived.

"But in the event that it lasts longer than we want it to, especially the penal tariff of 25 per cent, then the second and third round effects will become more pronounced, which is the uncertainty with respect to investments, capital formation, overall sentiment in the economy," he said.

However, Nageswaran said GST reform would not only boost domestic consumption but more importantly it provides an antidote to the second and third rounds of tariff impact.

"So net-net, I think 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.

The steep tariffs of 50 per cent -- among the highest in the world -- include a 25 per cent penalty for buying crude oil from Russia. The penalty of 25 per cent kicked in from August 27.

On August 7, the Trump administration enforced a 25 per cent tariff on Indian goods, citing India's persistent oil imports from Russia and long-standing trade barriers.

The sectors impacted due to high import duties include labour-intensive segments such as textiles/clothing, gems and jewellery, shrimp, leather and footwear, animal products, chemicals, and electrical and mechanical machinery.

Sectors such as pharma, energy products and electronic goods are out of the ambit of these sweeping duties.

The US accounted for about 20 per cent of India's USD 437.42 billion worth of goods exports in 2024-25.

The US has been the largest trading partner of India since 2021-22. In 2024-25, the bilateral trade in goods stood at USD 131.8 billion (USD 86.5 billion exports and USD 45.3 billion imports).

On structural reforms in the domestic economy, Nageswaran said while many initiatives have been started by the Centre to boost the agriculture sector, these initiatives are state-level subjects that should be supplemented by them.

He emphasised that the agriculture sector still has room to contribute at least 0.5-0.7 per cent more to India's GDP growth and that is a function of giving farmers the right to sell to whosoever, whatsoever, wherever, and whenever.

"That is the kind of freedom that farmers need much more than agriculture subsidies," he said.

Farmers also need some element of insurance, given their business is inherently prone to ravages of nature and uncertainties, he suggested.

"Empowering farmers and not imposing restrictions in their ability to tap market signals from within India or overseas, these would unleash productivity in agriculture and add to GDP growth," he added.

Asked if India is part of any initiative on finding an alternate currency to dollar for global trade, Nageswaran said there is no attempt in this regard.

"No, certainly not. India is not part of any such initiative," he emphasised.

Although last year, at the BRICS Summit, India and other BRICS nations had contemplated settlement of cross-border payments in local currency and had agreed for creation of a special BRICS currency.

"We recognise the widespread benefits of faster, low cost, more efficient, transparent, safe and inclusive cross-border payment instruments built upon the principle of minimising trade barriers and non-discriminatory access.

"We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners," the declaration of the 16th BRICS Summit held in October 2024 had said.

BRICS is a grouping of emerging economies comprising Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates.

It aims to promote unified emerging economy perspectives in multilateral forums.