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.

Like almost everyone, I too spend a substantial amount of time on social media.

I recently saw a quick-commerce delivery driver post a “fit check” video showcasing his grooming routine — face wash, moisturizer, hand cream, lip gloss — proof that spending on something like self-care is cutting across income lines.

India’s 600 million people between the ages of 18 to 35 are shaping consumption trends and Gen-Z consumers appear excited by the planned GST overhaul. Vandit Garg, a Bengaluru-based banker, told me: “I will spend on travel and tech upgrades now that taxes will be lower.” His colleagues, he added, were already planning to switch from motorbikes to compact cars.

According to Deveshwar, consumer discretionary sectors — particularly those currently under the 28% bracket — stand to gain the most. “Yes, there’s a short-term fiscal cost, but the long-term benefits in demand revival are substantial.

Inflation has also been cooling off in India, easing to an eight-year low in July, largely due to falling food and vegetable prices. Savings on essential items could spur discretionary spending, with their possible inclusion in the 5% GST slab being an additional boost — currently, several items of daily use such as toiletries, packaged food and some drugs fall in the higher tax brackets.

While lower grocery bills are helpful, several people I spoke to hope the tax relief extends to more essential services.

“No doubt it’s good if groceries get cheaper, but for me, that’s not enough,” said Ashutosh Agarwal, a software engineer in Noida. “If GST on medical and education expenses is cut, I’d consider upgrading my health insurance or investing more.”

Currently, health insurance premiums attract 18% GST in India. A panel of state ministers that met on Wednesday to discuss reforms has proposed exempting tax on health and life insurance premiums, according to domestic media reports.

Back in 2017, I was in a newsroom on a late-night shift waiting for the GST bill to be cleared in India’s parliament. It was touted as a move toward “One Nation, One Tax” that was set to simplify a variety of state and federal taxes. But what followed were multiple, rather confusing, GST tax slabs. Contrast that to Singapore where I am based out of – a flat 9% tax across all goods and services.

Mohit, a toy store owner from Shamli, a small town in the northern state of Uttar Pradesh has struggled with the variety of GST tax rates rates: “A soft toy is taxed at 5%, plastic items at 12% anything fitted with batteries at 24%. I spend 10 days a month just doing GST paperwork.” His struggle is emblematic of the problem that the existing tax system poses for ordinary businesses.

“As GST 2.0 will likely be focused on reducing procedural hassles and correcting inverted duty structures, if implemented, it could improve the ease of doing business,” Sahay of Standard Chartered Bank said in a report.

If the proposed GST are passed, implementation could begin as early as October 2025 — just ahead of India’s festive shopping season.

But politics may complicate the timeline. HSBC’s Pranjul Bhandari estimates the overhaul could cost the exchequer $16 billion, or 0.4%, of India’s GDP. “This could be equally split between the central and state governments. The centre has other revenue sources to count on, but states do not have as many options. They may not agree to the revenue hit,” Bhandari wrote in a report.

Modi promised in his speech earlier this month that newer GST regime will be in place in right when India celebrates Diwali, its festival of lights — it remains to be seen if the reforms will go through and indeed light up consumers and businesses.

Top TV picks on CNBC

James Thom of Aberdeen said he remains bullish on India’s structural outlook, noting the tax reform could revive weakening consumption and cushion the impact of high U.S. tariffs.

Ashutosh Tiwari, managing director and head of institutional equities at Equirus Securities, said he thinks rural demand will be the big market play over the next 6-12 months amid India’s GST overhaul.

IKEA India CEO Patrick Antoni said the company adapts some products for Indian homes, focuses on affordability and is looking to source more materials locally. IKEA also sees large long-term potential in India’s young, fast-growing market.

Need to know

U.S. President Donald Trump’s peculiar geopolitical strategy. India is a close ally of Washington — yet it is facing 50% tariffs and accusations of profiteering from cheap Russian oil. What’s behind Trump’s playbook?

A U.S. delegation to India was reportedly called off. The visit by U.S. trade representatives was expected to happen between Aug. 25 and Aug. 29, but will likely be rescheduled, according to local broadcaster NDTV Profit.

Apple has reportedly increased iPhone production in India. Even as the South Asian nation faces pressure from the White House over its purchase of Russian oil, Apple is ramping up manufacturing at five of its Indian factories, Bloomberg reported Tuesday.

OpenAI launched its most affordable plan in India. The subscription, launched Tuesday, costs just 399 rupees ($4.57) a month, signaling the artificial intelligence company’s push to grow in its second-largest market in terms of users.

– Yeo Boon Ping

In the markets

Indian markets rose Thursday, with the benchmark Nifty 50 up 0.22% while the BSE Sensex index had added 0.35% as of 11:55 a.m. Indian Standard time (2:25 a.m. ET). The Nifty 50 has gained 6.27% since the start of the year, while the BSE Sensex is up 5.14%.

The benchmark 10-year Indian government bond yield was slightly up at 6.517%.

– Amala Balakrishner

Coming up

Aug. 26: Essential oil manufacturer Gem Aromatics and supermarket chain Patel Retail launch IPO

Aug. 28: Industrial and manufacturing production for July, transformer component manufacturer Mangal Electrical Industries launches IPO

Each weekday, CNBC’s “Inside India” news show gives you news and market commentary on the emerging powerhouse businesses, and the people behind its rise. Livestream the show on YouTube and catch highlights here. 

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