MC EXCLUSIVE Boost domestic consumption, urge exporters to look inwards: Govt’s plan to curb tariffs’ impact

This is an intensive task, which would also need the proactiveness of states, said one official.

Apart from eyeing newer export markets across the globe and handholding traders via credit aid and incentives, the government has also initiated discussions on ways to increase domestic consumption to offset the impact of any external uncertainties with respect to tariffs, two government officials and experts  in the know told Moneycontrol.

From the ramparts of the Red Fort, Prime Minister Narendra Modi on Independence Day announced that goods and services tax (GST) rates would be rationalised by Diwali (in October), which would bring down prices of daily use items, thereby boosting consumption. Moneycontrol reported on Friday that the government is of the view that there should be only two GST slabs—5 percent and 18 percent—for the purpose of simplicity, widening the tax base and ease of compliance.

“This is an intensive task which is not only inter-ministerial but would also need the proactiveness of state governments," said one of the two officials mentioned above.

Official sources told Moneycontrol last week that the government has proposed to the group of ministers (GoM) looking at GST rate rationalisation to move almost all the items in the 28 percent slab, barring 'sin goods', to the 18 percent slab; and move 99 percent of items in the 12 percent slab to the 5 percent bucket.

"We (the government) aim to cut GST rates for labour-intensive sectors such as leather and textiles…but ultimately that lies with the GST Council. Overall, the government is looking at measures to boost domestic consumption,” the first official said.

If the government's proposals to the GoM and GST Council are accepted, the broad categories of items that will see a reduction in tax incidence are textiles, fertilisers, auto parts, handicrafts, medical devices and insurance, said officials.

At present, most finished leather products, including bags, wallets, belts and jackets, are subject to GST at 18 percent. And apparel priced above Rs 1,000 attract a 12 percent GST, while those below are subject to a 5 percent rate.

Modi on Friday also announced the launch of the Pradhan Mantri Viksit Bharat Rozgar Yojana. With an outlay of Rs 1 lakh crore, this scheme aims to support the creation of over 3.5 crore jobs in two years. It will provide an incentive of up to Rs 15,000 in two instalments to newly employed youth and for employers, up to Rs 3,000 per month per new hire.

India’s GDP is likely to grow at 6.5 percent in the current financial year, according to the Reserve Bank of India (RBI). Earlier this month, the central bank's monetary policy committee said that supportive monetary, regulatory and fiscal policies including robust government capital expenditure should boost demand in the economy.

Tax experts say that as the GST rate rationalisation has been pending for some time, the present situation offers an opportunity to stimulate the economy and domestic consumption by reducing rates on products adversely affected by the additional US tariffs.

"Targeted rate reductions would provide partial cushioning to impacted sectors while strengthening demand within the domestic market,” said Vimal Pruthi, partner, international trade, EY India, adding that domestic consumption should be stimulated also through measures that enhance disposable income availability.

The second official mentioned above also confirmed to Moneycontrol that the government has held inter-ministerial meetings on the matter in recent days. “There is a need to cater to the domestic market. Our exporters should build capacities for it, and this has been communicated to stakeholders. Any kind of support it requires, in terms of easing of credit or other financial incentives, the government will provide,” the official said.

On August 12, Moneycontrol reported that the RBI may enhance the limit of collateral-free loans for micro and small enterprises to Rs 20 lakh from Rs 10 lakh under the government’s Credit Guarantee Scheme.

US President Donald Trump has announced raising tariffs on Indian goods to 50 percent. While the 25 percent tariff announced earlier came into effect from August 7, the so-called "penalty" for buying Russian oil will kick in from August 27. However, Trump recently hinted that the US may not impose secondary tariffs on countries continuing to procure Russian crude oil.

According to the finance ministry, around 55 percent of total value of India’s merchandise exports to the US are subject to the 25 percent levy that began on August 7. In FY25, India exported goods worth $86.5 billion to the US, or around 20 percent of India's total merchandise exports. Shipments worth around $30 billion covering pharmaceuticals and certain electronic products such as smartphones, semiconductors and energy are, however, secure from steeper duties given that they are under an exemption list so far.

'Diversify into domestic markets'

Ajay Sahai, director general, Federation of Indian Export Organisations, said that diversifying into other countries is not possible in the short term, as India is outpriced in the US market by 30-35 percent, given the duty on India will be 50 percent, while on most other competing countries, it’s 15-20 percent.

"The domestic market is an option from that perspective, because it’s vibrant. For instance, when the Red Sea crisis happened, we thought ceramics exports would be heavily impacted, but that did not happen due to absorption by the domestic market. Apparels and textile products, too, have a domestic market,” he said, while adding that there are limitations. For instance, high-value gems and jewellery products might not find a domestic market easily, he noted.

Ajay Srivastava, founder, Global Trade Research Initiative, said that to boost domestic demand and also to find newer markets overseas, India should now focus on products. “Trade policies are secondary in nature, what is most important is the product, which means reducing the cost of making things, cutting the cost of doing business, providing uninterrupted electricity, etc. For example, if you’re producing an iPhone, do you need a trade agreement to sell it anywhere? No, because the product is that of high quality,” he said.

Pruthi said the government could also consider measures such as exempting units in special economic zones from basic customs duty on supplies to the domestic tariff area, thereby placing them on a par with imports made under free trade agreements. Such a step would lower product costs, improve competitiveness and enable exporters to tap the local demand more effectively, he said.