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A Major Step Toward Simplification

Prime Minister Narendra Modi’s announcement of a sweeping reform to India’s Goods and Services Tax (GST) has set the stage for what could become one of the biggest consumption-driven growth stories in years. The proposed revamp will cut the current four-tier GST system (5%, 12%, 18%, 28%) down to just two slabs — 5% and 18% — making it simpler for businesses and cheaper for consumers.

The final blueprint is expected to be discussed at the next GST Council meeting in September, with potential implementation by October 2025, just ahead of India’s festive shopping season.

Consumption at the Heart of India’s Growth

India’s economy is deeply consumption-driven. According to the Finance Ministry, private consumption made up 61.4% of nominal GDP in FY2025, the highest in two decades. Experts believe that lowering GST rates on essentials and discretionary goods could add 0.35–0.45 percentage points to GDP growth by FY2027, according to Standard Chartered Bank’s Anubhuti Sahay.

“This is much needed,” said Saurabh Mukherjea of Marcellus Investment Managers. “Net-net, I think it’s a $10 billion boost to consumption … but Donald Trump’s tariffs do twice as much damage to India.”

Youth Employment and Shifting Spending Trends

Alongside tax reform, Modi also unveiled a 1 trillion rupee ($12 billion) youth employment scheme during his Independence Day speech, aiming to create 35 million jobs. This is crucial given India’s 19% urban youth unemployment rate, which has been climbing steadily.

India’s 600 million young consumers are already driving new spending patterns. From self-care routines shared on social media to tech upgrades and travel, Gen Z and millennials are fueling a surge in discretionary demand. Bengaluru banker Vandit Garg said: “I will spend on travel and tech upgrades now that taxes will be lower.” His colleagues, he added, were planning to move from motorbikes to compact cars.

Sectoral Winners and Inflation Relief

Consumer discretionary sectors — especially those currently taxed at 28% such as automobiles, electronics, and luxury goods — stand to benefit the most. If implemented, the reform could also bring relief to healthcare and insurance, where premiums currently attract 18% GST. A ministerial panel has already proposed exempting life and health insurance premiums, which could significantly lower household expenses.

Meanwhile, inflation in India hit an eight-year low in July, mainly due to falling food and vegetable prices. Lower grocery bills free up disposable income, further enhancing the consumption outlook.

The Tariff Factor and Global Pressures

The timing of GST reform is also strategic. India faces a new round of 25% U.S. tariffs, which will double duties on several Indian exports to 50% later this month. Experts suggest that boosting domestic consumption could help offset the drag from weaker export revenues.

“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 of TS Lombard.

Challenges to Implementation

While the benefits of GST 2.0 are widely acknowledged, there are fiscal and political hurdles. HSBC economist Pranjul Bhandari estimates the revamp could cost the exchequer $16 billion, or 0.4% of GDP, a burden that states may resist sharing equally with the central government.

Business owners also stress the need for simplification. “A soft toy is taxed at 5%, plastic items at 12%, anything with batteries at 18%. I spend 10 days a month just doing GST paperwork,” said Mohit, a toy shop owner in Uttar Pradesh.

Analysts say the new structure would reduce compliance burdens, ease inverted duty issues, and improve the overall ease of doing business.

The Road Ahead

Modi has promised that the new GST framework will be in place by Diwali 2025, symbolically aligning tax relief with India’s festival of lights. If successful, the reform could energize consumer demand, improve business efficiency, and offset global trade pressures — laying the groundwork for sustained growth.

But experts warn that this must only be the beginning. “India desperately needs a consumption and jobs revival. One won’t happen without the other,” said Mukherjea. “The government and central bank must work in tandem, and reforms must go deeper.”

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