Under pressure from tariffs, Modi's sudden tax cuts and accelerated streamlining of administration and decentralization

In the face of a 50% tariff threat, the Indian government is rushing to implement a series of emergency reforms before the pressure becomes evident.

According to CCTV News, on August 25 local time, the U.S. Department of Homeland Security issued a notice proposing to impose a 50% tariff on Indian goods starting from midnight on August 27. The notice stated that the tariff would apply to "all Indian goods imported for consumption or storage for consumption."

According to media reports, recently, Indian Prime Minister Modi suddenly announced a reduction in consumption tax during a public speech, catching even government officials off guard. Media reports cited government sources indicating that relevant officials had planned to announce the tax reform proposal months later, and the finance ministers of various states were not consulted in advance.

It is reported that India plans to simplify the Goods and Services Tax (GST) from four tax rates to two levels, while establishing a high-level committee specifically to promote deregulation, aiming to change the international image of "difficult business operations."

By simplifying the tax system and bureaucratic procedures, the Modi government hopes to eliminate obstacles that have long hindered investment, delayed major projects, and affected economic growth due to layers of approvals, overlapping regulations, and slow processes.

Emergency Tax Reduction Plan Introduced

According to the proposed GST reform plan, the number of tax categories will be reduced from four to two, with goods that were previously taxed at 12% and 28% now subject to lower rates of 5% and 18%.

The government expects that this GST tax reduction will stimulate consumer spending, especially in essential goods such as food and clothing. IDFC First Bank estimates that the tax reduction measures could increase the nominal GDP growth rate by 0.6 percentage points within 12 months.

Nim from ANZ summarized:

“The market views these measures as positive signals, as they address factors that we traditionally believe limit India's potential. There is a general recognition that the breadth of challenges is enormous, and reversing the economic situation may come with some growing pains.”

Accelerated Deregulation Efforts

In addition to GST reform, Modi also mentioned "next-generation reforms" in his Independence Day speech on the 15th, including policy changes aimed at reducing corporate compliance costs and abolishing redundant laws.

Reports indicate that the government has established two high-level committees to advance related work. The committee led by Cabinet Secretary TV Somanathan held its first meeting last week, focusing on state-level deregulation.

Another committee, led by Rajiv Gauba, a member of the government think tank Niti Aayog, is responsible for formulating the next-generation reform proposals mentioned by Modi.

India's complex tax system and bureaucratic red tape have long been seen as obstacles to doing business.

Government reports show that current factory laws lead companies to prefer operating two factories with 150 workers each rather than building one factory with 300 workers, which suppresses economies of scale. Labor laws require overtime pay to be at least twice the regular wage, prompting many workers to turn to informal overtime

Tariff Pressure as a Catalyst for Reform

The tariff threats from the Trump administration unexpectedly became a boost for Modi to advance reforms. Dhiraj Nim, an economist at ANZ Bank, stated:

“In the current environment, conventional policy tools have limited effectiveness, and the only way out is to implement more difficult reforms.”

According to media reports, Modi has recently been meeting with the Economic Advisory Council to gather policy suggestions for improving people's livelihoods and the business environment. Economists attending the meeting believe that with low inflation and interest rate cuts, the growth target of 6.5% for the fiscal year 2026 is still achievable, but policy changes are needed to boost economic demand.

Sonal Varma from Nomura Holdings pointed out that the reform goal is to “change the perception of investment in India,” signaling to the market that India is reforming and committed to reducing the cost of doing business. She emphasized that U.S. tariffs are clearly the “trigger” for these changes.

Currently, India's macroeconomic indicators remain stable, providing space for advancing difficult reforms. Sanjeev Sanyal, a member of Modi's Economic Advisory Council, stated:

“The condition of macro stability indicators is good, which creates space for a more vigorous reform agenda to lay the foundation for the next round of high growth.”