India is projected to remain among the fastest-growing emerging market economies in Asia, with GDP holding above 6% despite the impact of fresh US tariffs on export growth. According to BMI, a Fitch Solutions company, the Goods and Services Tax (GST) reform is expected to offset the drag from Washington's 50% 'reciprocal' tariffs, with the aim to cut rates and boost private consumption from October.
The proposed GST reform is expected to simplify the existing four-tier system of rates (5% to 28%) into a two-tier structure, with most goods taxed at either 5% or 18%. Consumer durables like washing machines, air conditioners, and refrigerators are among the products expected to be charged lower rates. This rationalization is expected to drive consumption and improve profitability in sectors such as automobiles, financial services, cement, and consumer staples.
BMI has revised down its GDP growth forecasts for FY2025/26 and FY2026/27 by 0.2 percentage points each. They now expect the economy to expand by 5.8% in FY2025/26 and 5.4% in FY2026/27. However, they also stated that depending on the specifics, the GST reform could cancel out the drag on growth from the tariffs.
Household spending in India is expected to post strong growth in 2025, rising 6.9% year-on-year. This growth in consumer spending will come as India's wider economy continues to expand, supported by growing domestic demand brought about by the continuous expansion of the Indian middle class. Inflation is also under control, having moderated to 1.55% in July 2025, the ninth consecutive month of easing and the lowest level since June 2017.
A recent SBI Research report suggests that GST reforms, combined with recent income tax cuts, could lift consumption by ₹5.31 lakh crore, which is around 1.6% of GDP. Fitch Ratings has affirmed India's rating at 'BBB' with a stable outlook, expecting US tariffs to have a limited impact.
Even with the 50% tariffs on Indian exports set to take effect, the Indian government is fast-tracking GST reforms, expected to collapse four tax slabs into just two (5% and 18%). This could make essentials, FMCG products, and even small cars cheaper, boosting domestic demand.
James Thom of Aberdeen noted that the GST reform could revive weakening consumption and cushion the impact of high U.S. tariffs. Economists estimate it could be as big as a 1% boost to GDP growth, while the tariff impact on the economy might be around 50-60 basis points. India is largely a domestic consumption story, with exports being a relatively small contributor.
India is projected to become the third-largest economy in market exchange rate terms by 2028, overtaking Germany. With appropriate countermeasures, India can limit the adverse impact of higher US tariffs on selected Indian imports to about 10 basis points of real GDP growth. India is emerging as one of the most dynamic among the world's five largest economies, with strong economic fundamentals including high savings and investment rates, favorable demographics, and a sustainable fiscal position.
The steep 50% tariff on Indian goods entering the United States, which came into effect from Aug. 27, would impact exports worth more than $48 billion. Sectors that would bear the brunt include textiles/clothing, gems and jewellery, shrimp, leather and footwear, animal products, chemicals, and electrical and mechanical machinery. However, this impact can be neutralized through countermeasures such as reducing overall imports and boosting domestic demand for goods that are currently exported.
