Reforms to boost growth, but tariff suspense a risk, says FinMin

Finance ministry warns tariff risks could hit jobs and consumption, while GST rationalisation and reforms are seen as key to sustaining India's growth amid global uncertainties

The Centre’s reform agenda, such as the recent goods and services tax (GST) rate rationalisation, is expected to cushion the economy against the adverse effects of tariffs and trade disruptions, but persistent tariff uncertainties could impact export sectors and pose spillover risks to domestic employment, income and consumption, the Finance Ministry said on Friday. 

While India’s economic outlook remains broadly optimistic, with the near-term outlook characterised by steady, reform-driven growth rooted in macroeconomic discipline and adaptive economic diplomacy, the ministry’s monthly economic review for August reckoned that ongoing vigilance is warranted against external shocks and global market volatility. 

The United States’ move to levy a one-time $1,00,000 on new H1B visa-seekers is a reminder of the risks of trade uncertainties hitting the ‘hitherto unaffected services sector’, the review noted.

 

While these risks appear manageable for now, the impact of this move on future remittances and service trade surpluses will need close monitoring if these restrictions persist, it pointed out. 

The review, authored by officials in the ministry’s economic affairs division, also highlighted a 10.5 per cent uptick in inward FDI flows ($25.2 billion) in the first quarter of 2025-26 (FY26), and said that if this trend is maintained in the coming quarters, annual gross FDI inflows could hit about $100 billion. Gross FDI reached a four-year high in June 2025, it pointed out, and there are “notable improvements” in equity inflows, while the incidence of repatriations remains broadly at the same level as last year. 

With GDP growth beating market expectations in Q1FY26 and GST reforms expected to provide an impetus to economic activity through the rest of this year, market analysts have raised their growth forecasts and India’s sovereign rating has been upgraded by three agencies, the review noted. The median growth projection for FY26 is now 6.6 per cent, compared to 6.5 per cent last month and 6.4 per cent in June-July 2025, the ministry said, adding “there is a further upside bias” on growth prospects with the reform push. 

Terming the rationalisation of GST “the third leg of the tripod of tax reforms”, after the corporate tax reductions and personal income tax reforms, the ministry argued that these reforms, alongside the RBI’s interest rate cuts, income tax rebates, and the wider context of deregulation and easing inflation, create favourable conditions for an economic uptick. 

“At the same time, this is not the time to drop our guard. Uncertainties and risks persist,” it cautioned, and urged States to add to their bit to bolster the growth momentum. 

“Regulatory reform and infrastructure development will be key to sustaining momentum. States will do well to leverage cooperative federalism and contribute to this effort by pursuing state-level deregulation, thereby putting India’s economy on a higher growth trajectory… Speed of decision-making and attention to detail in execution are more critical than ever at all levels of the government — Union, States and local,” the review stressed. 

Considering the rapidly polarising geopolitical environment, national security and self-sufficiency in critical primary resources will have to be strengthened, the ministry emphasised. “Commitment to and delivering on fiscal targets is critical to make available the stimulus of lower cost of capital to all segments of the society,” it added. 

The GST reforms would not only boost consumption and provide a cushion against tariff impacts, but are also likely to improve demand visibility for firms, enabling them to expand investment in additional capacities, the review noted. While inflation is expected to remain well under control, the GST rate cuts may also lead to a one-time reduction in inflation over the next year, the review said. The upsurge in precious metals prices is holding the core inflation to around 4 per cent, it averred.