Defiance won't beget India respect, export-focused manufacturing base will

India’s Goods and Services (GST) Tax Council, meeting on September 3, unveiled what was billed as the most radical simplification of the levy since its introduction in 2017. On September 22 the country will move to two broad slabs — 5 per cent and 18 per cent — with essentials such as foodgrains and fresh produce exempted, and hundreds of other goods shuffled into lower brackets. The changes followed Prime Minister Narendra Modi’s Independence Day promise of reform. Will these benefit the Indian consumer and the economy? Lower indirect taxes, in theory, should spur demand. And since, private final consumption expenditure (PFCE) contributes 60 per cent to growth in gross domestic product (GDP), a boost to consumption would push GDP higher. In practice the cuts will touch only about 11 per cent of consumption — mainly processed food and consumer durables shifting from 12 per cent or 28 per cent into lighter buckets. The boost to spending, reckons one estimate, will be ₹0.7 trillion-1 trillion, or 0.2-0.3 per cent of GDP, showing up in the latter half of FY26. That is more a statistical rounding off than a growth engine. 

One of the best ways to judge the impact of any policy is to check its effect on stock prices of companies, supposedly benefiting. The market had two full days to judge the impact of the GST cuts and here is the verdict. The main market index, the Nifty 50, barely moved from 24,715 on Wednesday to 24,741 at Friday’s close. Nestle’s stock price was flat while that of Hindustan Unilever fell; consumer-durables firms, from Voltas to Whirlpool, got no lift. In fact, all these stocks and the overall market, opened high on Thursday on the GST announcement and gave up all their gains. Only carmakers, notably Maruti and Hyundai, clung to gains chalked up since Mr Modi’s August 15 speech. In my previous piece I had suggested that GST 2.0 is an improvised fix and will not help much. It turns out that investors too think so. 

Let’s step back and assess what the rate cuts were for. There were two objectives: First, to pep up growth amid grumbling and sarcasm on social media about “tax terrorism” (GST, tolls, cess, and other taxes); second, to counterbalance American President Donald Trump’s 50 per cent tariff wall, coming into effect on August 27, threatens $50 billion of Indian exports to America. The idea is to lean on domestic demand — India’s supposed shield — just as exports falter. It was not just economic; boosting domestic consumption was part of India’s aatmanirbhar policy, coloured in nationalistic hues, meant to score political points. But GST 2.0 will manage neither. The dent in India’s exports has to be met with targeted responses to the industries affected, which could be temporary; and not by mild, overall consumption increase. Also, raising consumption beyond its already hefty 60 per cent of GDP is hard without far steeper tax cuts, which the state cannot afford. After all, the main economic strategy of this government has been to tax heavily and spend it on infrastructure, railways, defence, and social schemes. Also, much of the consumption leaks abroad through imports from China. 

The longer, harder, obvious option 

The answer to the virtuous cycle of higher GDP growth, higher wages, and higher consumption is to ensure decades of export boom. This obvious solution propelled Japan, Taiwan, South Korea, and Singapore to prosperity between the 1950s and 1980s, turning poor farmers into rich consumers, followed by Thailand and Malaysia. China adopted it in the 1990s and turbocharged it; today 30 per cent of global manufacturing capacity, largely export-driven, is in China. It is surprising that despite a large pool of educated and English-speaking people, and the eye-popping success of one country after another, all next-door, India never made export its top national mission; not even under Mr Modi, economically the most activist leader in decades. When Trump tariffs started to roil the world, East Asian tigers and China seemed particularly vulnerable, given their export-oriented economies. India appeared safer. The irony is that East Asia quickly signed deals to protect their markets. India, by contrast, now faces a 50 per cent duty with little leverage. 

Some experts think that India should not try to emulate East Asian countries because that ship has sailed. This is nonsense. The model endures because prosperity itself reshapes competitiveness. When countries prosper, wages rise, and labour-intensive businesses become uncompetitive. These businesses are then picked up by other lower-wage countries for export. Japan ceded textile to South Korea, then to China, which now passes them to Bangladesh and Vietnam. Each rung up the ladder frees space below. In fact, India can be competitive at both ends of the spectrum. At one end, it can be a bigger exporter of lower-value items like textile, steel, footwear, and plastics. At the other end India can be a major exporter of chemicals and an even bigger powerhouse in pharmaceuticals. All the ingredients are in place. It needs a series of dedicated, focused and goal-oriented steps — exactly what was behind the rise of Taiwan, South Korea, and China. In 10 years India can be an export powerhouse. At the Shanghai Cooperation Organisation summit last week Mr Modi posed beside Chinese President Xi Jinping, striking a note of defiance towards America. Many Indians were proud. But defiance is not power. China’s clout rests on decades of relentless investment in technology, production at scale, and export. India will win respect abroad not through posturing and slogans but through large factories humming at home, producing quality products for world markets. 

The author is editor of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers