GST reform in two steps

Rate rationalisation can be the long-term goal, while a unilateral reduction in central GST could boost domestic demand in the short term

- R KAVITA RAO

The economic environment facing Indian business has received a new shock. The punitive tariffs announced by the United States government came into effect on August 27, levying a 50 per cent import duty on a range of Indian exports. The impact of these tariffs is expected to be felt across sectors, including garments, footwear, gems and jewellery and shrimp exports. Significant second-round effects are also anticipated, such as a reduction in imports related to exports of goods. Gems and Jewellery is one such sector, where exports are closely linked to the import of raw diamonds.

While diplomatic channels continue to explore the possibility of returning to a regime with more modest tariffs, the responses by the Government of India will clearly encompass a range of initiatives, including the exploration of new markets and designing policies to support exporting units in the short run. Apart from policy initiatives targeting the export sector, it is also possible to conceive of more broad-based measures to stimulate domestic demand as an alternative to export demand. Reform through the rationalisation of goods and services tax (GST) rates could be one such measure. We explore some design questions and options in utilising the proposed change to address the short-run as well as the long-run expectations of the economy.