NextFin news, On Tuesday, September 30, 2025, Indian political economist Prabhat Patnaik published an analysis on Monthly Review Online regarding the economic impact of U.S. tariffs imposed by President Donald Trump on India and the recent adjustments to India's Goods and Services Tax (GST) rates.
Patnaik explained that Trump's tariff aggression, which includes levying tariffs as high as 50 percent on Indian goods, is expected to have a contractionary effect on the Indian economy. Even if tariffs are reduced, it would likely be in exchange for India lowering its tariffs on American goods, particularly agricultural and dairy products, which could lead to increased imports from the U.S. and reduced incomes within India.
The Indian government's recent GST rate adjustment, effective from September 22, 2025, reduced the number of GST rates from four to two main rates—5 percent and 18 percent—with a penal 40 percent rate on certain 'sin goods.' While this adjustment lowers the overall tax burden on consumers if the concessions are passed on, Patnaik noted that it does not inject additional purchasing power into the economy. This is because any government revenue loss from the tax cuts could lead to corresponding expenditure cuts unless offset by an increased fiscal deficit or higher taxes on the wealthy.
Patnaik emphasized that without an increase in the fiscal deficit or alternative financing, the GST concessions will not increase aggregate demand or the total consumption of working people, whose incomes are already compressed due to the tariffs. He argued that the government's fiscal measures have not countered the contractionary effects of Trump's tariffs.
The economist also discussed the possibility of increased private consumption financed by credit or reduced savings. However, he pointed out that working people are unlikely to have sufficient creditworthiness or savings to boost consumption significantly. While middle-class consumers might temporarily increase consumption through credit, this effect is transient and self-reversing, as repayments will necessitate future consumption cuts.
Patnaik further highlighted that the Modi government has not adopted direct financial subsidies for affected small producers, which could have been financed by higher taxes on the rich. Instead, the government may increase the fiscal deficit indirectly through the sale of equity in public sector banks, effectively privatizing public assets. This privatization, while having anti-contractionary effects similar to deficit financing, could accelerate capital centralization and wealth inequality.
In conclusion, Patnaik's analysis underscores that the recent GST rate adjustments in India do not effectively offset the negative economic impact of Trump's tariffs. Without deliberate fiscal expansion or targeted subsidies, the contractionary pressures on the Indian economy and working people's incomes are likely to persist.
Source: Monthly Review Online, September 30, 2025, article by Prabhat Patnaik titled "Trump tariffs and GST rate adjustments" (https://mronline.org/2025/09/30/trump-tariffs-and-gst-rate-adjustments/)
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