India’s Bold Pivot: Using Tariff Pressure as a Trigger for Tax Cuts and Bureaucracy Reform

TradingKey - The Trump administration’s imposition of a 50% tariff on Indian goods has pushed the decades-long U.S.-India relationship into a “darkest hour.” Rather than capitulate, India has responded by launching deep domestic reforms aimed at long-standing structural problems — particularly its complex tax system and bureaucratic red tape that have long undermined its business environment.

On Wednesday, August 27, the U.S. government announced an additional 25% tariff on Indian imports, citing India’s continued crude oil imports from Russia. The new levy took effect immediately, raising the total U.S. tariff rate on India to 50%, making India the highest-tariff Asian country in the U.S. trade system.

Since April, the U.S. and India have held five rounds of trade talks, but negotiations ultimately failed, leading to a policy split. Indian goods now facing the 50% tariff include apparel, jewelry, footwear, furniture, and chemicals, threatening thousands of small exporters and a significant number of jobs.

The Federation of Indian Export Organisations warned that the new tariffs will disrupt exports to India’s largest market, with about 55% of export products now facing a 30–35% price disadvantage compared to competitors like Vietnam, Bangladesh, and China.

In response, the Modi government has “unexpectedly” announced sweeping domestic reforms. Prime Minister Narendra Modi recently announced a major cut in consumption taxes, a move that comes months earlier than officials had anticipated.

To stimulate domestic consumer spending, the new tax reform will reduce tax brackets from four to two, lowering rates from the previous 12% and 28% to 5% and 18%.

Private consumption accounted for 63% of India’s GDP last year — the highest among major Asian economies — but household spending has been slowing in recent quarters due to deleveraging, rising urban unemployment, and U.S.-India trade tensions.

The Indian government has already introduced stimulus measures, including cuts in direct and indirect taxes and income tax rebates in the budget. However, analysts say further fiscal action is needed to boost consumption and create space for growth.

ANZ Bank noted that in this environment, usual policy tools are unlikely to be effective, and the only path forward is bold structural reform.

Beyond the surprise overhaul of the Goods and Services Tax (GST), Modi, in his Independence Day speech on August 15, outlined a vision for a “next-generation reform” agenda — including reducing corporate compliance costs and scrapping outdated and redundant laws.

For years, India’s bureaucratic red tape — including layered permits, overlapping regulations, and slow approval processes — has severely hindered international businesses and investors from operating efficiently in India.

Nomura analysts said that reforms ranging from easing foreign investment rules to relaxing labor and land restrictions aim to “change the perception of India as an investment destination.”

“Notwithstanding what’s going on with the US, to send a signal that India is reforming, is looking to ease the cost of doing business and remains an attractive investment destination.”

Nomura added that it’s clear that the US tariffs have been the “trigger” for those changes.