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Sep 05, 2025
Ramaharitha Pusarla

India’s Assertive Diplomacy Takes Centre Stage at Tianjin

PM Modi visited China after a gap of seven years to attend the 25th Shanghai Cooperation Organisation (SCO) meeting at Tianjin. His participation at the SCO Summit has been more or less regular; however, the 2025 SCO Summit dominated the headlines of international media. Coming in the wake of Trump’s extortionist tariffs on India and PM Modi’s refusal to capitulate, his engagement with SCO leaders, especially with President Xi and President Putin, has stimulated outsized attention. Cutting through the clutter of op-eds galore, it is vital to decipher the prominence of his trip to Tianjin. Miffed by India’s defiance, the MAGA extremists have especially been egregiously presumptuous about the India-China reset at Tianjin. But PM Modi’s enthusiastic presence at the SCO has several facets to it. Restabilisation of ties with China post-Galwan clashes began in October 2024 after the complete disengagement of troops in Eastern Ladakh. At the Kazan BRICS meeting, leaders agreed to “explore a fair, reasonable and mutually acceptable solution to the boundary question”. Subsequently, India and China held the 23rd round of talks of Special Representatives of India and China on the Boundary Question (SR) in December 2024 after a gap of five years. SR Dialogue was suspended after the Galwan clashes. The last SR Dialogue was held in New Delhi in December 2019. During the border standoff along the LAC, discussions at the diplomatic level were conducted through the Working Mechanism for Consultation and Coordination on India-China Border Affairs (WMCC) and its military counterpart Senior Highest Military Commanders Meeting (SHMC). 17 rounds of WMCC and 21 rounds of SHMC meetings took place during the entire duration of disengagement. The latest round, the 34th iteration of WMCC in July, “expressed satisfaction with the general prevalence of peace and tranquillity in the border areas, leading to gradual normalisation of bilateral relations”. The 24th round SR talks in August, steered by India’s Ajit Doval and China’s Wang Yi, agreed on- “Setting up an Expert Group, under the Working Mechanism for Consultation and Coordination on India-China Border Affairs (WMCC), to explore Early Harvest in boundary delimitation in the India-China border areas”. Additionally, they announced the resumption of direct flights, facilitation of visas and trade & investment flows, expansion of Mt. Kailash Yatra and re-opening of border trade through Lipulekh Pass, Shipki La Pass and Nathu La Pass. A cautious normalisation of ties with China is already underway. Hence, the portrayal of PM Modi and President Xi’s meeting being propelled by Trump’s trade tantrums is misplaced. However, tariff weaponisation has inadvertently catalysed a recalibration. Making no secret of the tenuous global trade landscape, at the bilateral talks, Xi said, “The world today is swept by once-in-a-century transformations. The international situation is both fluid and chaotic. China and India are two ancient civilisations in the east, we are the world’s two most populous countries, and we are also the oldest members of the Global South”. For more than four years, India has diligently engaged in multiple rounds of dialogue with China, aiming for a full withdrawal of troops from the friction points- Demchok and Despang. Drawing lessons from earlier missteps, India has recalibrated its diplomatic approach with greater precision. China's strategy of prolonged negotiations—often designed to wear down its adversaries—demands unwavering patience and resilience. Through patient and persevering diplomacy, India has ultimately succeeded in breaking through the impasse. Hence, Xi understands that India is not an easy pushover. Beijing only respects strength. India’s defiance and resistance to Trump’s unwarranted economic coercion is a signal not only to Washington, but to Beijing also. Entangled in a trade war with the US, China believes that a temporary reset with India is in its best interest. Battling with poor domestic consumption, trade imbalances, an ageing population and pension liabilities, China is keen on ramping up economic engagement with India. This aligns with India’s attempts to diversify trade to offset tariff pressure and strengthen its manufacturing capabilities. Given India’s size, growth potential and expanding markets, China is forthcoming about rapprochement with India. While Washington chose not to accept this reality to its detriment, Beijing is quick to grasp this. Post-SCO, global media is awash with pictures of bonhomie between the leaders of India, Russia and China. Finnish Prime Minister Alexander Stubb warned, “My message, not only to my European colleagues, but especially to the United States, is that if we don't derive a more cooperative and dignified foreign policy towards Global South, the likes of India, we are going to lose this game”. The emergence of a vibrant Global South can no longer be ignored. Xi’s implicit reference to India and China as members of the Global South underscores the same. Hinting at recalibration, PM Modi stated, “A stable relationship and cooperation between India and China and their 2.8 billion people on the basis of mutual respect, mutual interest and mutual sensitivity are necessary for the growth and development of the two countries, as well as for a multipolar world and a multi-polar Asia befitting the trends of the 21st century”. Interestingly, PM Modi’s subtle invocation of Asian solidarity for a constructive partnership finds a resonance with President Xi’s summary statement, “It is the right choice for both sides to be friends who have good neighbourly and amicable ties, partners who enable each other’s success, and to have the dragon and the elephant dance together”. The diplomatic trope, “the dragon and the elephant dance together”, has been more flourish than reality. However, the affirmation from leaders that “the two countries were development partners and not rivals, and that their differences should not turn into disputes”. While India is willing to be a partner in reshaping Asian destiny, its discomfort with China runs deep. India treats both China’s weaponisation of strategic supplies like speciality fertilisers, rare-earth magnets, and tunnel boring machines and Trump’s tariffs and secondary sanctions with equal scepticism and distrust. Though India is reconsidering the FDI cap and easing its position on Chinese investment in the electronic manufacturing sector to jack up production, it is equally wary of Beijing’s economic entrenchment. The unresolved border dispute, recurring standoffs, blatant violation of mutual agreements, together with Beijing’s containment policy of India, geopolitical competition in the strategic Indian Ocean Region, continue to remain persistent irritants in the relationship. Beijing’s attempts to emerge as a reliable foreign force in South Asia through its informal tracks with Myanmar and promotion of multilaterals between Pakistan, Afghanistan, and Bangladesh haven’t escaped India’s attention. China has drawn the Maldives, Nepal, Myanmar, and Sri Lanka into the SCO and is pushing Bangladesh to join. Alongside, Beijing is also weaving an alternative to SAARC without India in the South Asian region. China's military intelligence support to Pakistan during Operation Sindoor, along with its repeated obstruction of UN sanctions against the Resistance Force (TRF) and its veto of global terrorist designations for five Pakistani nationals at the UNSC, continues to serve as a stark warning to Indian policymakers. These actions highlight the complex web of geopolitical alignments, where India’s current decisions are shaped not just by regional concerns but by the broader strategic calculus of global power dynamics. Trump’s untrammelled bullying is shifting the world order. Seeking self-reliance and diversification, India is expanding its engagements and recalibrating ties. However, India is redefining relationships on its own terms. PM Modi has unequivocally conveyed India’s commitment to a “multipolar world and multipolar Asia” in talks with Xi. Stealing the light at the SCO with his infectious camaraderie, PM Modi certainly earned unusual approval from the Chinese. Good optics make for better signalling. In geopolitics, appearances are important. Body language, symbolic gestures and display of bonhomie all have a role to play. The grand display of camaraderie at Tianjin, with three leaders of the top four countries chatting and clasping hands, went beyond symbolism. The coming together of PM Modi, President Putin and President Xi sparked the notion of a potential alternate world order. India-Russia-China cordiality has grabbed headlines with US hawk Navarro accusing India of “getting in bed with two biggest authoritarian dictators in the World: Putin and Xi Jinping”. This kind of criticism reflects a poor understanding of India’s foreign policy dynamic. Unlike the modern-day Nation-States, India is a civilisational power which builds solid relationships for the long term and from the perspective of a worldview. Impetuosity is foreign to it, and it resists making decisions in a huff. National interests have always been paramount. India has resolutely safeguarded its interests and continues to do so. In a major diplomatic win, the SCO condemned the Pahalgam attack and backed India’s stand to bring the perpetrators to justice. Earlier, at the SCO Defence Ministers Meeting, India refused to sign a joint declaration for diluting Indian stance on terrorism and for not mentioning cross-border terrorism. Enunciating India’s vision for SCO as Security, Connectivity and Opportunity, PM Modi stated, “We believe that every effort towards connectivity must uphold the principles of sovereignty and territorial integrity. Connectivity, that by-passes sovereignty, ultimately loses both trust and meaning”, and once again refused to endorse China’s Belt and Road Initiative (BRI). Evidently, India refuses to make any concessions to China in pursuit of stable relations with China. This underscores the strength of India’s fiercely independent foreign policy, firmly anchored in safeguarding its core interests. Fundamental differences exist between India and China. Beijing has to demonstrate its commitment through specific actions; grand verbosity can no longer work. The burden of sustaining this new reset is on China now. India has clear redlines and its foreign policy is rooted in its commitment to democratic values, the rule of law, and pluralism. This was clearly reflected in PM Modi’s absence at China’s Victory parade marking 80 years of World War II after the SCO Summit. Beijing sought to use the parade to mobilise national sentiment to position itself as Asia’s pre-eminent power. Indian participation would have positively legitimised China’s pursuit of domination. The tariff war against India is an epic blunder of Trump’s foreign policy. This miscalculation allowed India and China to explore a partnership rising above differences. India has always rejected imperial tendencies and rigid groupings. Asserting independence, India is diversifying its relationships. The rubric of geopolitics is changing; the old order of alliances and kowtowing is passe. Multi-alignment and geopolitical hedging have come to dominate international relations. India rejects the unipolarity of the US and the unilateralism of China. Amid Trump’s hardball approach, defining a clear sense of its own interests, India is affirmatively asserting its strategic multi-alignment. References Statement by External Affairs Minister, Dr. S. Jaishankar in Rajya Sabha Prime Minister's bilateral meeting with Chinese President Xi Jinping (August 31, 2025) https://www.mea.gov.in/press-releases.htm?dtl/40016/Visit_of_Chinas_Foreign_Minister_and_Special_Representative_on_the_IndiaChina_boundary_question https://www.mea.gov.in/press-releases.htm?dtl/39819/34th_Meeting_of_the_Working_Mechanism_for_Consultation__Coordination_on_IndiaChina_Border_Affairs_July_23_2025 English Translation of Prime Minister's statement during the 25th SCO Summit (September 01, 2025)

Sep 04, 2025
Viren S Doshi

Impact of Drastic Goods and Services Tax Reductions on India’s Economy and Global Trade

In a landmark move, the Indian government has approved sweeping reforms to the Goods and Services Tax (GST) system, effective from September 22, 2025, termed "GST 2.0." These reforms simplify the existing four-tier tax structure (5%, 12%, 18%, and 28%) into a two-slab system of 5% for essentials and 18% for most goods and services, with a new 40% rate for luxury and sin goods. Additionally, 33 lifesaving medicines and all individual life and health insurance policies are now GST-exempt, and rates on agricultural machinery, daily-use consumer goods, and affordable footwear and apparel have been reduced to 5%. This article comprehensively analyses the potential impacts of these reductions on monthly and annual tax collections, identifies major tax contributors in the new set-up; and explores effects on defense spending, the Indian rupee’s value, monetary policy, and how these changes could bolster domestic consumption to counter United States (U.S.) tariffs, particularly in light of India’s strategic restraint in response to provocative measures. Impact on Monthly and Annual Tax Collections The GST reforms are expected to reduce tax rates significantly, with approximately 90% of items previously in the 28% slab moving to 18% and 99% of items in the 12% slab shifting to 5%. This restructuring aims to lower consumer prices and stimulate demand, but will likely impact tax revenue. Quantitative Impact: In the financial year 2024-25, gross GST collections reached ₹22.08 lakh crore, reflecting a 9.4% year-on-year growth, with the 18% slab contributing 67% of revenue, 28% contributing 11%, 12% contributing 5%, and 5% contributing 7%. The elimination of the 12% and 28% slabs and the shift of most items to lower rates (5% and 18%) are projected to reduce the effective GST rate. Previously, the Reserve Bank of India (RBI) estimated the average GST rate at 11.6%, which sources suggest will now “substantially come down.” Assuming the effective rate drops to around 9-10%, and considering the 18% slab’s dominance, monthly GST collections, which were ₹2.36 lakh crore in June 2025, could see a reduction of 10-15%, translating to approximately ₹2.01-2.12 lakh crore per month. Annually, this could result in a revenue shortfall of ₹1.5-2.5 lakh crore compared to the ₹22.08 lakh crore collected in 2024-25. Offsetting Factors: The government anticipates that lower tax rates will boost consumption, widen the tax base, and reduce tax evasion, potentially offsetting revenue losses. Historical data support this: a 1% increase in GST revenue has been correlated with 0.56% economic growth, suggesting that increased economic activity could mitigate short-term revenue declines. Additionally, the removal of the compensation cess (set to conclude by March 31, 2026) creates fiscal space, and pre-filled GST returns and faster refunds are expected to improve compliance, further supporting revenue recovery. Major Contributors to Tax Revenue Post-Reform in the New Set-up With GST rates reduced, the composition of tax revenue contributors will shift. The 18% slab, now covering most consumer goods and services (e.g., mobile phones, industrial intermediates), will remain the largest contributor, previously accounting for 67% of GST revenue. However, other tax sources will gain prominence. Petroleum Products: Petroleum products (crude, diesel, petrol, natural gas, aviation turbine fuel) and alcoholic beverages remain outside the GST framework, taxed under the pre-GST regime by state governments. These are significant revenue sources for states. In 2024-25, indirect taxes, including state-levied taxes on petroleum, contributed 18 paise per rupee of government revenue, with petroleum products being a major component due to high consumption and tax rates (e.g., excise duties and state value-added taxes). With these GST reductions, petrol and diesel prices are unlikely to decrease, as state governments rely heavily on these revenues. For instance, state taxes on fuel often exceed 30-40% of the retail price, generating substantial income. Assuming stable global oil prices (around $70-80 per barrel in 2025), petroleum taxes could contribute ₹4-5 lakh crore annually to state and central revenues, making them a top contributor alongside the 18% GST slab. Direct Taxes: The 2025 Union Budget rationalised income tax slabs and raised exemptions, increasing disposable income. Direct taxes (personal and corporate income taxes) contribute 45 paise per rupee of government revenue, and with GST reductions, their relative share may increase. Corporate tax collections, driven by robust economic growth (projected at 6.5-7% GDP growth), and personal income taxes, bolstered by higher disposable income, could add ₹10-12 lakh crore annually. Other Indirect Taxes: Customs duties and taxes on tobacco (subject to a 40% GST rate and additional levies) will also contribute significantly, though less than petroleum and direct taxes. Impact on Defence Spending India’s defence budget for 2025-26 is approximately ₹6.21 lakh crore (13.5% of the total budget), driven by modernisation, personnel costs, and geopolitical tensions with CCP-occupied China and Pakistan. The GST revenue shortfall may strain fiscal resources, but defence spending is unlikely to be reduced due to its strategic importance. Fiscal Impact: The projected GST revenue loss of ₹1.5-2.5 lakh crore represents 6-10% of the 2024-25 GST collections. However, the fiscal deficit is not expected to widen significantly, as officials note the revenue hit will be manageable. Increased consumption and tax base expansion could offset losses, ensuring funds for defence. Moreover, the central government’s share of GST (Central GST and Integrated GST) directly supports defence, and petroleum excise duties (a central tax) provide a stable revenue stream. For example, central excise on petroleum contributed ₹2-3 lakh crore in 2024-25, which can be allocated to defence. Prioritisation: Defence spending is a priority, with allocations for capital expenditure (e.g., Rafale jets, indigenous Tejas fighters) insulated from revenue fluctuations. The government may reallocate funds from non-priority sectors or increase borrowing marginally to maintain defence budgets. Impact on Rupee Value The rupee’s value is influenced by trade balances, foreign investment, and monetary policy. GST reductions could have mixed effects: Positive Factors: Lower GST rates are expected to boost domestic consumption, contributing 60% to India’s GDP. A 0.6% nominal GDP increase is projected over 12 months due to tax cuts. This economic growth, coupled with increased foreign direct investment (FDI) inflows (encouraged by simplified compliance for businesses), could strengthen the rupee. In 2025, the rupee is trading at approximately ₹83-84 per U.S. dollar, and robust growth could stabilise or appreciate it slightly to ₹82-83. Negative Factors: A revenue shortfall could increase borrowing, potentially pressuring the rupee if foreign investor confidence wanes. However, India’s “BBB-” credit rating (affirmed by Fitch in 2025) and solid external finances (foreign exchange reserves of ~$700 billion) mitigate depreciation risks. The insignificant negative impact of inflation (currently below double digits) further supports rupee stability. Impact on Monetary Policy The Reserve Bank of India’s monetary policy, focused on inflation control and growth, will be influenced by GST reforms: Inflation Control: Lower GST rates are expected to dampen inflationary pressures by reducing consumer prices. For instance, daily-use goods (e.g., toothpaste, shampoo) moving from 18% to 5% and GST exemptions on health insurance will lower out-of-pocket expenses. The RBI’s 2025 repo rate cut to 5.5% and reduced cash reserve ratio already signal a growth-oriented stance. Lower inflation (projected at 4-5%) could allow the RBI to maintain or further ease rates, supporting consumption. Liquidity and Growth: The RBI’s liquidity injection via lower cash reserve ratios complements GST reductions, making loans cheaper and boosting consumption. The Auto Regressive Distributed Lag (ARDL) model suggests that GST revenue positively impacts economic growth, and the RBI may use countercyclical policies to sustain this momentum during global trade disruptions. Countering U.S. Tariffs Through Domestic Consumption The timing of GST 2.0 is strategic, as some sections of Indian exporters face increased U.S. tariffs under the Trump administration, viewed as a moderate risk to India’s economy. The U.S. imposed a 25% tariff on Indian imports in July 2025, followed by an additional 25% levy in August, raising the total to 50%, primarily to pressure India over its Russian oil purchases. These tariffs could reduce India’s U.S.-bound exports by 40-50%, impacting sectors like textiles, diamonds, and shrimp, and potentially shaving 0.8% off India’s GDP. Despite these provocative measures by the Trump-led U.S., often referred to as India’s “big brother” due to its economic and strategic influence, India has wisely avoided retaliatory tariffs, demonstrating restraint as a strategic partner. Instead of escalating tensions, India is focusing on strengthening its domestic economy to outsize external pressures, maintaining calm and pursuing constructive dialogue. Boosting Domestic Demand: Lower GST rates enhance the affordability of essentials (e.g., roti, hair oil, fast-moving consumer goods) and aspirational goods (e.g., small cars, TVs), encouraging spending. For instance, GST on small petrol/diesel cars (<1200cc/<1500cc) dropped from 28% to 18%, and footwear/apparel below ₹2,500 is now at 5%. This could increase consumer spending by 5-10%, supporting sectors like consumer goods, autos, and retail banking. India’s approach reflects a strategy of making its economic “line bigger” through internal growth rather than attempting to “scuttle” the U.S. through tit-for-tat measures. Supporting MSMEs: Simplified compliance and lower rates reduce costs for micro, small, and medium enterprises (MSMEs), enabling them to focus on domestic markets. For instance, GST on agricultural machinery (e.g., tractors, sprinklers) dropped to 5%, benefiting rural economies and domestic manufacturing. This aligns with the Atmanirbhar Bharat (Self-Reliant India) initiative. India’s calm response to U.S. tariffs, despite the Trump administration’s efforts to pressure its strategic partner for economic and geopolitical reasons (e.g., Russian oil purchases), underscores its focus on long-term resilience over short-term retaliation. Economic Resilience: Increased consumption is projected to drive GDP growth to 6.5-7% over the next two years, cushioning the impact of U.S. tariffs. The coordinated fiscal (GST cuts, income tax relief) and monetary (RBI rate cuts) policies create a multiplier effect, with analysts predicting double-digit corporate earnings growth and improved market valuations. India’s strategic patience, avoiding retaliatory measures despite U.S. provocations, positions it to negotiate from a place of strength, potentially by the sidelines of the UN General Assembly in September 2025. Conclusion The GST 2.0 reforms mark a pivotal shift in India’s taxation landscape, prioritising affordability, consumption, and economic resilience. While monthly and annual GST collections may face a shortfall of ₹1.5-2.5 lakh crore, increased consumption, wider tax compliance, and a broader tax base are expected to mitigate losses. Petroleum products and direct taxes will emerge as major revenue contributors, with the 18% GST slab retaining its dominance. Defence spending is likely to remain unaffected due to its strategic priority and alternative revenue streams like petroleum excise. The rupee is expected to stabilise or appreciate slightly, supported by robust growth and FDI inflows. Monetary policy will likely remain accommodative, with lower inflation enabling sustained or further rate cuts. Most critically, GST reductions will boost domestic consumption, helping India counter U.S. tariffs by strengthening domestic markets and supporting MSMEs. India’s wise restraint in avoiding retaliatory measures, despite provocative U.S. tariffs, reflects its commitment to strategic partnership and economic self-reliance, ensuring it builds a stronger domestic economy to navigate global trade challenges. As India maintains calm amidst pressures from the Trump-led U.S., it positions itself as a resilient player, delivering tangible benefits to households and businesses while preserving its strategic autonomy.