PM Modi Urges ‘Make and Spend in India’ as 50% Tariffs Take Effect: Impact on Businesses and Trade with Donald Trump

Earlier this month, Indian Prime Minister Narendra Modi made a significant announcement. He promised a “massive tax bonanza” as a Diwali gift for everyday people and the millions of small businesses that drive India’s economy, the third largest in Asia.

During a speech at Delhi’s Red Fort, Modi called for a shift toward self-reliance. He encouraged shop owners to display “Made in India” signs proudly. His message was clear: “We should become self-reliant—not out of desperation, but out of pride.”

This statement seems to respond to U.S. President Donald Trump’s upcoming 50% tariff on Indian goods, which will take effect on August 27. This tariff could disrupt numerous livelihoods in India’s export-driven sectors, such as textiles and shrimp.

Modi’s call for domestic manufacturing comes at a challenging time. Manufacturing has stagnated at about 15% of India’s GDP, despite government incentives. However, experts believe that implementing tax reforms could ease some economic pressures. Following a $12 billion income tax cut announced earlier this year, Modi is now focusing on overhauling India’s complex Goods and Services Tax (GST) system.

Introduced eight years ago, the GST replaced a web of indirect taxes. Unfortunately, it still has many exemptions and thresholds that complicate doing business. Modi has promised a simpler two-tier GST to reduce this complexity. Analysts from Jeffries, a U.S.-based brokerage, note that these changes, combined with income tax cuts, could stimulate consumption.

Consumer spending is crucial for India’s economy, making up nearly 60% of GDP. While spending in rural areas remains strong due to good harvests, demand in cities is slowing, worsened by job cuts in sectors like IT. Analysts from Morgan Stanley suggest that tax cuts could revive consumption during a tough period marked by global economic tensions.

Specific sectors could see significant benefits from these tax breaks. Items like scooters, small cars, and cement—especially in preparation for Diwali—are likely to see a boost in demand. Moreover, a Swiss investment bank, UBS, predicts that the GST cuts might have a more substantial economic impact than earlier tax reforms because they directly influence consumer spending.

There’s also potential for interest rates to be cut further, thanks to these tax handouts. The Reserve Bank of India has already reduced rates significantly, which could encourage more lending. The boost in government salaries starting early next year is another positive sign for growth.

Despite these efforts, India’s growth rate has slowed compared to the 8% seen in previous years. Geopolitical tensions, especially with the U.S. over energy purchases from Russia, are complicating matters. The drastic 50% tariffs have triggered fears of a trade sanction-like situation, a reality unthinkable just months ago.

In summary, while Modi’s administration is pushing for vital reforms, the road ahead is laden with challenges. The global economy is in turmoil, and India must navigate these waters carefully while fueling domestic growth.

For more insights, check out S&P Global’s recent report on India’s sovereign ratings, which discusses the implications of such changes on the economy.



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