When Washington moved to raise duties on a wide set of Indian exports to 50 per cent, the aim was straightforward — to force concessions or extract commercial leverage from New Delhi. Reports from the past
week captured the public face of the dispute — US President Donald Trump’s repeated criticisms of India’s trade stance and claims about barter with Russia — and the private diplomatic disquiet that followed. The tariffs have been framed in US political debate as part of a broader protectionist push; internationally they prompted quick reassessments of alliances and trade strategies. Politically, the measures created an opening for India to choose posture. The Narendra Modi government picked restraint over recrimination: There was no headline-grabbing retaliation aimed at Washington; instead New Delhi recalibrated policy instruments at home and redoubled outreach abroad. That diplomatic choice has two effects — it denies the US the spectacle of an escalatory bilateral row, and it buys India time to convert diplomatic sympathy into new commercial and strategic partnerships. This, in fact, has been the BJP-led NDA’s template response in the face of adversity. Remember then-Finance Minister Yashwant Sinha’s ‘bland’ budget in the year 2000, the time when many Indians expected retaliation against the sanctions for Pokhran II slapped by the Bill Clinton-ruled US? India’s domestic politics may see knee-jerk reactions quite often; India’s management of extern affairs rarely does.
Modi’s return from Japan and China
Prime Minister Narendra Modi returned to New Delhi on 2 September after a four-day diplomatic tour to Japan and China, timed amid the escalating US tariff row. In Japan from 29-30 August, Modi co-chaired the 15th India-Japan Annual Summit with Prime Minister Shigeru Ishiba, focusing on defence cooperation, economic ties, and supply chain resilience—areas critical for diversifying away from US dependencies. Discussions reportedly included accelerating joint ventures in semiconductors and green energy, with both leaders emphasising a “free and open Indo-Pacific” in subtle counterpoint to US protectionism.
From there, Modi proceeded to China for the Shanghai Cooperation Organisation (SCO) summit in Tianjin from 31 August to 1 September—his first visit to the country in seven years. Bilateral talks with President Xi Jinping highlighted efforts to stabilise relations post-border tensions, with agreements on trade deficit reduction and resuming direct flights. Foreign Secretary Vikram Misri noted that both leaders viewed their nations as “partners rather than rivals”, stressing that stable ties could benefit 2.8 billion people and foster a multipolar Asia. While no major breakthroughs on territorial disputes emerged, the meeting underscored India’s push for balanced trade amid US pressures, with Modi advocating a “political and strategic approach” to economic imbalances.
These engagements, occurring just before the GST overhaul, signalled India’s intent to deepen Asian partnerships as a hedge against Western volatility.
GST 2.0: Targeted economic cushion, timed for effect
On 3 September, the GST Council approved what ministers described as the most consequential rate rationalisation since the GST’s introduction, collapsing four slabs into two, broadly 5 per cent and 18 per cent, with targeted exemptions and a continuing high rate for luxury and “sin” items. The reforms take effect on 22 September — deliberately ahead of the festive season. The Modi government expects the package to spur consumption and ease price pressures. The Centre’s initial estimate of revenue loss is sizeable but deemed manageable by officials.
The timing is politically resonant. While ministers insist the overhaul was long planned, the coincidence with the tariff shock means GST 2.0 now reads as an explicit economic buffer: lower domestic indirect taxes across many consumer lines will lift volumes, provide immediate relief to manufacturers and traders squeezed by weaker external demand, and soften the political sting of lost export opportunities. Analysts described the package as “one arrow, many targets” — stimulating demand, cooling inflation, helping MSMEs and improving cash flows so firms can ride out disrupted US orders.
Five ways GST 2.0 helps — and the gaps it cannot fill
Demand backstop: Lower GST on mass goods and reduced taxes on small cars and appliances should raise household purchases during the crucial festive quarter, aiding factories that otherwise would face faltering US orders. Early market commentary suggests festival season sales will be the quickest indicator of the package’s effectiveness.
Working capital relief: Rate cuts and exemptions ease cash-flow constraints across MSMEs and retail chains, which in turn reduces immediate layoffs and bankruptcies in export-adjacent clusters. Faster GST refunds, which the government has promised to prioritise, will be critical.
Signal to investors. Simplification reduces compliance frictions. That helps multinational firms reallocate production to India — a process already under way, for example in electronics — and reassures foreign investors that policy can be responsive. Reuters and industry reports earlier in the year documented rising iPhone production in India, a trend GST 2.0 aims to accelerate.
Macroeconomic breathing room: By cooling inflation (some banks suggest headline consumer price pressure might ease if cuts are passed through), the reform affords the Reserve Bank and the government more room to support growth without triggering immediate monetary tightening. Citi and other institutions placed a quantifiable easing effect on inflation in their models.
Fiscal strain: Cuts mean revenue loss. The government’s estimate of the hit has been challenged by economists; balancing this shortfall without crowding out capital spending will be the policy test in the quarters ahead. States face uneven impacts that will require Centre–state coordination on borrowings and transfers.
What GST 2.0 will not do is alter the landed price of Indian exports in the United States. Tariffs are applied at the US border; domestic indirect tax cuts can only partially offset the competitiveness loss through lower production costs, higher domestic demand and improved firm resilience. Targeted export relief — faster drawback, interest subsidies on export credit and bilateral market access concessions — remain necessary complements. Specific exemptions on life and health insurance policies, along with reductions on essential medicines, agricultural machinery, and renewable energy devices, further underscore the focus on affordability and inclusion.
Diplomacy on two fronts
Economic fixes would be incomplete without politics. Over the week, New Delhi reinforced its diplomatic outreach. Singapore’s Prime Minister Lawrence Wong conducted a high-level visit focused on trade, green energy and digital cooperation; Germany’s foreign minister Johann Wadephul met Indian counterparts to press for deeper EU-India engagement and even asked for India’s help on wider security questions. Finland’s President Alexander Stubb publicly cautioned against alienating the Global South — all signs that many countries are seeking stable ties with India amid doubts about Washington’s consistency.
That outreach serves multiple political aims. First, it converts short-term diplomatic goodwill into concrete commercial and investment opportunities that can help absorb the tariff shock. Second, it strengthens India’s voice in fora where the Global South seeks alternatives to an order perceived as increasingly fractious. Third, it preserves space to mend relations with the US later without having escalated into a bilateral crisis. In other words, New Delhi is pursuing diversification rather than decoupling.
Global North balanced with Global South
The week gone by has underscored an emerging narrative — the Global North is not monolithic in response to US policy. While some Western capitals share concerns about India’s ties with Russia, many European governments and Asian partners are pragmatic — keen to secure supply chains, investment and collaboration With New Delhi, even as they voice reservations about Washington’s methods. Germany’s outreach is notable: Berlin explicitly sought India’s help on wider diplomatic problems, signalling trust and the potential for a deeper EU-India economic compact.
Perhaps the EU leaders wouldn’t have been wary of Trump if the US president had not treated them with condescension, making them sit around his desk at the White House recently, as though they were obedient pupils attending a lecture by the headmaster.
Be that as it may, India’s alignment with parts of the Global South has political meaning beyond immediate bilateral economics. BRICS expansion and active engagement in multilateral forums have amplified India’s diplomatic voice; presenting India as a leader of an alternative coalition makes the country more attractive to nations seeking hedging options. GST 2.0 strengthens the domestic pillar of that leadership by showcasing governance that can protect and stimulate the home economy.
Sectoral winners and losers
In electronics and mobile manufacturing, firms that have already moved assembly to India — notably players in the Apple supply chain — stand to gain as domestic demand firmed and compliance slows. GST simplification reduces the friction of complex input chains. However, where exports to the US are price sensitive, gains may be contained without targeted export rebates.
The labour-intensive, export-dependent sectors—textiles, gems and jewellery, and shrimp—are most vulnerable to border tariffs. Domestic demand can absorb some production, but order books to the US will still decline unless the Indian government offers direct export support. Some industry sources and analysts estimate meaningful short-term revenue risks.
As for automotive and appliances, reclassification of small cars and certain appliances into the 18 per cent bracket reduces consumer prices, which should boost volumes during the festival season. Strong retail take-up here will be an early signal of the package’s success.
Policy complements that matter now
GST 2.0 is necessary but not sufficient. The past week’s news discourse identified immediate follow-ups policymakers must prioritise:
- Faster GST refunds and predictable drawback schedules to help exporters manage cash flow.
- Targeted export credit and interest-subsidy windows for sectors hit hardest by US tariffs.
- Bilateral and multilateral market access pushes — particularly accelerated EU-India trade discussions — to diversify destination markets for Indian goods. Germany’s visit and public calls for an FTA point in that direction.
- Currency policy calibration: some economists argue that a somewhat weaker rupee would help cushion exporters; this is politically sensitive and technically constrained, but it’s part of the policy conversation.
Measuring success
The next quarter will provide an empirical verdict. Watch for:
- Festive-season retail sales and small-car registrations (early gauge of domestic demand).
- Factory utilisation and export order books (to see how much production is re-oriented to the home market).
- Timeliness of GST refunds and the speed of other export relief measures (operational success).
- Diplomatic outcomes: new trade agreements, investment commitments announced during state visits, and concrete EU-India FTA progress.
Calibrated, two-track answer
India’s reply to Trump’s tariff gambit is not a single act of retaliation but a calibrated two-track strategy. GST 2.0 provides an economic cushion and a political narrative of self-reliance; diplomatic outreach with Singapore, Germany and others converts sympathy into substance. The combination is designed to protect jobs, keep markets open and expand India’s geopolitical room for manoeuvre without burning bridges.
The risks are material — revenue shortfalls, vulnerable exporters and potential strain in US ties — but the approach reduces the likelihood of an all-out bilateral rupture. If India can pair GST 2.0 with rapid, export-focused support and tangible trade wins with alternative partners, the tariff episode will be remembered less as a blow and more as an inflection point in India’s rise as a resilient and consequential actor between the Global North and the Global South.
The author is a senior journalist and writer. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.
