GST 2.0, US tariffs could reshape investment and trade dynamics: Josh Felman

Economist Josh Felman noted that India’s Goods and Services Tax (GST) reforms and the US tariffs could reshape investment and trade dynamics. In an exclusive interview with The Federal, he said the GST changes may ease costs for some businesses but leave structural challenges unresolved, while US President Donald Trump’s 50 per cent tariffs on Indian exports could weigh on growth and keep firms cautious.

Felman also underscored the uneven impact on MSMEs, noting that benefits from lower tax rates could be offset by the removal of Input Tax Credits.

He also questioned the disconnect between India’s headline GDP growth and other economic indicators, pointing to slowing credits, weak industrial output, and falling corporate sales as reasons for continued caution. Edited excerpts:

Watch: Income-tax break unlikely to boost consumption: Ex-IMF India Rep

US President Donald Trump has hinted at more tariffs on India. This comes against the backdrop of Prime Minister Narendra Modi meeting with Russian President Vladimir Putin and Chinese President Xi Jinping at the SCO Summit. The Commerce Ministry says back-channel talks are underway. How optimistic are you about these talks fructifying?

I’m not in any way an expert on the US policy, so this is not really something I know much about. But a long time ago, there was a very famous economist, one of the first econometricians to build a model to explain the economy. He had a well-known saying: “I can give you a number, and I can give you a date — but please don’t ask me for both.”

There’s always a tension between what the economy needs and what politics allows. If India wants to attract businesses moving out of China, it will need some level of trade cooperation with China.

It’s pretty obvious to me that this problem will be solved at some point. I’m sure there are back-channel discussions going on right now — that has to be true, just as a matter of logic. I don’t know the details, but when they will fructify into an agreement, I don’t think anyone outside the very few people directly involved has any clear idea.

So I think everyone needs to plan on the assumption that the Trump tariffs will be around for some time, and adjustments will need to be made accordingly.

Also read: How Centre has bullied states over GST compensation over the years

Earlier, you advised India to reduce its export dependence on the US, which now seems quite prescient given Trump’s tariff stance. How can India act on that advice today? What are the realistic options for diversifying trade?

The most obvious strategy right now is to work hard on finalising a trade pact with the European Union (EU). These discussions have been going on for a long time, but we haven’t seen any results yet. That has to be the number one trade priority.

Equally important is developing stronger ties with the Association of Southeast Asian Nations (ASEAN). For India to become a true global manufacturing superpower, it needs to integrate into global supply chains. Right now, those supply chains are shifting out of China into ASEAN, which makes it crucial for India to deepen its engagement there. While India already has some trade agreements with ASEAN, a lot more could be done to strengthen those relations.

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But what’s your take on this? India has been signing a barrage of Free Trade Agreements (FTAs) with other countries. Do you think that’s the right approach, or have we missed a bigger opportunity? You’ve said India should build stronger ties with ASEAN, yet we opted out of the RCEP, the Regional Comprehensive Economic Partnership. Do individual FTAs make up for that, or should India be aiming for bigger partnerships?

There’s always a tension between what the economy needs and what politics allows. Politically, it’s very difficult to have close economic relations with China. But at the same time, China is the workshop of the world. If India wants to attract businesses moving out of China, it will need some level of trade cooperation with China.

In some respects, we’ve actually gone backwards. For a fair number of goods, Input Tax Credit has been abolished. That means GST is no longer a true value-added tax on these goods, but instead a tax on the selling price — essentially the old excise system.

To be practical, if a Chinese businessman decides to shift his factory to India, that’s an economic gain for India. But if India resists Chinese investment, that shift gets blocked. These are thorny political issues. That’s why I’ve been emphasising less politically difficult options — like agreements with the EU and ASEAN.

Also read: GST 2.0 'people's reform', touches all 140 crore Indians: FM Sitharaman

The number of slabs under GST has been reduced now. But as many economists have told us, this is not the end of reforms; a lot more still needs to be done. What would your prescription be? What else could have been done to make GST even better?

If you go by what’s commonly reported, you get the impression that there are now just two GST rates — 5% and 18%. But that’s not true at all. A third 40% rate has been introduced on so-called sin products. And beyond that, there are still many different rates.

Before this reform, there weren’t just four GST rates — there were more, depending on the value of the good, its end use, and several other factors. Some of that has now been cleaned up, but much still remains. A simple example people know of is the very different rates on small cars and bigger cars. So, we are still a long way from the “good and simple tax” that was promised.

Another concern is that in some respects, we’ve actually gone backwards. For a fair number of goods, Input Tax Credit (ITC) has been abolished. That means GST is no longer a true value-added tax on these goods, but instead a tax on the selling price — essentially the old excise system. The big disadvantage of excise was that it favoured large integrated firms over smaller, less integrated ones.

For example, consider packaged roti. An integrated firm that grows the grain, processes it, and retails it can avoid cascading taxes. But a small kirana shop that buys the package wholesale and sells it will pay GST but won’t get ITC on what it already paid. That puts them at a competitive disadvantage.

The longer-term impact on growth depends on whether we are moving toward a simple tax regime that treats everyone equally. We are still far from that.

You can understand why this was done — keeping track of ITC can be administratively difficult, and there are fears of fraud. But the effect is to tilt the playing field, instead of treating everyone equally, as GST was supposed to do.

This applies to services too — for instance, ITC is not available on health insurance. The result is twofold: it risks making certain products more expensive and creating cascading effects, which could be inflationary.

That said, tax cuts generally should reduce prices. Auto manufacturers, for example, have said they could cut the price of an SUV by around ₹1 lakh, depending on the model. That will certainly benefit consumers. But overall, the price impact will depend on whether manufacturers and retailers actually pass on the GST cuts.

Also Read: Will the GST rejig revive consumption and boost growth?

Does this GST reform really have the potential to revive private investment, or is it just a short-term consumption boost? Last time tax cuts didn’t lift demand — will this be any different?

Obviously, there will be some short-term impact. If you cut the price of SUVs by ₹1 lakh, that’s significant and people will buy more SUVs — no doubt about that.

But the long-term impact on growth depends on whether we are moving toward a simple tax regime that treats everyone equally. We are still far from that. The benefits of real simplification and a level playing field could be enormous, but I don’t think those will be realised anytime soon.

If prices fall, consumers might not spend more — they may just pocket the savings because they want to build precautionary savings right now. So aggregate spending might not rise.

More broadly, a reform like this doesn’t address the real reason firms are not investing. They see huge risks in the Indian economy. Most recently, the Trump tariffs have made companies hesitant to expand export capacity. Even service firms — like IT companies or those setting up global capability centres — are nervous about expanding.

And beyond that, the old risks remain: policy reversals, uneven playing fields that favour national champions, and the fear of tax raids. If anything, these risks have intensified in recent months. Combined with external shocks like tariffs, they will continue to hold back private investment.

Also Read: GST 2.0: Why zero tax may not mean cheaper insurance

When we interviewed you in February, it was shortly after the government announced a tax cut. You said then that whatever extra money people got in their hands, they might not use it to boost consumption, but instead to build a safety net or a nest. Do you see the same happening now? Do you think these latest cuts won’t have any long-term impact and will only lead to a more defensive approach by investors?

Even from a short-run point of view, there’s a long chain of events that needs to happen before you get a true boost to the economy — something people skip over when they say, “Look at these tax cuts, surely they’ll have a big impact.”

Let’s go through the chain step by step.

First, manufacturers and retailers must pass on the GST reductions. We’ve heard that carmakers might, but we haven’t heard the same from other sectors, so that’s a question mark. Next, how will consumers react? If prices fall, consumers might not spend more — they may just pocket the savings because they want to build precautionary savings right now. So aggregate spending might not rise.

Then there’s the fiscal side: the tax cut reduces government revenue. If the government needs to meet budget-deficit targets, it may have to cut spending. That means even if private households increase spending, lower public spending could offset it, leaving total spending unchanged. That’s why I don’t expect a big short-run boost.

Even if you work through all the steps and end up with some increase in spending, remember India is roughly a $4 trillion economy — the change is probably small relative to that. So don’t expect this to be, as people like to say, a “game changer.” That’s unrealistic.

That said, moves toward GST simplification and tax fairness are positive. Cutting taxes on goods that never should have been taxed so highly — for example, cement at 28% — was unreasonable, and correcting that is good. So there are useful gains, but they won’t transform growth on their own.

Also read: GST reform: Karnataka's Channapatna toys get cheaper

From an ease of doing business perspective, do you see these GST changes materially adding up to encourage more investment in India?

There are some procedural changes that will certainly help ease doing business in India — no doubt about that. But the larger risks I mentioned earlier remain, and those will make businesses very cautious.

Now, let me raise one question. When I look at the government’s data, growth has clearly been rising over the last three quarters — GDP has gone from 6.4% to 7.4% to 7.8%. But when you look at the components of GDP individually, they don’t seem to be doing as well. There seems to be a contradiction. How do we make sense of that?

Everyone wants simplicity — one single number that captures how the economy is doing. Normally, that number is GDP. But lately, GDP figures don’t seem to match either people’s impressions or the disaggregated data we regularly see.

For example, every month we get industrial production (IIP) numbers, and they suggest the economy is struggling. Credit growth data shows lending is slowing down. Corporate results show sales decelerating sharply. Inflation, too, has dropped steeply. None of this tallies with the headline GDP numbers — and that’s creating a lot of confusion about the true state of the economy.

Also Read: GST bonanza: SUVs, small cars get cheaper; relief for premium car segment

Are you saying that India’s GDP numbers are skewed or distorted?

I’m saying there’s a lot of confusion. GDP numbers are showing one thing, while many other indicators suggest another. That makes it very difficult to assess how economy is actually doing.

This confusion isn’t just for households or businesses deciding whether to invest — it’s also visible at the level of government policy. For instance, if the economy were truly booming, why did the government feel the need to announce a tax cut? The argument for the cut was to boost consumption. Similarly, the debate around whether the RBI should cut interest rates seems inconsistent — if the economy is strong, why lower rates?

It seems even policymakers themselves are uncertain about the true state of the economy.

I’d like to know your take on GST 2.0 and its likely impact on two crucial areas. First, how do you see it affecting MSMEs? What kind of impact it might have on this sector?

The impact on MSMEs will probably be mixed, depending on the sector. Some goods produced by MSMEs will benefit from lower tax rates, which will help them. But, for other goods, where ITC has been removed, MSMEs would get hurt. So, the effect really varies depending on the specific MSME and products they make.