India's economic landscape is currently marked by a pivotal overhaul of its Goods and Services Tax (GST) framework, robust first-quarter growth, and a booming services sector. The GST Council, led by Union Finance Minister Nirmala Sitharaman, has approved a simplified two-tier tax structure of 5% and 18%, replacing the previous four-tier system of 5%, 12%, 18%, and 28%. A new 40% slab has been introduced for 'sin goods' and luxury items. These significant changes are slated to take effect from September 22, coinciding with the first day of Navratri.
The reforms aim to stimulate domestic demand, with hundreds of consumer products, ranging from soaps to small cars, becoming more affordable. Notably, individual life and health insurance policies, along with 33 life-saving drugs, cancer medicines, and medication for rare diseases, will now be exempt from GST. For the automotive sector, GST on small cars (less than four meters in length with petrol engines up to 1,200 cc and diesel engines up to 1,500 cc) has been reduced to 18% from 28%, while larger or more powerful vehicles will attract a 40% GST. In a boon for the agricultural sector, GST on tractor tyres, parts, and tractors themselves has been slashed to 5% from 18% and 12% respectively. Similarly, farm inputs such as specific bio-pesticides, micronutrients, drip irrigation systems, sprinklers, and various agricultural machinery will now be taxed at 5%. While these changes are projected to result in an annual exchequer cost of ā¹48,000 crore, the government anticipates this will be offset by increased consumption and improved tax compliance. Prime Minister Narendra Modi has lauded these reforms as "next-generation" initiatives designed to enhance the lives of citizens and simplify business operations.
Economically, India demonstrated remarkable resilience in the first quarter of FY26, with its GDP growing by 7.8% (April-June), exceeding all expectations despite prevailing global challenges. This growth was broad-based, observed across manufacturing, services, agriculture, and construction sectors, solidifying India's position as the fastest-growing major economy worldwide. Further underscoring this positive trend, S&P Global recently upgraded India's sovereign rating, a significant development after 18 years.
The services sector has been a key driver of this growth, reaching a 15-year high in August, as indicated by the HSBC India Services Purchasing Managers' Index (PMI) which rose to 62.9 from 60.5 in July. This surge was fueled by robust demand and a significant increase in new orders, with export orders recording their strongest rise in 14 months. However, this expansion comes with a caveat of intensifying price pressures, as output price inflation reached its highest level since July 2012, and input costs saw their fastest rise in nine months. This could lead to a potential spike in overall inflation, which had previously declined to an eight-year low of 1.55% in July. The Composite PMI, combining both services and manufacturing sectors, also reached a 17-year high of 63.2 in August, signaling widespread economic momentum.
Amidst these domestic developments, India continues to navigate external pressures, particularly from US punitive tariffs (50%) on Indian goods, which are currently affecting 55% of India's exports to the United States and contributing to investment uncertainty. Former RBI Governor Urjit Patel has emphasized the need to mitigate the impact on the most exposed sectors. In response, Commerce Minister Piyush Goyal expressed optimism about concluding a bilateral trade agreement (BTA) with the US by November. Concurrently, India has forged a new free trade agreement with the European Free Trade Association (EFTA), comprising Iceland, Liechtenstein, Norway, and Switzerland, which includes legally binding provisions on trade and sustainable development and is set to commence on October 1. This pact includes an investment commitment of $100 billion over 15 years from the EFTA bloc.
Beyond trade, India is also bolstering economic ties with Japan, focusing on smart city development and high-tech manufacturing, notably in Gujarat's Dholera Smart City.