GST 2.0, Global Pressures, and a Hollow Growth Story: Is India’s Economy Being Propped Up by Optics?

In a year marred by geopolitical friction, economic uncertainty, and domestic discontent, the Indian government is touting a revamped GST policy, a flashy GDP figure, and high-profile diplomatic engagements as signs of economic strength. But when you dig beneath the headlines, a starkly different picture emerges, one of structural fragility, policy contradictions, and a growing disconnect between statistical storytelling and lived reality.

GST 2.0: A Misfired Booster Shot

The government’s rollout of GST 2.0, pitched as a “booster dose” for the economy, comes against the backdrop of U.S. tariffs on Indian exports. Trump’s decision to impose a 25% duty has placed significant pressure on India’s key labor-intensive export sectors: textiles, footwear, gems, and apparel. These industries, already squeezed, now face a demand shock that could translate into a ₹4.4 lakh crore loss in export revenue.

The government’s counter? Slash indirect taxes to spur domestic demand.

The logic is simple: cheaper goods fuel consumption. But the math doesn’t check out. The ₹48,000 crore in revenue forgone through GST cuts barely scratches the surface of the loss in external demand. Moreover, the sectors targeted by GST relief largely belong to the organized economy, which constitutes just 6% of India’s workforce. Meanwhile, the unorganized sector, the backbone of employment and domestic consumption, is left behind, or worse, further squeezed.

Even more concerning is the knock-on effect. As central revenues dip, states are expected to lose ₹7,000 crore. Their likely response: hike petrol and diesel prices through cesses and excise, driving up production and transport costs. Already, coal has seen its GST jump from 12% to 18%. That raises energy costs across the board, stifling industrial output and pushing inflation in essential goods.

The result is a vicious cycle: tax cuts that don’t stimulate enough demand, rising energy costs that suppress production, and fiscal gaps that threaten social spending on education, health, and rural employment – areas that actually generate jobs.

SCO Summit: Symbolism Over Substance

Prime Minister Modi’s recent visit to China for the Shanghai Cooperation Organization (SCO) summit was presented as a geopolitical masterstroke. But it delivered more pomp than payoff. While Russia and China walked away with 22 agreements, India inked none. The optics were striking: India, once wary of SCO summits, now participating in full force, without extracting any visible strategic or economic gain.

Why attend then? Some experts argue it was a signal to Washington: India has options. But this geopolitical balancing act only underscores India’s growing vulnerability. Russia is indispensable for India’s defense supplies, from aircraft to rifles and China, despite frosty ties, holds India in a trade chokehold with a $100 billion deficit. Attempting to play both sides while remaining diplomatically noncommittal has left India boxed in.

The border issues with China remain unresolved. The U.S. remains noncommittal. Russia is drifting deeper into China’s orbit. India’s external leverage appears increasingly thin.

Trump’s Tariffs: The Shockwave That Keeps Giving

Trump’s tariffs aren’t just punitive, they’re strategic. By locking India out of key markets and forcing one-sided trade deals with allies like Japan, South Korea, and the EU, the U.S. has disrupted global trade flows and left emerging economies scrambling.

The idea that India can quickly pivot to “swadeshi” or find alternative markets is deeply flawed. Global supply chains are complex, long-term ecosystems, not pop-up shops. Other countries now face surpluses and are dumping goods in third-party markets. Reports from hubs like Ludhiana suggest Indian exporters are already being outcompeted in the EU by cheaper Bangladeshi and Chinese goods.

The pressure isn’t just economic, it’s political. Rising unemployment, falling foreign investment, and a tumbling rupee feed public anxiety. Anti-incumbency grows. And while policymakers speak the language of resilience and self-reliance, the ground reality reflects fragility and fragmentation.

GDP Growth: A Mirage in the Data Desert

Into this storm comes the government’s latest headline: India’s GDP grew at 7.8% in Q1 2025-26. But scratch the surface, and doubts begin to pile up.

The figure relies heavily on high-frequency indicators, of which only six out of 22 show improvement. Services have allegedly surged, but no matching data supports such a leap. Meanwhile, the GDP deflator – used to convert nominal to real GDP – appears suspiciously low, making real growth look better than it is.

Add to that the “discrepancy” between income- and expenditure-side data, a statistical anomaly that has plagued post-demonetization estimates. The issue isn’t just technical; it’s political. By overstating base-year figures during economic shocks like demonetization and GST rollout, subsequent years appear rosier than they are.

Some economists now argue that India’s actual economy may be up to 48% smaller than officially claimed, closer to $2.5 trillion than $3.8 trillion. If true, it means we’re not the world’s fifth-largest economy, but barely ahead of Italy.

The Bigger Picture: Systemic Policy Blindness

What ties all of this together is a consistent policy bias toward the organized sector, even as 94% of Indian workers remain in the unorganized economy. The GST structure favors large corporates. Infrastructure projects and freight corridors extend corporate reach into rural markets, displacing local enterprises. Digitization and “formalization” are being imposed on sectors that survive on informality.

The assumption that India’s economy can be modernized top-down, through corporate tax cuts, highways, and digital compliance, is proving deeply flawed. What India needs instead is bottom-up growth: investment in rural health and education, strengthening micro enterprises, supporting smallholder farmers, and funding real R&D to reduce technological dependence.

Instead, we’re getting glossy data, corporate-friendly tax tweaks, and performative diplomacy.

Conclusion: Time to Rebuild, Not Rebrand

India is not without options, but they require confronting hard truths. Export dependence without competitive capacity is a vulnerability. Glossy GDP numbers without ground-level improvement are dangerous distractions. Geopolitical maneuvering without domestic strength is a dead end.

GST 2.0 isn’t a rescue plan, it’s a misdiagnosis. The SCO summit wasn’t a coup, it was a concession. And the 7.8% GDP growth isn’t a miracle – it’s a mirage.

The real work lies in rebuilding India’s economic foundations—not rebranding them.

 

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