Diwali Duty Cuts Put India in a Tight Spot Amid Trump's Tariff Warning

Prime Minister Narendra Modi has recently promised 1.4 billion consumers a Diwali gift of lower GST, in order to soften the blow in case President Donald Trump decides to go ahead with his threats of doubling tariffs on India this week.

But this decision poses its own set of challenges.

What Are These Challenges?

Amazon.com Inc. as well as Walmart Inc.'s Flipkart are going to launch their annual shopping festivals around a month prior to the Diwali holidays in the third week of October.

In case buyers postpone their purchases during this crucial period to wait for lower prices, inventories will pile up, according to a Bloomberg report.

Additionally, the auto sector, which is expecting to benefit the most from these tax reductions, is also asking PM Modi to speed up the tax cuts.

While this may happen, the report adds that it will also create problems.

The 28 state governments which had agreed eight years ago to forgo many of their local levies to adopt a unified goods and services tax would want  clarity on their share of the pie.

A hasty implementation of GST 2.0 which is also known as Modi's "next generation GST reforms" in which New Delhi pushes out most of the burden of lower revenue to states, could backfire.

Additionally, stocks have also declined way behind other emerging markets this year, and now fixed-income traders are also becoming nervous.

The spread between the 10-year yield and the central bank's policy rate shot up to a two-year high last week as investors demanded more compensation for holding government bonds, the report added.

In all of this, the risk is not so much about a blowout increase in borrowings in the near term, but the unpredictable consequences of a reboot in economic strategy.

While the readjustment is not a bad thing in itself, the problem is with the circumstances of the move and its timing.

According to investors cited by the report, the Modi administration's strategy is a little more than just a kneejerk reaction to Trump's tariff shock.

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