India's economy is expected to benefit from the proposed changes in the structure and rates of the goods and services tax this Diwali. Prime Minister Narendra Modi announced rate rationalisation in the GST during his Independence Day address this month.
A reduction in rates for consumer goods like electronic devices and furniture has the potential to boost a nascent recovery in domestic private consumption, which contributes 60% to India's gross domestic product.
Over the past 20 years, several major economic reforms have been implemented by governments to promote growth. Such reforms have focused on a range of areas, including taxation, financial inclusion, industrial policy and infrastructure development. They include supply-side reforms like corporate tax cuts and production-linked incentives to demand-side changes like GST.
Throughout this period, GDP growth averaged 7%, one of the fastest among major economies in the world.
UPA Era
The 10-year UPA government under Prime Minister Manmohan Singh continued with the reform momentum started in the early 1990s by Narasimha Rao, which translated into a period of strong economic growth. Quarterly GDP growth averaged 8% during the period.
In 2005, the Special Economic Zones Act was passed to provide a statutory framework for creating SEZs in India, which are designated duty-free enclaves offering incentives and integrated infrastructure to promote exports and attract investment for industrial growth.
The law was implemented the following year. Key features included tax and duty benefits for SEZ developers and units, a single-window approval mechanism, and the concept of SEZs as territories outside the normal customs territory.
The UPA government enacted the Mahatma Gandhi National Rural Employment Guarantee Act in 2005, as a rights-based legislation guaranteeing 100 days of wage employment to rural households for unskilled manual work.
The programme aimed to enhance livelihood security in rural areas, providing a vital social safety net for the poor and recognising the right to work as a fundamental right.
The NREGA was passed in 2005 and implemented in phases, starting in February 2006, covering all rural districts by 2009-10.
Between 2006 and 2008, GDP expanded by over 9% each quarter.
The global financial crisis hit in 2008 after the US subprime bubble bust. The effect of the global slowdown was also felt by India. Economic growth recovered briefly in 2009 and 2010.
In 2011, the second UPA government proposed 51% foreign direct investment in the retail sector. However, the decision was delayed due to pressure from coalition parties and the opposition, and it was ultimately approved in December 2012.
Governance troubles in the UPA-2 administration, policy paralysis, high taxation and the 'taper tantrum' in the US plugged a hole in India's growth in the subsequent years.
Modi Era
The first Modi government began an exercise of reforming the welfare system. It introduced the Jan Dhan Scheme, Swachh Bharat, PM Mudra, PM Awas and Atal Pension Yojana. Quarterly GDP growth averaged 6.2% between 2014 and 2025.
India adopted a flexible inflation targeting framework in 2016, formalising its monetary policy with a mandated medium-term target of 4% Consumer Price Index inflation, within a 2% to 6% tolerance band.
This shift, codified by an amendment to the RBI Act, 1934, was a response to the high inflation experienced in the preceding years and established the Monetary Policy Committee to achieve this objective.
The GST has been the most transformative reform in decades, the largest indirect tax overhaul since independence. In July 2017, the government introduced a unified indirect tax replacing a complex system of multiple central and state levies, such as VAT, service tax and excise duty. The primary goal was to create a single, common market across India, simplify tax compliance, reduce the cascading effect of taxes on goods and services, and boost economic efficiency.
After an initial bump in the quarters following GST rollout, GDP growth began to decline.
In response to a growth slowdown, the government reduced the base corporate tax rate from 30% to 22% for companies that do not seek exemptions, and from 25% to 15% for new manufacturing companies in 2019.
The coronavirus pandemic dragged the economy into recession in 2020. Amid a package of reforms under the self-reliant India vision, the country introduced the PLI scheme to promote manufacturing, liberalised entry of private players in sectors like nuclear power, space and defence, and decriminalised minor offenses under the Companies Act, 2013.
The Modi government proposed agricultural and labor reforms but faced backlash from farmers who protested against the proposed agricultural bills. Eventually, due to the sustained protests, the government repealed the agricultural bills in 2022.
India is now facing headwinds from the tariff policies of the US under Donald Trump. Modi's latest turn to accelerate on the reform pedal is seen as a response.
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