Reforms to cushion economy against adverse effects of trade disruptions; external shocks need vigilance: FinMin

New Delhi, Sep 26 (PTI) The government's reform agenda will cushion the economy against the adverse effects of trade disruptions, the Finance Ministry said on Friday, as it pitched for vigilance against external shocks and global market volatility.

Terming GST rationalisation as the "third leg of the tripod of tax reform" after the cut in corporate tax rate and personal I-T, the Finance Ministry's Monthly Economic Review said the GST rate cuts will help lower inflation over the next year and also bring a further upside bias to the country's growth prospects.

Three global rating agencies have upgraded India's sovereign credit ratings so far in FY26 on the back of strong growth, macroeconomic stability, and fiscal discipline over the previous few years, it added.

However, the recent US imposition of a one-time fee of USD 100,000 for all future H-1B visas caused disruptions, the impact of which, particularly on the growth of future remittances and service trade surpluses, will need close monitoring if the restrictions persist.

"This is not the time to drop our guard. Uncertainties and risks persist.

"The Union government's reform agenda is expected to cushion the economy against the adverse effects of trade disruptions. Regulatory reform and infrastructure development will be key to sustaining momentum," the report said.

It also called upon states to pursue state-level deregulation, thereby putting India's economy on a higher growth trajectory.

"Speed of decision-making and attention to detail in execution are more critical than ever at all levels of the government - Union, States and local. Commitment to and delivering on fiscal targets is critical to make available the stimulus of lower cost of capital to all segments of society," the ministry said.

The ministry said if tariff uncertainties persist, there will be an impact on export sectors with spillover risk to domestic employment, income and consumption. Newer markets will take time to mature and contribute to export growth as established markets have.

Further, the decision by the US government to impose a fee on new H1B visa-seekers is a reminder of the risks of trade uncertainties affecting the hitherto unaffected services sector.

"For now, the risks appear manageable, but they are there.

"The near-term outlook, therefore, is characterised by steady, reform-driven growth rooted in macroeconomic discipline and adaptive economic diplomacy, with ongoing vigilance warranted against external shocks and global market volatility," the ministry said in its report.

The report said that despite trade and tariff-related headwinds, India's external sector has remained resilient.

India's economic outlook remains broadly optimistic despite a turbulent international environment marked by geopolitical uncertainties and shifting trade dynamics, it said, adding that domestic components of demand have played a key role in supporting growth in the April-September period and are expected to remain so in the next half-year as well.

Indian economy grew 7.8 per cent in the April-June quarter, much faster than the RBI's estimate of 6.5 per cent.

The RBI expects FY26 growth to be at 6.5 per cent, while the Finance Ministry's Economic Survey pegs growth at 6.3-6.8 per cent.

The Monthly Economic Review report further said, recognising the need to strengthen domestic growth drivers amid these heightened external-sector risks, the government has announced a rationalisation of the GST regime.

"This move is expected to lower the tax burden on consumers, boost consumption, and provide a cushion against tariff impacts. Additionally, it is likely to improve demand visibility for firms, enabling them to expand investment in additional capacities. Additionally, the revision in GST rates may lead to a one-time reduction in inflation over the next year," the report added.

Effective September 22, Goods and Services Tax (GST) are levied in 2 slabs of 5 and 18 per cent, besides a 40 per cent tax only on ultra-luxury items.

Earlier, GST was a 4-tier structure of 5, 12, 18 and 28 per cent, and a compensation cess was levied on luxury and sin goods. PTI JD BAL BAL