India's Tax Reforms Under Modi: Balancing Fiscal Strain and Economic Growth in a Geopolitically Tense Environment

India's economic transformation under Prime Minister Narendra Modi has been a masterclass in balancing ambition with pragmatism. Over the past two years, the government has rolled out sweeping tax reforms—ranging from corporate tax cuts to a restructured Goods and Services Tax (GST)—aimed at spurring growth, reducing compliance burdens, and positioning India as a global manufacturing hub. Yet, these reforms are unfolding against a backdrop of U.S.-China trade tensions, fiscal constraints, and structural dependencies that test the resilience of India's economic model. For investors, the question is whether these reforms will catalyze a self-sustaining growth story or expose vulnerabilities in a volatile geopolitical landscape.

Tax Reforms: A Double-Edged Sword

The Modi government's tax agenda since 2023 has prioritized simplification and competitiveness. The proposed GST overhaul, set to consolidate tax slabs into 5%, 18%, and a 40% “sin goods” bracket, aims to reduce complexity and lower consumer costs. By shifting 99% of 12% GST items to the 5% slab and 90% of 28% items to 18%, the government seeks to make essentials more affordable while maintaining revenue neutrality through the elimination of the Compensation Cess. This move, if executed smoothly, could boost consumer spending and ease the burden on small businesses, which are the backbone of India's economy.

Corporate tax cuts, meanwhile, have been a cornerstone of the government's strategy to attract investment. The 2023 budget reduced the corporate tax rate for domestic companies from 30% to 22%, with further incentives for manufacturing firms. These cuts, paired with the Production-Linked Incentive (PLI) scheme, have drawn capital to sectors like electronics, pharmaceuticals, and automobiles. The “Make in India” initiative has gained traction, with foreign direct investment (FDI) inflows into manufacturing rising 69% year-on-year to $165.1 billion since 2014.

However, these reforms come with fiscal trade-offs. The fiscal deficit for FY2024–2025 closed at 4.8% of GDP, a modest improvement but still above the government's 4.4% target for FY2026. The reduction in tax rates and increased spending on subsidies and infrastructure have strained public finances, particularly in an election year. While the government has offset some of this by expanding the tax base and digitizing GST compliance, the risk of revenue shortfalls remains.

Export Competitiveness in a Fractured Global Order

India's export sector is both a beneficiary and a casualty of the U.S.-China trade war. On one hand, the U.S. has sought to diversify supply chains away from China, offering India a window to capture market share. The Trump administration's 25% tariffs on Indian goods in August 2025, however, have complicated this narrative. Sectors like textiles, pharmaceuticals, and auto components—accounting for 30% of India's U.S. exports—face immediate headwinds. The pharmaceutical industry, which supplies 50% of U.S. generic drugs, is particularly vulnerable to supply chain disruptions and margin compression.

To mitigate these risks, India is diversifying its export destinations. The European Union has become its second-largest trade partner, while Southeast Asia and Africa are emerging as growth corridors. Domestically, the “Make in India” push has driven a 200% surge in electronics manufacturing since 2019, reducing reliance on Chinese imports. Yet, structural dependencies persist. China remains India's largest trading partner, with a $85 billion trade deficit in FY2024–2025. Critical sectors like EVs and pharmaceuticals still rely heavily on Chinese inputs, and Beijing's export controls on rare earth magnets and APIs pose a direct threat to India's manufacturing ambitions.

Investor Implications: Navigating the Tensions

For investors, India's tax reforms and geopolitical positioning present a mix of opportunities and risks. The government's focus on manufacturing and digital infrastructure has created fertile ground for long-term growth. Sectors like pharmaceuticals, electronics, and IT services are well-positioned to capitalize on global demand, particularly as U.S. and EU markets seek alternatives to Chinese supply chains.

However, short-term volatility is inevitable. The U.S. tariffs and China's supply chain dominance could weigh on export margins and investor sentiment. Currency hedging and sectoral diversification will be critical for managing exposure. For example, IT services firms like Tata Consultancy Services (TCS) and Infosys are adapting to reduced U.S. demand by accelerating AI integration and restructuring workforces. TCS's 2% workforce reduction in 2025 underscores the need for cost efficiency in a competitive landscape.

Infrastructure and energy sectors also offer compelling opportunities. The National Manufacturing Mission and PLI schemes are driving investments in shipbuilding, mobile batteries, and green energy. With India targeting a $10 trillion economy by 2030, infrastructure spending is expected to rise, supported by the National Infrastructure Pipeline (NIP) and public-private partnerships.

The Road Ahead: Strategic Resilience

India's ability to navigate these challenges will hinge on its capacity to balance fiscal discipline with structural reforms. The proposed GST simplification, if implemented by Diwali 2025, could unlock efficiency gains and boost compliance. Meanwhile, the government's push for “cooperative federalism” with states will be crucial in ensuring smooth execution of reforms.

For investors, the key takeaway is to focus on sectors with strong policy tailwinds and global demand. Pharmaceuticals, electronics manufacturing, and IT services are prime candidates, while regional trade expansion into Southeast Asia and Africa offers diversification benefits. Currency risk, however, remains a wildcard, particularly given the rupee's 5% depreciation against the dollar since the U.S. tariffs were announced.

In the long term, India's demographic dividend, technological capabilities, and strategic partnerships position it as a resilient player in a multipolar world. But the path to $10 trillion will require navigating fiscal constraints, geopolitical tensions, and the lingering shadow of China. For those willing to bet on India's transformation, the rewards could be substantial—but patience and agility will be paramount.