📰States Push Back on Tax Cuts | Daily India Briefing

State governments are pushing back against Modi’s tax cuts. India, once again, reaffirms it will purchase Russian oil. Lastly, we dive into economic factors driving India and China’s warming ties.

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Macro

• Most governments, other than India, are deferring to Trump to ease relations. Most governments are choosing to allow US companies to run rampant or even nominate Trump for the Nobel (like Pakistan), other than India, which has made no changes to foreign policy. 

• India's Christmas exports are under threat due to tariffs. Small Indian firms ship everything from lights to angels every year, but this year might be different due to the 25 or even 50 percent tariffs. Exporters are redesigning products that are less seasonal to last longer. 

• Oil indicators are pointing towards an Asian supply glut, even with tariffs and sanctions. Large imports from Brazil, the US, and Nigeria (due to new sanctions on Russia) will keep oil reserves high. This is seen with the low premium Brent is trading at compared to Dubai.  

• India's economic activity rose in August, based on flash PMIs at 59.PMIs were 59.8 for Purchasing Managers, and Services rose to 65.6. The private sector showed its largest growth since the data was first published, starting in 2005, on the back of domestic sales volumes.

Equities

• Indian broker Avendus botched Clean Science & Technology's share sale, and is in hot water now. They were meant to release 24 percent of shares but released 56 percent or $749 million (₹65.4 billion) instead. This comes as Mizuho was looking to buy a stake in the company. 

• Nazara will likely write down a $122 million (₹10.7 billion) poker app investment with an online betting ban looming. CEO Mittersain said that financial statements should not be impacted since Moonshine’s revenue is not consolidated due to the 46 percent minority stake. The Parliament online betting bill threatens a $3.8 billion (₹331.7 billion) industry and 200,000 jobs.

• Apple is expanding its Indian push with a new store in Bangalore. This is the 3rd store in the country after Mumbai and Delhi. Apple only accounts for 5 percent of the 700 million smartphones but revenue has risen 30 percent y-o-y, mostly from iPhones. Other devices still remain priced out.

• Ola shares have jumped from up 19 percent to down 9 percent due to 76 block share trades. These block trades have constituted over 5 percent of Ola’s total share count which has led to a tentative rebound in Ola equity value after a July trough from accidents and shrinking market share.

Alts

• Key Trump advisors have pointed to Ambani as a war profiteer with Russian oil imports. There are reports of several Indian businesses being seen as war profiteering, with Ambani chief among them due to Reliance’s huge imports. Modi has so far shielded Reliance since it is key to India’s development. 

• Indian assets are EM investors' biggest underweight, with 71 percent of EM funds underweight now. Inventors moved into Taiwan, China, and South Korea while actually shorting Indian stocks, bonds, and rupees to provide funding sources for their longs. Investors are not expecting the domestic-driven economy to be a safe haven from volatility.

Policy

• China and Pakistan are holding dialogues to improve relations. Chinese Foreign Minister Wang Yi met with Pakistani counterpart Ishaq Dar to maintain close coordination and communication. This is after China has poured billions into the country as investments and helped Pakistan repel Indian attacks earlier this year. 

• Modi is on the offense now, demonstrating domestic strength after spurning Trump.By ignoring the US on tariffs and focusing on the domestic side, Modi has shown India’s strength albeit in a risky way. Stock markets have remained cautious since the domestic bet could easily fail, though success could propel India to become an independent superpower.

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1. States Push Back on Tax Cuts

The new goods and services tax cut (similar to a U.S. sales tax) has sparked concerns among state governments, which are expected to bear the brunt of the resulting revenue shortfall. Economists estimate the move could cost the exchequer $20.7 billion (₹1.8 trillion) annually, with states losing nearly 0.36 percent of GDP compared with 0.15 percent for the federal government. 

While investors cheered the tax rationalization as a boost to consumer spending to offset US tariffs, states are warning about fiscal health. GST accounts for more than 40 percent of state tax receipts, and many already face strained finances due to high deficits, rising debt, and weak revenue mobilization. Bond markets are signaling concern: the spread between state 10-year bonds and central government securities has nearly doubled to 66 basis points.

State reactions have been mixed. Southern states such as Tamil Nadu and Kerala have flagged potentially “devastating” impacts, while Punjab has called for a new compensation framework. Even some BJP-ruled states are pressing for clarity. There is also a political stance present, since a Diwali timeframe allows for Modi to frame the cuts as pro-voter ahead of key state elections in Bihar; goodwill would strengthen the ruling coalition. 

The Modi administration is moving swiftly to build consensus, with FM Sitharaman presenting proposals to a panel of state finance ministers last week. While the panel endorsed the changes in principle, concerns over revenue losses dominated discussions. The final decision rests with the GST Council, which requires a three-fourths majority but is dominated by BJP-ruled states. New Delhi argues that near-term revenue losses will be offset by stronger consumption and note that states retain the ability to raise taxes on petroleum and alcohol.

2. India Rebuffs the US on Russian Oil

India has once again signaled it will continue purchasing Russian oil so long as it remains economically advantageous. The pledge, delivered by India’s ambassador in Moscow, highlights both the scale of India’s energy dependence and the geopolitical risks it faces as the U.S. prepares to raise tariffs on Indian exports to 50 percent on August 27.

India accounts for 37 percent of Russian crude exports since Russian Urals are sold at a 5 percent discount, leaving refiners with few alternatives. State refiners resumed purchases earlier this month after a brief pause, while Russian officials signaled they expect flows to hold steady and flagged scope for expanded cooperation in coal, LNG, and Arctic upstream projects.

The U.S views Indian purchases as directly undermining sanctions enforcement and helping fund Russia’s war effort. Jaishankar pushed back strongly, noting Washington itself had previously urged India to buy Russian crude to stabilize energy markets. He framed the dispute as another case of U.S. policy inconsistency that unfairly burdens India’s energy security.

For markets, the message is twofold. First, Russian oil remains an entrenched part of India’s energy mix and a buffer against imported inflation, limiting upside risk to the country’s trade deficit despite U.S. tariffs. Second, the geopolitical cost is mounting: higher U.S. duties will weigh on India’s exports at a moment when growth is already under pressure, and may further dampen foreign equity inflows.

3. The Growing, But Tense Chinese-Indian Relationship

India and China have been in cold relations since 2020, with India banning Chinese apps and blocking companies. But, even amid geopolitical hostility, economic necessity has kept the relationship from breaking.

For India, the dependence is structural. China supplies critical technologies and inputs that underpin India’s industrial ambitions. Nearly $48 billion (₹4.2 trillion) of India’s 2024 imports from China were electronics and electrical equipment — vital for its smartphone assembly, telecom buildout, and broader push into manufacturing. Its vaunted pharmaceutical sector still relies on Chinese active ingredients, while green transition goals hinge on Chinese rare earths and batteries. Without Chinese inputs, India risks bottlenecks across electric vehicles, renewables, and consumer electronics. That is why Indian conglomerates from Adani to JSW continue exploring partnerships with Chinese firms despite political resistance.

China needs India to grow since domestic economies are slowing and access to Western consumers is narrowing. Chinese smartphone makers already dominate sales in India, and automakers like BYD see the country’s fast-growing EV market as a prize worth competing for. Tech giants such as Alibaba and Tencent have also invested in India’s startups, betting on its digital economy. But the opportunity is paired with risk. Beijing knows India is following the same path China once took by importing foreign know-how to leapfrog industries. 

In Trump’s first term, Washington courted India as a counterweight to China. In his second, the calculus shifted: tariffs, energy disputes, and trade criticism have put New Delhi on the receiving end of Trump’s ire. That alignment of pressure has given both Beijing and New Delhi incentives to stabilize ties. High-level visits resumed in 2024, Modi is preparing to attend the Shanghai Cooperation Organization summit in China, and restrictions on flights, visas, and fertilizer exports are easing.

See you tomorrow.

Written by Eshaan Chanda & Yash Tibrewal. Edited by Shreyas Sinha.

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