GST reform isn’t the only catalyst that the equity markets need
Consumers are expected to delay purchases of items likely to benefit from GST cuts. This could hurt near-term demand.
The benchmark Nifty 50 index gained 1% on Monday, flirting near the 25,000 level, while the BSE Sensex rallied 676.09 points to 81,273.75. A couple of factors are at play here.
The Street is pinning its hopes on the rationalization of the goods and services tax to spur consumption, ease near-term concerns on weak economic growth and repair the dull corporate earnings outlook.
The other feel-good factor was the upgrading by S&P Global Ratings of India’s long-term sovereign credit rating to investment grade (from BBB- to BBB) – a first for the country since 2007. The chances of a potential pause on the 25% punitive tariffs on India’s exports to the US (the reciprocal 25% tariff remains) also brought some relief.
The Centre plans to rationalize the current GST structure by moving it to two tax rates (possibly 5% and 18%) from four now. Thus, a reduction of GST on mass-market items and aspirational goods is on the cards.
A GST cut should be more effective than income tax cuts (announced in the Union Budget) or corporate tax cuts in buoying demand because it directly affects consumption at the point of purchase.
FMCG, consumer durables, autos and cement are seen as potential beneficiaries of this rejig as purchasing power improves. Companies that expect their growth to improve amid GST cuts can see an upward revision in earnings estimates, though this may not be material for overall earnings of Nifty 50 companies.
Further, rotation of funds from capex-led stocks to consumption-led stocks is likely. Still, earnings revival would be slow, especially after a lacklustre June quarter (Q1FY26) results season.
“In Q1FY26, Nifty50 EPS grew 9.5% year-on-year (versus expectation of 10.3% year-on-year growth)," JM Financial Institutional Securities Ltd said in a report dated 16 August.
The broking firm trimmed its Nifty 50 FY26 EPS growth estimate to 9.3% from 11.1% earlier. The ask rate for the remaining nine months of FY26 stands at 9.3%, JM Financial added.
Heavy lifting
To meet this target, one sector that must do the heavy lifting is consumption. Whether GST is able to do the trick remains to be seen. The final rates/categories under a revamped GST are awaited. Until then, consumers are expected to delay purchases of items likely to benefit from GST cuts. This could hurt near-term demand, but a rebound is likely later.
“Combined with the income tax cut in place from April 2025 (25-30 bps of GDP), the GST rate reforms (likely worth about $20 billion/45 bps of GDP) should together provide a meaningful push to consumption," said analysts from Jefferies India. “Other large policy actions likely ahead include trade deals with US & EU, resumption of privatisation (PSU Banks, state discoms) and ramping up PPP infra projects," they added.
Measures to uplift economic growth such as interest rate cuts by the Reserve Bank of India and other liquidity infusion steps are expected to yield results in the second half of FY26 (H2FY26).
“A well-distributed (both temporally and spatially) normal monsoon rainfall (74% of districts receiving normal+ rainfall), multi-period high real rural wage growth, the advent of the festive season, and a lower base effect are additional growth drivers for H2FY26 and can help boost market sentiments," Motilal Oswal Financial Services said.
Meanwhile, the MSCI India Index has declined about 1% in the past year, significantly underperforming the MSCI Asia Ex-Japan and MSCI Emerging Markets indices, which have fetched returns of 21% and 18%, respectively.
Still, the MSCI India trades at a one-year forward price-to-earnings multiple of 19x, a premium to peers, Bloomberg data showed. Simply put, there is no room for error.
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