GST Rate Cuts: A Booster Shot for Economy and Markets

The Modi government's GST rate cuts have served as a booster shot for the Indian economy and markets, with consumption-driven growth expected to aid the economy amid 50% US tariffs. The comprehensive GST modifications announced by Finance Minister Nirmala Sitharaman, with revenue implications of Rs 48,000 crore, have been regarded by market analysts as a "consumption revival bombshell" that has energized the previously sluggish Sensex and Nifty.

Immediate Market Reaction

The market's immediate reaction was significant, with the Sensex recording an increase of nearly 900 points, whilst the Nifty advanced by 1%, approaching a potential breakthrough above the critical 25,000 mark.

Auto Sector: Big Beneficiary

The surge in automotive shares aligns with substantial tax benefits. According to Jefferies, the reduction in GST rates from 28% to 18% for two-wheelers below 350cc and small cars could trigger significant market growth, benefiting companies like TVS and Maruti. For M&M, the unexpected reduction in SUV taxation from 50% to 40%, including cess, presents a remarkable advantage.

The rural market segment shows promising developments. Emkay's study indicates that "tractors and agri-machinery that have witnessed a GST cut to 5% from 12%" will experience considerable demand growth. "Such sharp reduction directly lowers acquisition costs for farmers and boosts affordability," presenting substantial opportunities for organisations like Mahindra & Mahindra and Escorts.

According to the research organisation, "this strategic tax relief in the auto space could potentially offer a 5-10% boost in demand across categories," explaining the current market momentum in automotive shares.

In the stock market, automotive shares showed remarkable performance, with M&M recording a notable 6% increase. Other manufacturers including Eicher Motors, TVS, Bajaj Auto and Hero Moto experienced gains between 1-2%.

FMCG Booster

The FMCG sector emerges as the second-largest beneficiary of the tax reduction, receiving more comprehensive relief than anticipated. According to Amit Agarwal, SVP-Fundamental Research at Kotak Securities: "The GST rate for almost all food items (biscuits, instant noodles, nutrition, namkeen, instant coffee, chocolates, ice cream, fruit juices, sauces and cheese) has been cut to 5% from 18%/12% and that for select daily essential personal care categories (soaps, shampoo, hair oil and toothpaste) has been reduced to 5% from 18%."

Jefferies indicates this development was "largely unanticipated," resulting in "positive for consumer staples companies, notably Colgate, Britannia, Nestlé, followed by HUL, GCPL, Marico, Dabur, Patanjali." The extensive range of products affected explains the increased investor attention towards FMCG stocks.

Cement Sector Rejoices

The cement industry benefits from a substantial GST reduction of 10 percentage points, decreasing from 28% to 18%, addressing persistent investor worries. Jefferies elaborates on the significance: "The reduction in GST rate by 10ppt creates some volume upside but potentially also headroom for price hikes, where the sensitivity of the industry to a profit increase is high (1% pricing is 4-5%)."

The combined advantages of increased volume and pricing flexibility explain why analysts predict an upturn in cement stocks, which have remained relatively stable until now.

Impact on Indian Economy

The GST reforms carry significant implications beyond sectoral advantages, contributing to broader economic momentum. As Garima Kapoor, Economist and Executive Vice President at Elara Capital, states: "We expect GST related demand boost to add 100 to 120 bps to the GDP growth over next 4-6 quarters, thereby nullifying the negative impact of higher tariffs on exports to US."

According to Dr. Vijayakumar's assessment, these changes could "boost India's growth to 6.5% in FY 26 and perhaps 7% in FY 27 with impressive gains in corporate earnings," establishing solid foundations for continued market advancement.

The implementation arrives at an opportune moment as various policy instruments demonstrate positive alignment. As noted by Kapoor: "Today's GST rate changes, along with RBI's rate cuts, income tax rebates announced in FY26 budget and easing inflation are all levers for a consumption uptick in the economy. We remain constructive on the uptick in consumption demand in the economy as multiple policy levers turn favourable for the first time in a decade."

Nilesh Shah, MD of Kotak Mahindra AMC, indicated that the GST restructuring would help counterbalance the negative effects of US tariffs in subsequent quarters.

What Should Investors Do?

The stock market responded favourably as investors recognised how reduced GST rates could boost consumer demand across various sectors. Jefferies anticipates "festive demand should see a positive boost," whilst cautioning about "some negative demand impact in September."

The projected increase in consumption could generate cascading benefits for broader economic expansion. Analysts emphasise that swift transfer of tax benefits to consumers by companies would be crucial, potentially enhancing both consumer confidence and expenditure.

"Lower taxes on essentials, FMCG products, autos and cement will leave consumers with more money in hand. This should directly boost demand, help traders and businesses see higher volumes, and may even favourably impact next quarter's earnings. It also carries the potential to ease inflation." said Shripal Shah, MD & CEO, Kotak Securities.

These wide-ranging tax adjustments, encompassing both everyday necessities and substantial purchases, have led investors to consider this a fundamental transformation rather than a short-term measure. This perspective has driven widespread market gains across diverse sectors including automobiles, FMCG, white goods, cement, and insurance.

(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)