India Insights
Key Highlights:
- India’s GST reforms simplify tax structures, reduce compliance burdens, and aim to boost domestic consumption – notably at a time when most emerging-market countries are exposed to global trade volatility
- For India equities, the GST reforms could drive approximately 1 per cent earnings growth, benefiting consumer-sensitive sectors and supporting equities as valuations look stretched and momentum stays relatively muted
- For India fixed income, the GST reforms anchor macroeconomic stability, reduce fiscal risks to 0.13 per cent of GDP, and strengthen the case for long-duration sovereign bonds
GST reforms and their impact on domestic consumption
India’s overhaul of the Goods and Services Tax (GST) introduces a simplified structure, replacing the 12 per cent and 28 per cent bands with 5 per cent, 18 per cent, and a new 40 per cent rate for ‘sin’ and ultra-luxury goods. This reform is designed to spur domestic consumption, improve compliance and reduce litigation. The changes are expected to free household savings worth INR 1.8 trillion, equivalent to 0.6 per cent of GDP, boosting mass consumption categories. Additionally, the reforms address structural inefficiencies, such as inverted duty structures, and create a more equitable tax burden for lower- and middle-income groups. However, fiscal costs are estimated at INR 480 billion this year, rising to INR 576 billion by FY26, with potential risks if companies retain part of the tax benefits instead of passing them on to consumers.
A catalyst for Indian equity resilience
For equities, the GST reforms could emerge as a key domestic policy driver in FY26, with consumer-sensitive sectors poised to benefit significantly. These sectors, which represent a meaningful portion of the MSCI India ex Financials index, could see a revenue increase, translating into potential earnings growth. Despite stretched valuations, India’s equity market remains resilient, supported by strong return on equity, manageable leverage, and robust manufacturing momentum. However, the amount of cushioning the GST reforms provide against tariff-related pressures, and the degree to which they support long-term structural shifts towards affordable mass-market goods and services, will depend on the extent of demand pass-through.
Strengthening fixed-income stability
For fixed-income investors, the GST reforms reinforce India’s macroeconomic stability by reducing fiscal risks and supporting disinflation. The fiscal cost of the reforms is offset by higher duties on ‘sin’ and luxury goods, reducing the need for additional borrowing. This aligns with the government’s fiscal deficit glide path. Furthermore, the disinflationary impact could provide room for the Reserve Bank of India to adopt an accommodative stance. This creates a favourable outlook for long-duration sovereign bonds, supported by elevated term premiums, a low correlation with global bonds, and a stable fiscal trajectory. The GST reforms, combined with earlier income-tax cuts and lower debt servicing costs, could make Indian bonds a compelling choice amid global uncertainties.