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Informist, Monday, Aug. 18, 2025

 

By Anshul Choudhary

 

MUMBAI - The government's proposal to cut the number of GST rate slabs and lower taxes on several goods is likely to push investors towards consumption-based stocks. However, the possibility of further gains depends on several unanswered questions as the proposal is yet to get the final approval from the GST council.

 

Analysts were largely positive on consumption stocks after the government proposed to do away with the 12% and 28% tax slabs altogether and move several goods and services to lower tax rates. This is expected to lower prices and aid consumption at a time when demand from consumers has not picked up despite the large income tax relief announced in the Budget and the 100 basis points cut in the benchmark repo rate affected by the Reserve Bank of India's Monetary Policy Committee.

 

Investors Monday lapped up shares of consumption-based companies with automobile, fast-moving consumer goods, and consumer durable stocks seeing a surge in traded volumes. This pushed the Nifty 50 past 25000 points briefly before it erased some gains to end the session at 24876.95 points. Despite some profit booking at higher levels, the index gained 1%--its highest single-day gains in nearly two months.

 

Shares of automobile companies were the top gainers among consumption-based companies. Several automobile stocks saw their best single-day gains in many years with the Nifty Auto index ending over 4% higher at 25127.20 points. The sectoral index closed at its highest level in over nine months.

 

Analysts are largely positive that lower GST rates will spur demand as product prices fall. Companies will be under scrutiny to pass on the benefit of lower GST to consumers, analysts said.

 

"Prima facie the tax changes could be positive for sectors and stocks related to consumption in general such as staples, consumer discretionary, dairy, quick commerce, auto, budget hotels etc. along with other sectors such as cement, insurance, pharma and renewable solar panels," ICICI Securities said in a report Monday. Emkay Global Financial Services is extremely bullish on the proposal of GST reforms and even raised their Nifty 50 target to 28000 points for September 2026 from 26000 points for March 2026 earlier. The new target indicates the brokerage expects the Nifty 50 to rise 12% over the next 13 months.

 

There are some hopes the Nifty 50 may see some more gains if foreign investors cover their short positions. Foreign institutional investors have net short positions worth $3.95 billion in index futures, Nuvama Wealth Management said in a report.

 

Having said that, several analysts also said the proposed GST reforms will not spur demand immediately and may even hurt demand in the near term. "Timing of the announcement is a problem...consumers may delay their planned purchases," Dharmesh Kant, head of research at Cholamandalam Securities, said.

 

"You are not likely to see lifetime high for at least a year," a technical and derivatives analyst at a top domestic brokerage house said, asking not to be named.

 

Prime Minister Narendra Modi Friday said GST reforms, intended to reduce tax burden on consumers, will be brought by Diwali, which will be celebrated in the third week of October. This is still two months away and may push consumers to defer purchases beyond Jul-Sept in hopes of lower prices in the coming months, market participants said.

 

Nomura pointed out automobile companies may need to compensate dealers for inventory loss on products bought on the current GST rate. This is also expected to affect companies' profits in the near term once lower GST comes into effect. "Major (positive) impact on consumption is likely to be from Q4 (Jan-Mar)," the head of research at a top Mumbai-based brokerage house said while asking to be anonymous.

 

Some analysts said the proposed GST rate cut is positive but does not address the main challenge faced by consumers, which is stagnant incomes. "This will not have a material impact...a structural change in consumption will only come when income levels improve," the Mumbai-based head of research said. Several analysts pointed out the bigger challenge for consumers currently is poor wage hikes in urban areas, rising cost of living across regions, and not enough job creation.

 

Some analysts said there is a possibility lower taxes would further bring down inflation. Brokerage Morgan Stanley said GST cuts may help lower CPI inflation by 40 basis points.

 

However, other market participants expect only a marginal impact on inflation as mass-consumption products are already in lower tax brackets. "The products in higher tax bracket do not have major weightage in the CPI basket, so the impact will be limited," Teresa John, deputy head of research and economist at Nirmal Bang Institutional Equities, said.

 

WHO PAYS FOR GST CUTS?

Analysts are divided over how the government will address the loss of revenue a cut in GST rates will entail. Some analysts said a higher-than-budgeted dividend from the Reserve Bank of India would be able to cover the loss, some said the government may have to reduce its capital expenditure outgo, or the government may have to reconcile with higher fiscal deficit. Economists expect a revenue loss of INR 1 trillion-INR 1.2 trillion owing to the proposed GST rejig.

 

Analysts at Emkay Global Financial Services said the government is more likely to absorb the revenue loss through higher deficit. "...the growth accretion will cover the shortfall within 2-3 years," the brokerage said. However, two other heads of research said the government is more likely to cut capital expenditure.

 

Analysts largely agreed that the final GST rates may be different from the ones floating around in media reports currently. A big part of the change depends on the stance by states as these are expected to a take a bigger hit.

 

"Considering a (INR) 1 lakh crore revenue loss and half of it to be borne by the Centre and the other half by states...managing (INR) 50,000 crore is easier for the Centre, but the same is difficult for states," Teresa John of Nirmal Bang Equities said.

 

Analysts await clarity on what benefits the Centre may give states to get their support for the proposed GST rate changes. This is also important at a time when the compensation cess is set to expire in March next year. Compensation cess was levied compensate states for any loss of revenue due to the rollout of the GST.  End

 

US$1 = INR 87.35

 

Edited by Deepshikha Bhardwaj

 

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