India faces likely growth in consumption amidst GST reform
Lower prices set to boost demand in sectors like pharmaceuticals and car manufacturing.
The domestic market in India is facing a possible uptick in demand due to changes to the country's goods and services tax (GST).
"Fitch Ratings believes the reform of India's GST should be generally credit-positive for our rated Indian companies, stimulating consumption and reducing risks to the economic growth outlook as higher US tariffs threaten export demand," commented rating agency Fitch Ratings pre-implementation.
It was highlighted that the 12% and 28% bands for GST will be scrapped starting 22 September as part of the taxation tweak.
"Most products in these bands will move to the lower 5% and 18% bands, respectively," Fitch Ratings noted. "We expect these and other GST changes to result in lower prices, though some firms may seek to absorb the benefit themselves rather than passing it on to consumers through price cuts."
Depending on the extent to which businesses pass on lower taxes to consumers, the sectors forecast to see elevated consumption levels include steel and vehicle production, pharmaceuticals, and construction supply.
"Car manufacturers are amongst those that have already announced price cuts," Fitch Ratings pointed out. "We believe this will help to lift demand across passenger and commercial vehicle segments in the second half of the financial year ending March 2026, after a subdued first half. Demand for two-wheelers could also be lifted by price cuts.
"Higher sales in the domestic market could cushion the effect of weak demand in overseas developed markets for auto components producer Samvardhana Motherson International Limited... Stronger auto sales could also benefit steel producers like JSW Steel Limited, since the auto sector is an important source of steel demand."
Meanwhile, the likely effect in the local pharmaceutical market is an anticipated outcome of the removal of GST on private insurance premiums.
Fitch Ratings went on to add: "The reduction of GST on cement and building materials could aid demand and EBITDA (earnings before interest, taxes, depreciation, and amortisation) for firms like UltraTech Cement Limited and Hella Infra Market Limited.
"We expect cement companies to pass through most of the GST cut to consumers due to the industry's competitive pricing environment. Construction companies, including Larsen & Toubro Limited, could also benefit from lower costs in fixed-price contracts if building material prices fall."
Whilst the tax changes are expected to slightly impact revenues, Fitch Ratings is of the view that this could be partially offset by the easing of administrative burden as a result of the simplified GST.
