The government recently unveiled the next phase of India’s Goods and Services Tax (GST) regime. These reforms come amid crippling earnings growth challenges for India Inc. and subdued growth in consumption. In recent years, the government has prioritised economic growth through investments in infrastructure and manufacturing. However, consumption growth has slowed due to high commodity inflation, rural distress, and elevated interest rates following Covid-19 pandemic.
The tepid consumption growth, coupled with a slowdown in government capex, has dampened market sentiments. In the last one year, the domestic equity markets underperformed most of the world equity benchmarks. While the MSCI India Index delivered -4.5% over the past year, the MSCI Emerging Markets and MSCI World Indices gained 24.5% and 23.4%, respectively. Returns are in rupee terms, based on closing values from 5 September 2024 to 5 September 2025.
Consumption the way forward
The announcement of income tax relief in the Union Budget by the government and the reduction in interest rates by the RBI are expected to revive consumption. The recent GST reforms will provide an additional lever to boost spending.
The reforms simplify the existing fourtier structure (5%,12%,18%,28%) into three slabs, 5%, 18% and 40% (the latter is reserved for sin and luxury goods). The revised rates will take effect from 22 September 2025 onwards (except for tobacco) and are expected to boost affordability and consumption across rural and urban markets. Notably, around 90% of the items have been moved from higher to lower slabs, benefiting consumers directly. The reforms also aim to improve ease of compliance, reduce litigation, and enhance the ease of doing business—creating a more efficient and growth-friendly tax ecosystem.
Experts believe that the reforms will play a key role in addressing the demand challenges. Lower taxes on essential and processed goods will create savings for consumers and improve spending and consumption.
A YES Securities report believes the reforms will create a premiumisation effect among the low- and middle-income households because the savings on food staples and personal care items will free up purchasing power that can be redirected toward high-value consumption.
The reforms are also poised to strengthen domestic economic growth amid global uncertainties. A Motilal Oswal report says that the measures will support growth and encourage long-term capacity building to drive the economy towards greater selfreliance in a volatile and uncertain global scenario. It expects that the consumption sector is poised for recovery over the next 12-15 months.
Anirudh Garg, Partner and Fund Manager at INVasset PMS, expects private consumption growth to rise by 40-50 basis points in the second half of the current financial year, helping cushion the Indian economy against external headwinds.
From the companies’ (producers) perspective, the lower prices will create volume acceleration, which coupled with operating leverage benefits and improved mix, will support profit margins. Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Group, says that with a consumption boost, the profitability of the corporate sector is likely to increase. He anticipates overall profitability to improve by 1-1.5% relative to 2024-25 earnings.
Shielding external pressures
The reforms will help cushion worries relating to the US tariffs. An ICRA report says that the domestic consumption and sentiment boost will help to offset the worries triggered by the tariffs and penalties imposed by the US on Indian exports.
Moreover, the private sector capex decisions may get a boost in domestic consumption-oriented sectors. However, the report highlights that exporters may still feel jittery about embarking on fresh capex.
An Elara Capital report expects that the demand boost from GST measures is likely to add 100-120 basis points to nominal GDP growth in the next 4-6 quarters, thereby nullifying the negative impact of higher tariffs on US exports.
Looking at the fiscal impact, the government estimates Rs.48,000 crore revenue loss due to the reduced GST rates. Experts feel that the loss of revenue will impact the fiscal deficit. "The tax revenue foregone due to the GST rate cuts will stretch India's fiscal deficit position above the target of 4.4% of GDP in 2025-26, unless the government absorbs it through slower capex intensity," says the JM Financial report.
In contrast, a high RBI dividend, a possible hike in excise duty for Oil Marketing Companies (OMCs), and the divestment pipeline will help mitigate revenue losses. Here is how different sectors will be impacted by the GST reforms.
Source Name : Economic Times