NEW DELHI: Fitch Ratings believes that the recent reforms to India's Goods and Services Tax (GST) will be a net positive for Indian companies it rates, boosting consumption and providing a buffer against the risks of higher US tariffs on exports. While the agency notes that the reform will have a limited impact on the sovereign credit profile, it will likely reduce government revenue slightly compared to previous forecasts.
Effective from September 22, the key change is the abolition of the 12% and 28% GST bands. Most products in these categories will be moved to the lower 5% and 18% bands, respectively. Fitch anticipates that this will lead to lower prices for consumers, thereby stimulating demand.
The automotive sector is expected to be a primary beneficiary. Car manufacturers have already announced price reductions, which are projected to lift demand for both passenger and commercial vehicles in the second half of the fiscal year ending March 2026 (FY26). This boost in domestic sales could help companies like Samvardhana Motherson International Limited, an auto components producer, offset weaker demand in overseas markets. The surge in auto sales is also expected to benefit steel producers such as JSW Steel Limited, as the automotive industry is a significant consumer of steel.
Beyond the auto sector, the GST reforms are set to improve market conditions for other industries. The removal of GST on private insurance premiums is expected to enhance access to healthcare, particularly in rural and smaller cities, which could in turn bolster the domestic pharmaceutical market and provide a cushion against potential U.S. tariffs.
Similarly, the reduction of GST on cement and building materials is viewed as positive for companies like UltraTech Cement Limited and Hella Infra Market Limited. Fitch expects that the competitive nature of the cement industry will ensure that these savings are passed on to consumers. Construction firms, including Larsen & Toubro Limited, are also poised to benefit from lower material costs on fixed-price contracts.
For power generators like NTPC Limited, the changes are not expected to have a material impact due to existing cost pass-through mechanisms. While the GST on coal will increase, any potential rise in generation costs will be offset.
Fitch estimates the fiscal cost of these reforms at around 0.2% of GDP annually. However, it notes that the overall boost to consumption and economic growth will depend on the extent to which companies pass on these tax cuts to consumers. The agency recently raised its GDP growth forecast for India to 6.9% for FY26, largely driven by a strong first quarter. While the revenue impact of the GST reform could complicate future deficit reduction goals, Fitch believes the government will adjust its spending to meet its 4.4% of GDP budget target for FY26. The simplification of the GST system is also expected to ease the administrative burden on businesses, potentially leading to increased compliance and partially offsetting the revenue decline over time.