India Strategy : GST 2.0 – Unleashing growth by Emkay Global Financial Services Ltd
India’s GST rationalization is growth-accretive, big-ticket reform. We see this as a major market mover and upgrade our Nifty target to 28,000 for Sep-26, while recommending investors to play this through Autos and Cement. The second-order benefits are key: this speeds up formalization of the economy and improves competitiveness of Indian companies. We think the government should absorb the revenue loss through the higher deficit, as the growth accretion will cover the shortfall within 2-3 years.
GST rationalization
The Prime Minister announced major GST rationalization in his Independence Day speech on 15-Aug-25, per which rates will be condensed to two major slabs. Subsequent media reports suggest a rationalization to three rates—5%, 18%, and a sin tax rate of 40%, though these are unconfirmed. This is a massive positive for India as it i) is a consumption stimulus, ii) will lead to ease of doing business with fewer rates, and iii) result in greater formalization of the economy as cost-benefit of evasion turns adverse.
Big boost for autos, durables, and cement PVs, 2Ws, ACs,
cement, and packaged foods are key beneficiaries. The best way to play this would be through companies addressing mass-segment brands in each category – we pick Hero Motocorp, Maruti Suzuki, Voltas, and Ultratech as key stocks; Bikaji is a small-cap idea. The benefits accrue to a narrow segment of the market (9.5% of Nifty) with a negligible (below 1%) direct EPS impact for the Nifty. We estimate 10-15% EPS revisions for the companies in the relevant sectors.
Key imponderables
i) We expect the Centre to absorb 0.1%/0.2% slippage in the central fiscal deficit for FY26/FY27 – partially made up by buoyancy and asset sales. ii) The BJP has the numbers to push this through, although it will need to convince state governments (including their own) as the revenue loss pushes a few beyond the 3%/3.5% deficit ceiling. iii) Implementation timelines are uncertain, given the multi-step approval process. The government should look through near-term fiscal slippage; India’s complex GST is a millstone around the growth neck, and rationalization is worth the risk. Strong macrofinancial stability, highlighted by the recent ratings upgrade, makes this the perfect time to push this through. We do note that this is not a done deal: GST Council approval is needed and rates on individual categories could change in the final announcement.
Tariff overhang continues
The US-Russia summit failed to arrive at a final decision, although it made some progress. India’s additional 25% tariff remains an overhang, though there were some encouraging comments from the US President. We see the possibility of a negotiated settlement on this issue before the 27-Aug-25 deadline. Key milestones would be a) resumption of trade talks between India and the US (on hold for now), b) any signs of India paring Russian crude imports. Even if the 50% tariff remains, there are now mitigants, including the GST rationalization and the rating upgrade from S&P.
Rating upgrade – Timely facilitator
S&P upgraded India’s sovereign rating to BBB on 14-Aug-25. India’s outstanding overseas debt, at 19% of GDP, is too small for this to be a material benefit. However, this is a timely recognition of India’s fortress balance sheet and will serve to calm potential investor fears around the impact of elevated US tariffs. It also, we believe, gives the government more freedom to risk a higher fisc through GST rationalization.
Market view
This is a rerating trigger from the market, given the long-term growth benefits to the economy. We revise our Nifty target to 28,000, with an aggressive 20.7x 1YF PER (+1sd above the 5Y average). The GST rationalization offsets near-term worries on weak growth and tepid earnings. The six-week downtrend should now reverse, as i) the outlook for earnings improves considerably, and ii) valuations will factor in the broader positives of this big-ticket reform measure. This move supports our sector positioning: we are OW on Consumer discretionary, and prefer SMIDs in staples and cement within materials.
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