GST and Market sentiment: can reduce investment volatility policy simple

Indian shares have been volatile in the past year, weighed by disappointing business profits, weak domestic consumption, high stock valuations, Trump’s tariff shocks and a weakening rupee. The government of India (GOI), however, has focused on new life for the demand for reduction in income tax in the budget, RBI’s rate reductions and liquidity support and now a simplified GST structure.

The new GST reforms are aimed at simplification with a two-speed structure-5%and 18%-in addition to a special 40%plate for luxury and sin goods, to replace the earlier four speed (5%, 12%, 18%, 28%) and CESS structure. CESS will continue for certain items until the Center refers to compensation loans to states.

In addition to income implications, GST 2.0 makes structural changes possible:
a) Support for labor -intensive sectors,
b) Support for agriculture,
c) Correction of reverse duty structures in textile and fertilizers, and
d) easier registration for small companies.

A two-fold GST structure is an important consumption-driven stimulus that is expected to cause a virtuous cycle of a higher demand and relax inflation. It could increase GDP growth by 0.5%. From September 22, 2025, the GST council reduced to 5% (or exempt) for essential and 18% for ambitious goods, while luxury/sin products have 40%. Lower GST on Essentials will reduce prices, stimulate demand and free up the household expenses for discretionary consumption or financial investments. With pent -up demand and income tax, consumption is expected to increase, the capacity use of the industry will improve and encourages private Capex in the coming years. Exportors will also benefit from lower input costs, which partially compensate for the American tariff shocks and reduce the offer to serve the domestic market. This should stimulate the profit recovery in direct beneficiary sectors through higher sales and margin wins, leading to upgrades.

Important industries are likely to benefit:

Consumption: GST on important FMCG categories has fallen to 5% (from 12-18%). This will limit the gap between organized and unorganized players and encourage premiumization. The margins can spread to volume growth and a better product mix. In discretionary, footwear and clothing under RS ​​2,500, 5%5%, premium items attract 18%. Consumers Duurzame such as ACS/TVs fall to 18% (from 28%).

Tile Winds: Inflation among RBI’s 4% tolerance bond and a good monsoon that stimulates rural consumption.

Urban consumption: Boosted due to direct tax cuts, RBI soups and indirect tax cuts.

Cement: GST on cement reduced from 28% to 18%. Input load on coal reduced, helped with cement, real estate and governmentcapex.

Insurance: Health and life premiums are exempt from GST (versus 18% earlier), reducing costs and improving affordability.

Healthcare: GST cut up to 5% (of 12%) on medicines, devices and diagnostics. Thirty -six life -saving medicines are fully exempt. This will lower treatment costs and improve access.

Agriculture: Input costs, including tractors, reduced.

NBFCS & Retail Banks: Credit growth will indirectly benefit from stronger consumption.

Structural changes:

1) Simple structure reduces compliance and disputes. With 75%of taxes at 18%, effective rates can fall to ~ 10%, which improves compliance and progressiveness.
2) Reverse duty corrections facilitate the repayments of ITC, reduces disputes and ensure predictability.
3) GST Return inputs simplified, reducing the burden for smaller companies.
4) Supported labor -intensive sectors.
5) An easier registration for small companies, which improves the convenience of doing business.

Fiscal and fixed -income impact:

Goi estimates that the new GST will reduce revenue with RS 93,000 crore. With RS 45,000 Crore expects from the 40% record, the net loss is on RS 48,000 Crore. Income loss is greater for states, which means they have to borrow more. The 10-year G-SEC yield relieved to 6.49% (of 6.65%) because the loss was lower than expected.

Nevertheless, tax pressure can be maintained as a result of lower nominal growth and weak taxing. Borrowing the state can keep spreads over G-SECs wide.

Although in the first place a reform and simplification, GST 2.0 also modernizes the indirect tax regime of India (for example, small cars that are no longer treated as “luxury”).

The positive thrust of GST 2.0 should partially compensate the American tariff shocks in the coming quarters. With shares that consolidate in recent months, improving macros and stronger income from 2HFY26 could pave the way for a rally.

(The author is CIO at Indiafirl Life Insurance)

(Disclaimer: recommendations, suggestions, views and opinions of experts are their own. These do not represent the views of economic times)