Daily Voice: GST reform could boost demand by Rs 2 trillion; Nifty may hit new highs by year-end, says HDFC Securities

With the GST rationalisation move, do you believe the government is now acknowledging the slowdown in demand and consumption?

This current GST rationalisation is a strategic response of government to ongoing economic challenges and recognition of ongoing consumption slowdown. Industry has welcomed this move as it is widely estimated that consumption can get a boost of approximately Rs 2 lakh crore due to this GST cut. While this GST reduction will lead to an annual revenue loss of Rs 85,000 crore but on the other hand increased consumption would more than compensate for this loss. Sectors such as automobiles and insurance are expected to be benefited by this move as two wheelers, entry level cars and various insurance policies will get cheaper.

Do you see the GST rationalisation as a game-changing move by the government, especially after the recent tariff actions dampened sentiment?

This has potential of becoming a game changing move however, success of this move depends upon implementation details. If the policy is implemented smoothly without much delay, it would have a lasting impact of stimulating demand. On the other hand, complexities and delayed implementation would limit its advantages. While this is opportune to have such a demand stimulant as country was impacted adversely by tariffs, it is imperative for government to balance long term consumption growth with the immediate revenue loss.

If consumption doesn’t pick up as expected, it could widen fiscal deficit. In short, with meticulous implementation, this could turn out to be a crucial move to boost economic momentum. Additionally, it could have a multiplier effect on manufacturing and services growth as well.

In your view, will the GST reforms help India maintain its status as the world’s fastest-growing major economy?

GST reforms have potential of boosting consumption demand in India as more than 60% of India’s GDP is accounted by consumption. With its right implementation, it could further boost entrepreneurship and industry growth as compliance cost would reduce with simplified tax regime. This will also stimulate formalisation and attract investments.

Having mentioned this, it must be noted that long term growth is dependent on many other factors such as geopolitical situation, supply chain stability, infrastructure development in the country and availability of skilled labour force alongside supportive monetary and fiscal policy. Hence GST reform is definitely an important enabler, but it is not sufficient for consistent growth in isolation. A broad-based policy support needs to accompany it for lasting economic growth.

Has the government's focus shifted from capital expenditure to boosting consumption?

The government had been focussing on investment led growth in the last few years. Now, as a significant amount of capex has already been executed in the last decade and infrastructure has been created to some extent, it expects private sector and states to participate in the bigger capacity for further capex.

So, we believe while government capex growth has moderated from higher levels, it continues to be sizable. Additionally, this recent shift of focus towards boosting consumption is opportune as infrastructure creation without commensurate increase in consumption would lead to unsustainable growth. Income tax relief announced in budget and recent GST reforms together have potential to stimulate consumption in a sustainable way.

How do you think the government plans to offset the potential revenue loss resulting from the GST rationalisation?

With recent GST rationalisation, potential revenue loss per year is approximately Rs 85,000 crore. It is expected to be implemented in the second half of current fiscal and hence potential revenue loss would be approximately Rs 45,000 crore for FY26. This is expected to be met by higher estimated RBI dividend and possible divestment of PSUs.

Further, FY27 onwards, this GST reform is expected to boost consumption through broadening of tax base by reducing exemptions, increasing compliance, increased rate on luxury and sin goods, boosting economic and consumption growth etc. In essence, foregoing this short-term tax revenue has a potential of providing long term sustainable growth. Over next few years, this is expected to provide a net positive reinforcement to GDP and tax revenues.

Do you expect the markets to reclaim record-high levels before Diwali?

Nifty is currently trading at 22.5x FY26E and expected to deliver an earnings growth of 9-10% in FY26 over FY25. We believe the valuation is fair and returns of Nifty over this fiscal is expected to mimic delivered earnings growth. Hence, in this context Nifty can move up by approximately 10% from current levels. Depending upon market liquidity, this can be achieved in the next few quarters. Hence, while achieving a new high by Diwali is also possible, if not, then this is strongly probable to touch a new high by fiscal end.

Are you bullish on travel and hotel stocks, considering the ongoing shift in consumer preferences and spending patterns?

With rising disposable income of Indian middle class and evolving consumer preferences towards experiences, travel and hotel stocks are surely going to get benefitted, in the medium term. Key consumer trends driving growth are an inclination towards longer stays, immersive travel experiences combining work and Leisure and spiritual tourism.

Furthermore, there is increasing demand of personalised, culturally rooted, wellness-oriented experiences by affluent travellers. Hence, if these customised experiences are offered in key locations by well managed properties, there is a strong underlying demand for such hotels from luxury seeking affluent travellers.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.