Market spotlight: GST Reforms 2025
India’s indirect tax system – Goods and Services Tax – is undergoing its most significant overhaul since GST was introduced in 2017. Effective 22 September, the GST Council approved sweeping rationalisation replacing the 12 per cent and 28 per cent slabs with a simplified structure of 5 per cent and 18 per cent, plus a new 40 per cent rate for sin and ultra-luxury goods. This simplification is designed not just to spur demand but also to improve compliance, reduce litigation, and accelerate formalisation. The timing of these reforms is of particular importance. With US tariffs casting a shadow on external demand, policymakers are using GST rationalisation to strengthen domestic consumption.
The measures cut across categories. Everyday essentials now fall into lower tax brackets, while services like salons, wellness, and yoga have been cut from 18 per cent to 5 per cent. Tractors and cement also benefit, easing input costs, while health and life insurance are exempt entirely – a move that nudges demand for financial protection. Collectively, these measures are expected to free household savings worth INR 1.8tn (0.6 per cent of GDP), lifting volumes in mass consumption categories. The ongoing fall in inflation gives policymakers much more flexibility, with GST reforms likely to exacerbate disinflationary forces, reinforcing macro stability at a critical juncture.
India CPI inflation year-on-year (per cent)
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Source: HSBC Asset Management, September 2025.
While the short-term boost is clear, GST reform also addresses structural frictions. It eliminates inverted duty structures, narrows the price gap between branded and unbranded goods, and creates a more equitable tax burden for lower- and middle-income groups. This is in sharp contrast to tariffs, which risk raising uncertainty and costs, but comes with its own risks. Fiscal costs arising from these reforms are real, estimated at INR 480bn this year and rising to INR 576bn by FY26. Also, inflation may not fully reflect the expected 1.1pp decline if companies pocket part of the gains. Separately, ultra-luxury segments may face a heavier burden under the new 40 per cent rate. Still, GST reforms are expected to keep fiscal slippage contained to just 0.13 per cent of GDP.
In a wider emerging market context, India’s path stands out. Many EM peers remain exposed to global trade volatility or commodity swings, but India plans to reduce it by tilting policy toward its vast internal market. This approach underscores the importance of considering idiosyncratic stories while investing in the EM countries.
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.
India equities
GST cuts cushion tariff risks
For equities, GST reform could be the single most powerful domestic policy driver in FY26. The reduction in indirect taxes disproportionately benefits consumer-sensitive sectors, which account for meaningful weight within MSCI India ex Financials. With roughly 14 per cent of the index’s revenue exposed to these cuts, the index could record a 0.8 per cent revenue increase, translating into ~1 per cent earnings growth. This comes at a time when valuations already look stretched with 12-month forward P/E multiples above median, and both short-and long-term momentum relatively muted.
GST cuts could add ~1 per cent earnings lift, supporting equities despite tariff headwinds.
Potential direct impact of GST rate changes to MSCI India revenue
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Potential direct impact of GST rate changes to MSCI India earnings
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Note: Based on our assumptions of pass-through of GST benefit and demand elasticity.
Past performance may or may not be sustained in future and is not a guarantee of any future returns.
Source: Goldman Sachs Global Investment Research, Data as of September 2025.
The broader equity market picture within India is nuanced. India still screens as expensive, but its quality score remains more balanced having strong return on equity, manageable leverage, and resilient margins. Manufacturing momentum is among the strongest in Asia, suggesting the economy’s underlying engine is intact. Against this backdrop, GST-driven demand growth adds a cushion that could keep earnings resilience intact, even if export-oriented sectors suffer from tariff-related pressures.
The reform also plays well into longer-term shifts. By lowering costs on tractors, cement, and consumer goods, it boosts both rural and urban demand. By exempting insurance, it channels household savings into financial products. And by simplifying compliance, it reduces frictions that have weighed on corporate India. These dynamics make GST less of a short-term stimulus and more of a structural tilt toward affordable mass-market goods and services that should sustain demand resilience. However, it will be clearer later if companies hold on to some of the tax benefits which could mute the demand pass-through.
Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.
India fixed income
GST keeps bonds anchored
For fixed income investors, the GST reform helps anchor India’s macro narrative around stability and disinflation, while reducing concerns over fiscal slippage. Before the GST announcement, bond investors worried about a potential revenue hole between INR 800bn–1.5tn. The final estimated figure, at INR 480bn or 0.13 per cent of GDP, will be largely offset by higher duties on sin and luxury goods. This narrower shortfall reduces the risk of additional borrowing in FY26 and keeps the fiscal deficit broadly aligned with the 4.4 per cent glide path. Even in a scenario where the Centre absorbs the full loss, no material increase in gross issuance is expected. This combined with clearer second-half borrowing plans, strengthens demand-supply balances.
The disinflation impulse adds another supportive layer. Around 295 goods which is roughly 65 per cent of the GST basket have been moved from 12 per cent to 5 per cent or NIL. If passed through, CPI could fall by 50–60bps in FY26–27. Economists already expect growth of 6.3–6.5 per cent through FY26-27, with GST helping offset tariff-related drag. Together with earlier income tax cuts (0.3 per cent of GDP) and lower debt servicing costs from repo rate reductions (0.17 per cent of GDP), the total consumption boost could reach 0.6 per cent of GDP, enough to add around 0.2 per cent to growth even after accounting for savings.
Progress on inflation gives the RBI-MPC room for a final 25bps rate cut in December, taking the repo to 5.25 per cent, especially if the Fed continues easing. With inflation trending lower into FY27, accommodative policy would reinforce the bullish case for bond market demand especially for sovereign bonds.
Against this backdrop, the risk-reward looks strongest at the long end of the sovereign curve, where term premiums remain elevated. India government bonds have not only outperformed global and EM peers but also shown low correlation of 0.15 with global bonds over the last 10 years, offering both return potential and diversification at a time of global uncertainty. A stable fiscal trajectory, manageable supply, a disinflationary impulse, and a dovish central bank further underpins a constructive stance. With GST reforms bolstering domestic fundamentals against tariff-induced global uncertainties, an overweight duration strategy appears well supported by both policy and market dynamics.
GST reform is estimated to lower fiscal risk to 0.13 per cent of GDP, reinforcing bond market stability.
10-year index performance in USD terms (rebased at 100)
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Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. Source: HSBC Asset Management, Bloomberg, August 2025.
Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.
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