GST overhaul to support consumption in India: Fitch Ratings

The reform of India’s goods and services tax (GST) is generally credit positive for Indian companies, as it could stimulate consumption and ease risks to the economic growth outlook amid pressure from higher US tariffs on exports, according to Fitch Ratings. The impact on the sovereign credit profile is expected to be limited, though revenues may be slightly lower than assumed when India’s ‘BBB-’ rating with a Stable Outlook was affirmed in August.

The key element of the reform is the abolition of the 12 per cent and 28 per cent bands for GST, effective from September 22. Most products in these bands will move to the lower 5 per cent and 18 per cent bands, respectively. It expects these and other GST changes to result in lower prices, though some firms may seek to absorb the benefit themselves rather than passing it on to consumers through price cuts, Fitch Ratings said in a press release.

India’s GST reform is seen as credit positive for rated companies, stimulating consumption and easing growth risks amid US tariff pressure, according to Fitch Ratings.
The reform abolishes 12 per cent and 28 per cent bands, shifting most goods to lower rates.
While it may trim revenues by 0.2 per cent of GDP annually, the government is expected to manage spending.

Fitch estimates the fiscal cost of the reforms to be around 0.2 per cent of GDP annually, but the potential boost to consumption and growth will depend on the extent to which companies pass on lower taxes to consumers. It recently revised up India’s GDP growth forecast to 6.9 per cent in FY26, from 6.5 per cent, although this largely reflects a stronger first quarter (Q1) of FY26 outcome.

The reform is expected to have a mildly negative effect on revenues, potentially making further deficit reduction beyond FY26 more challenging. Even so, the government is anticipated to adjust expenditure to maintain the FY26 budget target of a 4.4 per cent deficit-to-GDP ratio.

Simplifying the GST is also seen as reducing the administrative burden on businesses, which may encourage higher compliance and help offset part of the revenue shortfall, added the release.

Fibre2Fashion News Desk (SG)