india’s GST Reform: Why the Market Isn’t Celebrating

A long-overdue reduction in India’s consumption taxes is yet to take effect,but Prime Minister Narendra Modi has already hailed it as the nation’s “biggest reform” since independence in 1947. The private sector is fully on board with the plan, with several carmakers announcing price cuts and some asset managers describing the move as a “landmark reset.”

But if the change is as dramatic as it’s cracked up to be, why is the stock market not impressed?

The tweaks to the eight-year-old goods and services tax were announced on Sept. 3, though Modi had flagged them as a “Diwali gift” in an Aug. 15 speech. Yet the benchmark Nifty 50 Index has been largely unchanged since then. Auto stocks have run up, but broader investor sentiment remains weighed down by US President Donald Trump’s punitive 50% tariffs on India for its refiners’ purchases of Russian oil.In fact, the very purpose of the rushed tax relief is to compensate for export losses with more domestic spending.

Maybe the market is waiting for Sept. 22. That’s when small cars and light motorcycles, as well as other durables like TVs and air-conditioners, would slip into the 18% bracket, from 28% at present. At only 5% GST, everyday items like soap, shampoo, and toothpaste would become cheaper still. Health and life insurance premiums will become tax-free.

Some hiccups are to be expected.Consumers aren’t convinced that companies will pass on the full benefit of lower taxes. Firms, meanwhile, have asked the government for additional time to clear their old stock. Auto dealers are worried about losses on 600,000 units of unsold inventory. And while insurance policies may indeed become cheaper for consumers on a post-tax basis, their pre-tax prices may still have to rise to preserve insurers’ margins.

Bloomberg

But shouldn’t markets be looking beyond the speed bumps? Even if the tax cuts lead to lower prices with a lag, inflation is likely to be lower than the central bank’s forecast of 3.1% for the current financial year.That ought to create room for further interest-rate cuts, bringing relief to an economy that has suddenly lost competitiveness in its biggest export market.The main reason for the lack of enthusiasm in equity markets is that what is being