Markets Set To Benefit From Positive Cues
The long weekend saw Standard & Poor's upgrade India's rating to BBB from BBB minus, an upgrade that came after 18 years
On Episode 656 of The Core Report, financial journalist Govindraj Ethiraj talks to Rohit Jain, Deputy Managing Partner at Economic Laws Practice (ELP) as well as Prashanth Agarwal, Partner at PwC.
SHOW NOTES
(00:00) The Take
(06:17) Markets set to benefit from positive cues including GST-led consumption boost.
(10:19) GST will be a Rs 40,000 crore + hit to the exchequer.
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday the 18th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. Well, we've had, if you live here you would know, a completely and totally rained out weekend with some minor records here and there, like the 43% of August rainfall just on one day being Saturday and about 200 millimetres in a six-hour window. Well, speaking about the weather…
The Take: Why Indian Firms Can Weather The Current Crisis
Almost five months have gone by since President Trump's landmark April 2nd announcement of reciprocal tariffs. Businesses all over the world are barely wiser or better prepared than they were on the 1st of April 2025 and this applies to India as much as it does world over, particularly countries that export heavily to the United States. Businesses have been hoping all this while that we would arrive at some sort of agreement on tariffs.
Rahul Mehta of the Clothing Manufacturers Association of India or CMAI, which represents about 20,000 manufacturers, told me on The Core Report's weekend edition. Now, there are two very broad streams of advice for policy. It's about staying calm and keeping Trump happy, if you can.
For business, it's now time to think of plan B. A 25% tariff rate is not easy to match for the hundreds of thousands of small businesses across industries like apparel, seafood exports, and gems and jewellery. And a 50% tariff, as threatened by President Trump for continuing to buy Russian oil, is an effective economic blockade. Though he did drop hints after his meeting with Russian President Vladimir Putin in Alaska over the weekend that he may go easy on additional tariffs on India and China, but it was a hint and nothing more.
As we've seen before, it's not to say that even if the additional 25% is pulled back, it will not resurface in another form for another reason a few weeks later. The interesting thing is that despite all this business uncertainty world over and in India, stock markets are hitting record highs, led of course by Wall Street. India of course is still below its September 2024 lows and yet to join the party.
But Indian markets are still holding out fairly well given that earnings growth in recent quarters have disappointed and there are no star performers, industries, or companies to lift the whole market like artificial intelligence has done for Wall Street. The market's strong standing, that's global now, could be reflecting something deeper, which is that the global economy is more resilient today than ever before and better geared to deal with Trump's tariff tantrums, even if we may not feel so right now. Let's look at India for a moment.
Some 70% of Indian goods exposed to the United States, or about $61 billion, are facing a 50% tariff imposed by the US. But an analysis by the Indian Council for Research on International Economic Relations, or ICREAR, shows that the figures are just 1.6% of India's GDP or 7.4% of total exports. Now for a $3.9 trillion economy, that's India, this is a minor dent.
Now the problem of course is that these are some of the most labour-intensive industries in the country and include both formal and informal employment, though this does mean that overall growth figures, though lower than ideal, would still stay mostly on course. So why are markets so bullish? Incidentally, more than half the rich world stock markets are within 5% of their all-time high, according to an Economist article titled Disaster-Proof Capitalism last month. Now that's because, it says, businesses have become more resilient and governments have responded faster to help them and their own economies in times of need.
Also, supply chains have become more sophisticated and adapting more smoothly to radical changes too. Thanks to all of this, since 2011, growth has continued at around 3% per year, including through several crisis years, including the 22 invasion of Ukraine by Russia. The only exception was the pandemic because that's when governments themselves shut down their economies.
The Economist argues that the world economy has thus become impressively and increasingly shock-absorbent. Supply chains are thus resilient, energy sources have become more diverse, and policymaking is responsive. And thus, only 5% of countries are on track for a recession, according to IMF data, the least since 2007.
That's on the planet. Now what about corporate earnings? In the first quarter of 2025, global corporate earnings rose 7% year-on-year, according to that Economist piece. So what's all of this mean for India? Well, India has actually shown for close to 35 years that it does respond well to crises.
Or conversely, India is known to respond best only when there is a crisis. Now, Prime Minister Narendra Modi's Independence Day speech, with detailed references to upcoming reforms for business and lower goods and service tax to fuel consumption, could be interpreted partly as one such response. Now, there will be solutions even for India's exporting industries.
Mehta of the CMAI told me that they would surely benefit if import duties on raw materials, including fibre, were reduced. Now, that obviously hurts local manufacturers who've managed to get and hold on to their tariff and non-tariff protection for many years. But they too might find other ways to survive and compete more effectively.
Mehta also said large manufacturers were shifting their production to other plants in other countries, which they also own and face lower tariffs. The hunt for new export markets is also on, in earnest, though admittedly in some cases the United States is too large to substitute, for example, for shrimp exports. Other apparel makers are visiting or revisiting the domestic market and talking to some of the retail giants here.
The larger point, businesses are finally shaking themselves out of their stupor and focussing on solutions. So, Indian businesses, with some help from the government and policy makers, can weather or at least better weather this current trade on Broglio, whether it's 25%, 50% or more. To pull from The Economist again, the global growth stars are aligned in their favour and have been for some time, which of course does not mean we can take anything for granted, whether it's success or just survival.
It's just that the chances of coming out of this difficult economic phase steadier, if not stronger, are good and perhaps improving by the day.
And on to our top couple of themes.
The stock markets are said to benefit from positive cues, including a GST-led consumption boost.
And speaking of GST, it will be a 40,000 crore plus hit to the exchequer, but good for the consumers.
Strong Domestic Cues Could Lift The Markets
The long weekend saw Standard & Poor's upgrade India's rating to BBB from BBB minus, an upgrade that came after 18 years.
Now, rating upgrades in specific can help reduce cost of borrowing, like for example, could be about 15 to 20 basis points for cross-border borrowing. Though in general, it helps sentiment, particularly right now, welcome in the time of tariff tantrums. Global stock brokerages have already welcomed this upward revision, which S&P says rides on India's fiscal management, economic growth and monetary policy and is now projecting a 6.8% growth for the next three years.
And then came the Prime Minister's Independence Day speech, which promised a Diwali gift in the form of lower GST rates, which should benefit consumers and consumer goods companies. And more on that later in the show. Last week, the Nifty halted its six-week losing streak, but mostly because of strong domestic flows.
Foreign institutional investors are still selling this year and through August. On Friday, the Sensex was up 57 points to close at 80,597, while the Nifty was up 11 points to close at 24,631. Elsewhere, it's not all that good news.
On outlook, a Bank of America report says as per its latest survey, 30% of fund managers are now underweight in India more than any other Asian market. Japan, by contrast, remains the region's favourite destination, with a net 43% overweight, according to a report in Business Standard. Japan's Nikkei 225 stock average hit another fresh time high on Tuesday last week.
Overall investor sentiment, though, has shifted sharply in August, according to that Bank of America fund manager survey, which found global growth expectations retreating after three months of improvements. Some 41% of survey respondents anticipated a weaker global economy, up from 31% last month, and 31% expected weaker growth in Asia. The big turnaround was in India, once the top pick amongst Asia's equity markets, and as recently as May says the survey, India has now sunk to the bottom of investor preference lists, mostly because of tariff reasons.
Meanwhile, the rupee was down 11 paise to close at 87 rupees 55 paise and fell as low as 87 rupees 67 paise during the day, but saw a sharp recovery post the Standard & Poor's rating upgrade that's on Thursday. Wall Street continued to see record highs into the weekend. The S&P 500 slipped on Friday, but it hit a record high and was down slightly to 6,449.
The Dow Jones Industrial Average was up about 35 points to close at 44,946, according to CNBC.
Oil Outlook
Bets of rising US oil prices have fallen to a 16-year low, thanks to a looming supply surplus, according to Bloomberg. The retreat, which has retreated investors, has helped drive oil futures to two-month lows this week and comes on the back of forecasts of a supply glut, which outweighs concerns that sanctions on Russia will curtail global supplies, according to Bloomberg.
And those sanctions, of course, are now seeming unlikely, after Trump said he would hold off imposing tariffs on countries like China for buying Russian oil following his talks with Putin in Alaska over the weekend. He earlier threatened sanctions on Moscow and secondary sanctions on countries like China and India that buy Russian oil if no moves are made to end the Ukraine war. Analysts told Reuters that this means that Russian oil will continue to flow undisturbed and this should be bearish for oil prices.
On Friday, Brent was quoting just under $66 a barrel, and US West Texas Intermediate was under $63 a barrel.
The Big GST Changes
Prime Minister Narendra Modi on Friday announced a series of changes in goods and services tax, which will bring down prices for consumers across the country and also hit revenue for the government by anywhere between 50,000 crores to 150,000 crores per year, according to different estimates. He promised this as a Diwali gift, which is literally eight weeks away.
And it will also mean that states have to agree to this formula via the GST Council, which should and meet in a few weeks. In this revamped GST regime proposed by the central government, about 90% of taxable items currently in the 28% bracket are likely to be moved to the 18% bracket, while some 99% in the existing 12% bracket would be moved to the 5% bracket. So the new structure is expected to feature only two main rates, that 5% and 18%, apart from a special 40% rate for luxury and sin goods, which includes automotive beverages and tobacco.
GST collections are now hitting between 190 to 200,000 crores per month on the higher median. Now the tax cut plan comes with costs given that GST is a major revenue generator. Reuters quoted IDFC Bank saying the rate cuts will boost India's GDP by 0.6 percentage points over the next year, but will cost the state and federal governments about $20 billion annually.
The other part that tax experts have been consistently referring to, of course, is the tax system itself, which is crying for change and improvement. Remember, GST is just eight years old and was launched in 2017. I spoke with Rohit Jain, Deputy Managing Partner at Economic Laws Practice and Prashant Agarwal, Partner at PWC, both experts in indirect tax and goods and services tax, and I began by asking them how they were reading the latest announcements, and then on to what they felt was the unfinished agenda.
INTERVIEW TRANSCRIPT
Rohit Jain: More than 30 taxes have subsumed in one levy called GST, and which is most importantly uniform across the states. So what we have achieved in the last eight years is that uniformity. Even after eight years, while the GST Council decides the issue, there has been no disconnect amongst the levies in different states.
States have also been given the power to, as part of a GST Council, to also levy SGST, which is a state subject. But having said that, we have achieved uniformity across the states, be it in the tax rate, be it in the tax filing and compliances, be it in the availability of ITC. So the big takeaway and the achievement, I would suggest a uniformity.
The second big achievement is digitalisation. Today, every written filing is digitalised. An unprecedented number of e-invices have now been raised in the country, which is one of the biggest achievements as part of a GST transition.
And that has helped two things. One, the tax compliance has been slightly smoother. While it can be better, it has helped a lot of things in terms of digitalisation.
But the second big thing which I would put is that now the use of new high-end technologies of AI and other things, be it by the tax assesses or by the tax regulators, become quite easy because of the digitalisation. So it is a second big achievement in my view. One is uniformity and digitalisation.
Govindraj Ethiraj: Okay, Prashant, what in your mind are the milestones so far? Yeah, thanks.
Prashanth Agarwal: I think adding to what Rohit has already alluded towards, the other important pieces are the growth of the taxpayers. I mean, what we started in 2017, we have almost reached 1.5 crores of taxpayers. We have also looked at compliances, the impact of invoicing, etc., which Rohit talked about. The impact has been that we have doubled the number of returns we have filed before invoicing, after invoicing, per se, which means compliance has really kicked in. We've also seen revenue growth.
I mean, that was one of the objections that was raised by the states at all points of time while the consensus was being brought up. And we saw how the revenue, which was less than 1 lakh crore when we started off, has almost crossed 2 lakh crores consistently. And this year, the average revenue is almost 1.96 lakh crores, clearly shaping up whatever great ideas that the government has now to put in, of course, in consensus with the state. This impetus of compliances, revenue coming into play has really helped the government to reach this stage. And, of course, now, some of the cess, like compensation cess, which was brought in to support the states and now even after COVID for the loans, going away with it would make a lot of difference as we go around. So I think the milestones for me would be increasing compliances from where we stood, where we are.
You are looking at a better revenue growth rate for each of the state governments and overall from the central standpoint. And that is really kicking up a new era for all of us, hopefully, in the very near future.
Govindraj Ethiraj: Right. So we started with four categories of goods and service tax. Now, if you were to equate this to value added tax, like in some other countries, usually most countries who move towards this kind of taxation system move to one slab.
Now, we started with four. And now we are seemingly, with the Prime Minister's announcement, moving towards two. So would this be, Prashant, let me start with you.
Is this something that was a natural progression? Or is it because of the lessons that we've learned about facing or having to face such disparate categories?
Prashanth Agarwal: So we've discussed this, Govind, earlier as well in your podcast, this issue of rate rationalisation. It's been something which has been a subject matter of discussion since the inception, because we should remember, GST was an act of compromise. Not the ideal law was brought in because everyone has to be accommodated.
And at that point of time, late Mr. Ranjithly had also made the statement that as we move along, as the confidence of the states come into play, there is obviously a need to rationalise the number of rates we are looking at. So I would say that from where we stood, and if we move to the two slab rate and get away with the 28% and the 12% rate, that would be a very good structure. In our kind of a democracy, you have to look at India as multiple countries.
You can't equate it to any of the European countries or the Middle East countries where you may have one rate per se. You will have to live with at least two rates, I would say, given our demographic and the way we are in terms of the benefits that we need to provide to our common man as well. So you will probably have, this should be probably the rates how the structure would look like, where you have a lower rate for common man products, which is 5%, 18% in general.
And of course, some of the products which are so-called sin products, you would want to have a higher rate of 40% on that.
Govindraj Ethiraj: So, let me pick up on the popcorn example, Rohit. So, 5% GST for loose popcorn, 12% for pre-packaged, if I remember that correctly, and 18% if it's caramel coated, the kind you would get in a PBR or something. What is the logic?
I mean, this is more for people who are watching and trying to understand what was the logic even driving something like this?
Rohit Jain: See, what has been considered that all essential agriculture produced, we had a concept of 5%, which is a lower rate, which is for the masses. Then we have got into a branded category, which is anything which is branded, all food products which are branded. The understanding is that there is something more than it's only for the masses.
The branded products can be only sourced by people who can afford those sorts of branded products. Therefore, the rate of tax is 12%. And unfortunately, this caramel distinction is quite different, because what is the predominant nature?
Is it popcorn or is it sugar? And that sugar carries a high rate of classification. And under the HS code, we have a different classification for a basic popcorn and the sugar coated products, which contains added sugar in that.
And that has gone to the controversy of getting into 18%. Ideally, it should not be. Yes, 5% and 12% understandable, given the mass product consumption and a branded one.
But this sugar coated and caramel and all 18% is definitely unwarranted. And this is exactly the dispute that we want to avoid now, when we get to a rate rationalisation.
Govindraj Ethiraj: So you talked about 99% moving from 12 to 5%, 90% from 28 to 18 is what we understand from the reports that we've seen. So my question is, how is this going to look like from a revenue point of view, Prashant, first you and then I'll come to Rohit, because you've talked about 190,000 to 200,000 crore consistent, or somewhat consistent flow in terms of revenues.
Could this shift things around?
Prashanth Agarwal: So I think the government is waiting on two things. One, in terms of the reduction in revenue, whatever the news report suggests, it could be anywhere between 43,000 crores to 50,000 crore, that is the number that has been talked about. What the government has realised, and at least we have seen the trend, they have been very conservative in terms of their numbers from a budgetary standpoint, and they've been able to obviously do better than them.
And that's credit to them for that purpose. Our assessment is that that is around 0.1% of GDP that we're talking about in terms of the revenue loss. But what they are really banking on, with this and the income tax benefit that have come in, hopefully in the H2 of FY26, you would see a much bigger play on the consumption story.
And hopefully that would more or less overall, whatever the revenue loss we are talking about, from a GDP standpoint, and if it can add 0.2 or 0.3% of the GDP, which is more on a consistent revenue that you're looking at, that's much bigger opportunity and objective that the government would meet by reducing these gaps. So they are able to simplify the loss for the country and for the companies to invest in. And secondly, they are able to put more money to consumption.
So both sides are in a way taken care of if this happens.
Govindraj Ethiraj: Okay, last couple of questions. Let me start with you, Rohit first, and then I'll come to Prashant. What's the unfinished agenda now?
So assuming, let's say, I mean, we've still got a month and a half, but assuming, let's say, we are able to rationalise these rates to two new rates, which will obviously increase consumption, simplify things, and that will in turn give us some sort of internal fortification against other battles that we're fighting externally. So that's all the good news. But what's the other side?
Rohit Jain: We have to still see the final details post the GST Council meeting. What is getting covered? What we have today, only the high level pillars of the reforms.
Having said that, we don't see three important aspects which are getting addressed. The primary focus was on the rate, but beyond rate, there are some structural issues that require an address, particularly in the context of intra-company activities. That has created a huge litigation, be it brand, be it corporate guarantee, be it in terms of use of inter-branch ISD mechanism, and has created a lot of disputes.
So we don't find any reference of any of those intra-company transactions, how they are going to be tackled. That's the main thing. Second, we also don't see any dispute resolution mechanism.
AR has been a failure under the GST law. How are they going to really tackle this in terms of revised AR? Formation of tribunal benches we see getting operational.
That's the sad part. Even after eight years of implementation, we don't have tribunals being formed and being operational. That's the really sad part indeed.
We have to address the dispute mechanism in a much better way. And that is something, is the second thing, which I still believe unfinished in terms of approach. And third, I think this is slightly, you know, I would hesitate to say, but the mindset of the revenue officer.
How are they going to change? Because today, if the revenue collector's job is to collect revenue, we have changed our names from collector to commissioners, but their job is still acting like a collector. We have to somehow bring that confidence in the taxpayer.
And that can only happen to the revenue officers' mindset being changed. They cannot put the gun on the shoulders of the SAC and recover the tax, including in the course of investigation and so on and so forth. There has to be some stricter guidelines in terms of how procedurally all of this will be implemented.
And we may have the right intentions. We may have a right law, but if we fail on implementation, the overall positivity that we really want to achieve will not get through. So I believe that these three things are extremely critical.
There are some intra-company, some core structural changes are still unfinished. The dispute resolution mechanism still needs to be addressed in a better way. And third, how are we going to make the implementation smoother without getting into the mindset?
Now, I'll just give you one example and conclude that at any rate rationalisation, we had a mechanism of anti-profit hearing. You would see the demands which have been raised under anti-profit hearing today have been huge. The mechanism adopted by DGAP to NAA has been very, very sad.
Now, if you look at it, now this rate rationalisation from 12 to 5, 28 to 18, the anti-profit hearing, you can imagine how many notices will be issued. If there is no proper guidance issued by the regulator, by the policy makers, we will again see the surge of disputes. And that's the reason I mean, implementation needs to be smooth in this sort of matter.
Govindraj Ethiraj: Got it. Thanks Rohit. Prashant, last word.
What's the unfinished agenda in your view?
Prashanth Agarwal: Yeah, I think I'll just take a step back and see how we have gone out on GST. And it's been more reactive to be honest, whatever even today we are talking about, we knew it should happen and it is reactive. Having said so, what is missing according to me is beyond what Rohit has already very well elaborated is the GST credit part. I think I would have wished to see a lot more clarity around GST credit because that is another area of litigation.
You have to cut down on the litigation, see how best you can ensure that there is certainty in the business and there is no cost as we wanted cascading cost in the business under GST. So credits would be something that I would really love to see how it happens. They have talked about registration and returns for small tax payers. Trust me, 97% of your revenue comes from the large tax payers.
What is there for them? We see struggle for them even today, although best of the technologies have been implemented both in terms of registration and return compliances. How can that be eased out would be extremely important.
And I think the government has a focus on that as well. And futuristically, I would want to see how the whole data which we currently have as a government can be used better from an industry standpoint. I think going beyond GST has given us a lot of opportunity.
If today I know from where I source my raw material, where my consumption story stands, how can this be beneficial to the economy at a larger scale is something which I would love to see from a data standpoint. And the government has to democratise this data to ensure and enable the industries. So how that can be done would be really, really great to see, according to me.
Govindraj Ethiraj: Right, Prashant and Rohit, thank you. So Prashant, you started out by wishing us or and everyone a happy Janmashtami. And we've also talked about the deadline of Diwali, which is barely two months away or less than that.
So whatever it is, this is a sprint and not a marathon to achieve those lower rates so that people are able to enjoy their Diwali, buy things at lower prices and have a happy festival of light. So on that note, thank you both for joining me. Thanks.
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