Stocks Jump On GST Rate Cuts
India's auto stocks jumped as much as 3.7% to the highest level in nearly 11 months on Thursday
On Episode 669 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Rotti, Founder and CEO of Tax Compaas, Madhavi Arora, Lead Economist at Emkay Global Financial Services as well as Kaushik Sanyal, Managing Director for Data & AI, India at Accenture.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Stocks jump on GST rate cuts, clothing industry gets a shock.
(03:13) The big question, will demand and consumption rise because of lower consumption tax?
(10:42) The unfinished agenda on GST reform
(20:39) More used cases for agentic AI, including in areas you may not guess
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 Friday, the 5th of September, and this is Govindraj Ethiraj, broadcasting and streaming weekdays from Mumbai, India's financial capital, our top stories and themes. And before I come to that, we've got lots of in-depth analysis of the latest tax cut announced by the government on Wednesday night, so stay tuned. And finally, an interesting agentic AI initiative from our sponsor, Accenture.
And now, the top stories.
Stocks jump on GST rate cuts. The clothing industry gets a shock, as do premium economies and business travellers.
So the big question– will demand and consumption rise because of lower consumption tax?
The unfinished agenda on GST reform.
And more use cases for agentic AI, including in areas you may not have thought of.
Consumer Stocks Jump
India's auto stocks led the charge, jumping as much as 3.7% to the highest level in nearly 11 months on Thursday after the government slashed goods and services taxes on GST with most analysts now predicting a demand boost and more on that shortly. Stocks like Mahindra and Mahindra and Ayesha Motors hit record highs and led gains on the auto index, though everything corrected a little later as the market turned. Broadly, the GST Council's announcement on Wednesday night will lead to streamlining the tax structure into two slabs at 5% and 18% and reduce rates on essential goods while keeping higher taxes on what is known as sin and luxury items.
We did mention in the core report that some disappointments could follow in the stock market since most of the rate cuts were already priced into the stock prices of leading consumer-facing companies. The Sensex was up almost 889 points to an intraday high of 81,457 before closing up 150 points to 80,718. The Nifty 50 was up 19 points to 24,734.
The broader indices were, however, down. The Nifty Mid-Cap 100 was down 0.6%, and the Nifty Small-Cap 100 was down 0.7%. Foreign portfolio investors are still selling almost $2.7 billion of Indian financial stocks, mostly the highest monthly outflow in seven months according to data from the National Securities Depository quoted by Reuters. The rupee, thanks partly to foreign portfolio selling as well as other weakness, ended lower on Thursday and closed at about Rs.88.14 against the US dollar, down slightly from its previous close of Rs.88.07. That's in the previous session.
Dollar demand from local oil companies and foreign banks weighed on the rupee on Thursday. We've still got analysis on the macro and tax fronts coming up.
Will Inflation Fall?
Analysts are predicting that consumer price inflation could come down by 25 basis points. The government is likely to lose about Rs.48,000 crore of potential taxes as a result of the new rates, which analysts believe can be absorbed well if the rate rejig leads to an increase in overall demand.
So Indian consumers have now benefited, or many of them have benefited in two ways. One is because of lower income tax on incomes up to a lakh of rupees per month. And of course, lower rates on many products, particularly daily use products, and thus a lower consumption tax.
HSBC said they estimated the tax rate cuts could lower headline consumer price inflation by one percentage point if producers pass on all benefits to consumers. If the pass-through is only partial, it could be closer to 0.5 percentage points. And they expected the Reserve Bank to cut rates once again by 25 basis points in the fourth quarter, taking the repo rate to 5.25%. As categories go, food items, medicines, personal care, and stationary and small cars, air conditioners, refrigerators are amongst those where they've been reduced, including to zero, while items like mobile phones have not been changed.
Interestingly, goods and service rate tax on coal was hiked to 18% from 5%, but still, buyers will pay less because they will no longer have to pay a flat carbon tax of 400 rupees per tonne, known as a CESS, according to a Reuters report. So the net cost should be lower, which could lead to somewhat reduced energy bills somewhere along the way. Industry officials told Reuters that coal prices could fall after revisions to taxes on coal that generates nearly 75% of India's electricity.
Prices of power plant-grade fuel sold by Coal India, which produces about 75% of India's output, will now be about 8% to 19% cheaper for utilities and 5% to 16% cheaper for other users, like smelters, according to Reuters calculations. I reached out to Madhavi Arora, Chief Economist at Emkay Securities, and I asked her what her headline takeaways are before trying to understand how she was looking at overall consumption or demand patterns going ahead.
INTERVIEW TRANSCRIPT
Madhavi Arora: So we were estimating the net loss to the exchequer close to around 1 lakh crore. Against that, the number is relatively much lesser. Policymakers obviously had a much better handle of, you know, the consumption losses.
They've taken it on the basis of FY24. So obviously, I have to adjust for the next two years to get some estimated number, which would be a tad higher than, say, you know, 48,000 crore loss that they have estimated. But it is unlikely to be crossing more than 600 billion, which is roughly around 0.15% of GDP. So my numbers were much higher. Again, taking the estimation, the shift in the slabs, definitely the government numbers seems to be much lesser compared to what we had taken into account.
Govindraj Ethiraj: Any category surprises? I mean, mobile phones, for example, have not changed, even as many others in food and medicines and all that have come down.
Madhavi Arora: Pooja- No, I didn't find much of a surprise. A bit of a shift in terms of luxury goods here and there. Say, luxury watches, you know, they're not taxed at a higher slab.
So some of the minor things were there, but I don't think there was any big surprise in terms of categories that finally have been placed. Of course, the auto sector has been a positive surprise because even the luxury SUVs are adjusted for the compensation that will no longer be there, and will actually be cheaper. Some of the luxury SUVs were actually taxed at as high as 50%, but will now be capped at 40%.
So those things are obviously a clear positive for us in terms of, you know, sector shift.
Govindraj Ethiraj: Right. So as you now look ahead, a couple of questions. One is, are you seeing any inflation impact that's positive?
And secondly, is it your sense, even looking from history, if there could be a consumption boost?
Madhavi Arora: Pooja- See, any kind of supply-side reform, obviously, ceteris peribus would lead to changing in demand dynamics. That's the reason why policymakers do these supply hits. And of course, there's a loss of the X-checker somebody has to gain in the process, right?
The implied loss to X-checker should be technically the implied gains for the private economic agents. Apart from that, there could also be spillover effects in terms of lagged behaviour of consumers. Most importantly, you know, this indirect tax is actually a regressive tax in nature, right?
Because unlike direct taxes, where things are much more progressive, indirect taxes are much more regressive in the way they are imposed. Thus, India has one of the highest indirect tax to total revenue ratios, if I look at it, compared to emerging markets. So I think on the net, this definitely is going to have a second-order impact in terms of consumer sentiments, probably improving.
Obviously, compliance, as the government of India also mentioned, compliance factors and the tax incidence getting lower, all of that would play out over the medium term as well, which may not change the business cycle dynamics per se, because there are other factors which are impeding that. But definitely, ceteris peribus is positive. From the inflation point of view, our earlier estimates as well, we were probably going to be seeing a disinflation effect of between 40 to 50 bps, roughly, depending on the demand in our cities and depending on how much the pass-on that actually happens to consumers.
So we'll have to take that into account. But definitely, lower taxation would lead to mass consumption, probably gaining much more of the F&D category, which benefits the most in the inflation dynamics of it. But we'll see how that pans out as we get into the next year.
Govindraj Ethiraj: Right, last question. So is there anything that you're looking out for, you want to wait and see either the final fine print or anything like that?
Madhavi Arora: I think I would be more keen on understanding the next fiscal impulse that we're going to get from this. So there are two or three things that are important to watch for. One is the fact that any fiscal hit that happens will be disproportionately borne by the states because states not only get a share of it in SGST, but also get part of devolution-led money from the CGST as well.
The states get a disproportionate hit. And at this point in time, state fiscal is actually much more fragile than central fiscal in terms of the quality of the fiscal book. Because in the last one and a half years, they have actually moved their spending more towards revenue expenditure versus capital expenditure.
There's been a bit of a shift in the way they are spending. And if you look at YTD also, states are actually much more strained than central. Central fiscal is also looking pretty fragile.
Insofar, the gross tax revenue is less than 1% growth versus 12, 13% plus growth that is implied from the provisional numbers. I'll watch out for how much is that net fiscal slippage that you will see by the end of the year, because that will be equivalent to the net aggregate demand because of the so-called fiscal impulse that the economy may enjoy. Policymakers have buffers, say, in the form of higher RPI dividend, even PSE dividend for that matter.
At the same time, you may actually see benefits coming from no slippage in divestment, the talks that they would be able to go through with the IDPI sell-off as well as the LIC stake sale. So all of that could be positive leavers. But we'll also see how the government is going to manage its expenditure side.
Are they going to see any expenditure cuts at the margin so as to manage the fiscal deficit? Or they may even come ahead with some kind of a fiscal subsidy to export sectors, which are going to get hit by tariff or maybe credit guarantees, which are not necessarily fiscally impacted, per se, on the books. So we'll see how it pans out.
By the end of the year, I would want to see what is the net fiscal impulse coming from the government of India, because that is what will be equivalent to the aggregate demand that will be enjoyed by the economy.
Govindraj Ethiraj: Madhavi, thank you so much for joining me.
The Big Takeaways
The key takeaway from a business and enterprise point of view from the new GST rates is obviously the rationalisation of the current four-tiered tax rate structure into a two-rate structure with a standard rate of 18% and a merit rate of 5%.
A special demerit rate of 40% is for a few goods and services. The rationalisation is aimed at and expected to simplify compliance, minimise cascading tax, and obviously make Indian industry more competitive. The GST appellate tribunal will be operationalised for accepting appeals before the end of this month and will commence hearing before the end of December 2025.
I reached out to tax expert Ajay Rotti and founder of Tax Compaas, and I began by asking him what his headline takeaways were and also what was the unfinished agenda at this point of time.
INTERVIEW TRANSCRIPT
Ajay Rotti: I think moving this is quite a substantial change. A lot of the time we hype reforms to say 2.0, 3.0 etc and here I think we are at GSG 2.0. I think the fundamental thing without getting into each category of boots etc and that's not really the main point is that we moved from a 4 band rate to 2. Most of it is at 18, some of the essentials at 5 and a few things at 40 which in my view is almost ideal structure.
It's as good and as close to a single rate as we can be. In my view, I don't think we can get to a single rate given where we are as a country in terms of inequality. There needs to be a lower rate for essentials given our income levels etc.
So, I think this is quite ideal. What has really happened is what started as a 4 rate thing was more of a political compromise. We had to start somewhere, states were giving up their right to tax boots, they were losing revenue.
Therefore, you had to agree on a rate which worked for everybody and that's where we started and this had to be changed. Now, whether today is the right time, could we have done it two years ago is something that's moved according to today. So, I think overall, the structure has clearly changed with almost most things falling at 18% and two exceptions, one at 40 and one at 5.
So, structurally this becomes a much simpler regime than the past, fewer classification disputes. You know, you heard the revenue secretary say that these classification disputes were not anyway yielding too much revenue but were taking up a lot of time and effort. So, there will be fewer classification things.
So, I think overall, good changes on the rate of rationalisation.
Govindraj Ethiraj: Right. Okay. And if you were to now look at the unfinished agenda and when I say unfinished agenda, I mean in terms of what we could have hoped or expected at this point of time, not something that's idealistical and future.
Ajay Rotti: So, I think what is unfinished, a couple of big things which like you rightly said and need not wait for long can be done here and now or immediately after this rate rationalisation since it's behind them. One is on the administration overall. We went into a dual structure of GST knowing well why we were doing it again because of the compromise with the state.
So, there's a state GST authority, a central GST authority. We go back to pre-GST. It is very strict for the service sector, banks, telecom companies, software companies, people like that because service tax was a single registration centrally run. Today, if they are present in 20 states, there are 20 officers technically who can be down their neck, ask for the same details, take varying positions and deal with certain situations where on the same transaction, two states are taking two different views and state officers are still not trained so much.
There's been an ask for some of the people to have a centralised registration. We want to do 20 states. It's okay, but let there be one person calling for information.
I think in administration, there is a need and there is a scope to do a lot of things here and now to look at how you could streamline some of this, make it more consistent. That's one. Second, similar breadth on litigation.
You know, we've gone nowhere. The GST tribunal is not functional. Thankfully, yesterday's recommendations, one of them is on the GST council to make it operational.
There's some small step there, but there's a lot of distance there to cover in terms of pending litigation that's there. You know, how long will this tribunal take to clear those because remember, all the GST litigation is bottled up with the tribunal not being there. So on administration and litigation, there's a lot more we could have and should have done right now.
Let's hope it happens sort of in the near future.
Govindraj Ethiraj: You know, the rates kick in from September 22 for businesses for whom, let's say, a lot of products are in the pipeline, either moving or travelling or how does that work? Is there anything to be concerned about or can it be all resolved on the system?
Ajay Rotti: So there are some concerns there clearly and it happens whenever there's a rate lowering of the rates. So I'll take an example stationary, for example, and on the top of my mind, somebody who's bought stocks and assume you have one or two crossword stocks that's sitting with you and you bought it with GST. Now, stationary will not be liable to GST going forward and what happens on your input cost, you reverse it, you get a refund for an interim period, what will be the transition mechanism? I think we'll have to wait for some of these things to come out.
There will be some concerns there, no doubt at all. Most of the essentials have gone now. What happens in FMPG cases where there's already stock which is inclusive of GST that's there, you have the MRPs printed, biscuits etc.
where GST has changed. Some of these, I think over the next few days there will be some clarifications on what they will do. There could be some transition mechanisms for credit that are there.
There's also another aspect which is some goods which were having CESS will not have CESS forward because CESS goes away after 22nd September except for tobacco, pan masala and those things. So what happens when you purchase something with a CESS, you have stock which is liable to CESS and then you suddenly have a 40% rate as against 28% plus 12% CESS or whatever. So some of these I think we'll have to see in the next few days.
My sense is that they have taken this 10-15 day lead time to sort out some of these things. You couldn't have told the industry and the supply chain that from tomorrow these rates will be lower. Of course it does very nicely fit into the festival season etc.
But I think it's more of a practical need that there has to be a lead time between the changes.
Govindraj Ethiraj: Right and last question. So for consumers the rate cuts or the lower rates will be obviously effective from September 22nd. If for example they've paid for things ahead and so on, what happens?
I mean you know if you've booked a car and you've paid something right now or 10 days ago.
Ajay Rotti: So if GST has already been paid that's one actually because you paid it in advance. It's not only that going there are a few other getting into technicalities but important. Take for example health insurance.
You know it becomes 18 to 0. Now what happens is earlier if you had an 18% output and there was some input on commission that the insurers paid for distribution or rent that they paid etc. They could unlock that GST credit.
Now they can't go from 18 to 0. So if your insurance premium was 100 plus 18 of GST you cannot today go to 100. Because if they go to 100 then whatever is the ITC that's not unlocked becomes a cost for them.
So we may not actually see an 18 to 80 reduction for example in health insurance. We may not see it even in hotels. Hotels, room stays they've got it on from 12 to 5.
Even then there may be some adjustment for input credit. So the prices may not fall 7%. Some of this we'll have to see and what will come is the point you made at the beginning which is what happens to some of these credits that's already been paid.
If it becomes a cost how do you adjust? I think the next 10 to 15 days are going to be interesting to see where those things settle. Also important that we don't have the anti-profiteering body anymore.
You could go to the anti-profiteering body if there was no reduction. Because the GST law is very clear that if there is a rate change or there's any benefit of input tax credit that has to be passed on and appropriate adjustment has to be made in the price. There was a national anti-profiteering authority which was disbanded for a variety of reasons.
Then it went to CCI from CCI to the GST appellate tribunal. Now we don't have a body where you can go. The businesses are expected to adjust it in all good faith.
So we'll have to wait and see how that will play out.
Govindraj Ethiraj: Right and I'm sure I'll come back to you in about two weeks time. Thank you so much Ajay for joining me.
Ajay Rotti: Thank you.
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The clothing industry is upset as goods and services tax was raised to 18% from 12% on apparel and clothing accessories that cost more than 2,500 rupees, which could hurt global and local brands, and the global ones include Marks & Spencer's, Levi's, and Zara. The clothing industry has already been campaigning for relief on the exporting front, and clearly this is not the best time for them to be switching produce or product to the local market, given the field is narrower. The International Air Transport Association has expressed disappointment after the GST Council raised taxes on premium economy business and first-class tickets to 18% from 12%. The IATA said that India has been an amazing aviation story with its impressive growth, record aircraft orders, and world-class infrastructure.
Aviation has the potential to contribute to India's economic growth, both directly as Indian airlines grow and indirectly through increased connectivity for travellers and businesses, and thus it's disappointing to hear of a decision to increase the GST on non-economy travel with no clear justification. That was from Sheldon He, the Regional Vice President, Asia Pacific of the IATA. While air travel costs in non-economy classes will increase, the Council has kept economy fares, that's the GST, on economy fares unchanged at 5%.
The B-School Challenge
Accenture is running the ninth season of its B-School Challenge 2025 with a theme of driving process reinvention for enterprises through agentic AI. The finale is on the 11th and 12th of September, and you can catch some of those highlights on the core VR media partners.
I will also be hosting a panel discussion on agentic AI with industry experts. Ahead of that, I spoke with Kaushik Sanyal, Managing Director for Data and AI Business for Strategy and Consulting Global Network at Accenture, and I began by asking him, what were some of the more cool and interesting AI applications that's agentic AI applications he was seeing right now?
INTERVIEW TRANSCRIPT
Kaushik Sanyal: Agent applications are now practically everywhere. You know, you can always think, oh, it's happening here and it's happening there and you're not sure, but what I saw a couple of days back was how communications providers are using agentic applications in their network operation centres and security operation centres. And that's something that, you know, when we were always envisioning where agent applications could potentially come in, was never in the first of the list.
So to see those applications come in, work on the whole sort of mundane tasks that people do on those things, or even doing some of the error rectifications on other things, it was just amazing to see.
Govindraj Ethiraj: And can you give us a little more insight on that? I mean, because usually agentic AI, as people like me would understand, would be consumer-facing. And in this case, I think it sounds like this is more intra-enterprise.
Kaushik Sanyal: So intra-enterprise is another major area, Bhuvan, where we are seeing right now agent applications coming in. Companies are solidly investing in agentic applications to improve their productivity. One key area that I see a lot of people talk about, and I'll go back to the network thing, but one key area that I see people talk about is how they're even doing in terms of responding to requests for proposals.
What would probably take a few consultants days to assess and then respond to proposals, people are just going into these applications, going through, understanding what they're saying, coming back, figuring out what the task is, figuring out what the differentiators are, and then potentially putting their company's responses very effectively. In hours, that would have probably taken days, if not weeks, to respond. So that's one interesting thing.
But where I see this network thing was that company is now saying, okay, what used to be manned by a lot of individuals, could I start to have agents look into it, look at simple L1 errors, look at how to do the error rectification, look at the charts and making sure everything is working fine. Human eyes were looking at it. It's now agents doing that thing work and working through that thing as agents do tirelessly, 24-7.
So that's a lot of things, a lot of mundane work that you can see the agents really operating at at scale and doing things in a more effective, productive fashion.
Govindraj Ethiraj: And the example that you quoted also suggests that we are crossing into more real-time mission-critical applications in using agentic care, which otherwise people would have been scared to touch. Yep, absolutely.
Kaushik Sanyal: And you know, it is starting to impact everywhere. So you'd have seen recently that note from Mark Wienhoff, the Salesforce CEO, who kind of talked about how he has been able to reduce 45% of his customer service agents to do the work. And whenever I've been talking about agents, I said contact centre customer service is going to be the number one area that's going to get impacted.
The number two areas that's going to get impacted are all your business ops, whether it's finance ops, your supply chain ops, your procurement ops, your HR ops. Those are the things that's going to get started, going to get impacted. Because the people working on them for most organisations are not close to you.
They're probably people that you have already outsourced. So they're not part of your organisation. So you don't have that emotional connection when you have to do something about reinventing them.
And that's where it is going on. But now it is starting to hit real processes within organisations, be it software development, technology development, be it the network thing that I just mentioned, day-to-day core mission critical options that are starting to get impacted by agent AR.
Govindraj Ethiraj: And are there any Indian examples that you're seeing? I mean, without necessarily naming any specific companies or businesses.
Kaushik Sanyal: So most Indian companies are talking about it from a perspective of the contact centre customer service part. But surprisingly, the telecom example that I gave you was from an Indian operator. So Indian companies take this thing up very actively in the marketplace.
The other area that you can see the Indian operators, the Indian service providers are starting to deploy agents in doing the technology development work at scale.
Govindraj Ethiraj: And when you say technology development, you mean writing software code or something more than that?
Kaushik Sanyal: Absolutely. Software codes to start with.
Govindraj Ethiraj: Got it. So, you know, we usually think of large enterprises doing all of this. And does some of this or are there early signs of agentic AI specifically being used by smaller enterprises?
Is there a window there for them?
Kaushik Sanyal: So in terms of smaller enterprises, I would say it is easier for them because managing their data, which is the core of all applications of agents that would sit on, is easier because it's probably more in-house and, you know, you can possibly manage it much more. People always think that, OK, when I'm applying agents, building agents, it's a very costly exercise. It's not really a costly exercise.
It is all about managing your data sets effectively, figuring out where you want to target and how much benefit you can take. And in certain times, the smaller organisations, it would probably make more sense, especially if their data side of the thing is probably done. If they're a digital company, I've really taken to the cloud journey and everything else most effectively.
They can potentially do this much faster and more effectively.
Govindraj Ethiraj: Right. And if I could touch on the talent side and also link it to the your Accenture B-School challenge, you know, the example that you use in the beginning on network security, NOC, network operation centres and everything that goes inside that, to identify that you can use agentic AI in a situation like this will obviously call for some experience, skill, understanding of the business process itself and then saying that, let me now try and find this. And because this is a problem that needs to be solved. So how are you seeing the talent side of things to address these kinds of things, you know, finding problems, identifying them, whether low or not low, high hanging fruit, and then building the technology and the solution to actually do it?
Kaushik Sanyal: So I think talent is a critical part to the whole exercise. Of course, as you said, people will need to have knowledge around that whole business process to be able to draw or map up the business process on which the agents could be deployed or employed to kind of do the task most effectively. So having people who have, let's say, an industry specific understanding or a functional specific understanding is now a very important criteria.
So from Accenture's perspective, we are fairly targeting to try and get our people trained on the industry processes, trained on the functional processes, so that they can really go out there and help work with the client in terms of mapping it. Now, every company will have its own nuanced changes within those processes, but the generic process to a large extent for many of these larger business activities remains the same. And that's where these companies do come into play.
And that's where having people with that business mindset, knowledge about the business processes is very important for us as we look for the right talent.
Govindraj Ethiraj: And what's your own encounter or experience been with this cohort of young people who are coming in and the kind you would encounter, let's say, at a B-School challenge? And what would you expect from them or alternatively, how would you guide them into this world? So two things.
Kaushik Sanyal: I think there are two questions that you have over here. So first thing is what I think is happening is across schools, I'm seeing a lot more appreciation of AI and the applications of AI today among the people that I'm encountering. Many of them, if not having a hands-on knowledge about the capability or the skills, at least have a very strong understanding of what it brings to the table and how they could potentially work with it to further their careers.
So that's one good thing that is happening. I think the second thing that many people, as they come into the market, face that concern is, okay, what does it mean for me and my career in this fast-changing environment? And I personally feel that what needs to happen is people need to get down to their core capabilities.
So whichever core capabilities that they select or elect to, I think that should be the thing that one should go after. Because once you are able to figure out that this is what I want to do, you will invariably build the deep-down knowledge around those, then that's going to be important. Because as companies evolve, that core knowledge around your subject, whether it's in terms of processes, whether it's in terms of the core capabilities that is required to kind of deliver those things, is going to be important.
And that will always be something that's going to be useful. So my request for every individual is to not get worked up about what AI can do, but be clear about how AI can help them in their work that they do, and to specialise in the core areas of what they want to do. It could be mechanical, it could be electrical, it could be finance, it could be accounting.
Just do your job very well. Don't try to do multiple different things.
Govindraj Ethiraj: That's a good note to end on, Kaushik. Thank you so much for joining me.
Kaushik Sanyal: Thank you.
