In a significant positive turn for India's corporate landscape, a new report by CRISIL Intelligence reveals that recent goods and services tax (GST) rate cuts are set to provide a 'marginal revenue lift' for India Inc. The research note projects that corporate revenue will likely grow by 6%-7% this fiscal year, a notable increase of 25-50bps (basis points) from previous estimates. The GST reductions are expected to have a particularly positive impact on consumption, which constitutes 15% of corporate revenue, and their strategic timing ahead of the festive and wedding seasons is seen as a key growth catalyst.
“The new GST rates will lower the prices of products in key sectors such as fast-moving consumer goods (FMCG), consumer durables and automobiles. While the passthrough in FMCG, durables and automobiles will be direct, for a few other sectors, such as construction, the impact will bear watching. The anti-profiteering clause in the GST regime may, however, limit any material impact on the margin profiles,” the rating agency says.
The report identifies several sectors that are positioned to benefit from the new tax regime, which aims to stimulate demand and ease inflationary pressures.
Automobiles and Farm Equipment
The two-wheeler segment, which has been struggling, is set for a major boost. The GST rate reduction is expected to improve sales for two-wheelers with engine capacities under 350cc, a category that accounts for approximately 90% of the market. CRISIL anticipates a volume sales improvement of 100bps to 200bps for this segment.
Anuj Sethi, senior director of CRISIL Ratings, says, "With the GST cut fully passed on, vehicle prices are expected to drop 5%-10% or Rs30,000 to Rs60,000 on small passenger vehicles (PVs) and Rs3,000-Rs7,000 on two-wheelers. With the rate cut coinciding with the Navratri and the festive season, sentiment would get a timely boost. Coupled with new launches, softer interest rates and improved affordability, this should drive a stronger second half for the automobile sector."
Similarly, the agricultural sector is poised to benefit from GST cuts on tractors and farm equipment. The GST reduction from 12% to 5% on tractors is projected to lower acquisition costs by Rs40,000 to Rs60,000 per unit for the core 41-50 horsepower segment, potentially boosting tractor volume growth by 150bps to 200bps.
Consumer Goods and Durables
The fast-moving consumer goods (FMCG) sector will see lower prices for many packaged foods and personal care items, the rating agency says. For products sold in small packets, like namkeen and bhujia, companies are expected to increase the grammage rather than reduce the price, which is projected to boost volume demand by 100bps to 200bps.
For consumer durables, a GST reduction could lead to a 7%-8% price drop for products such as air conditioners and televisions (greater than 32" size). Volume growth for these goods is expected to improve by 100bps to 200 bps.
Nuanced Impacts on Other Key Sectors
While the impact is broadly positive, the report highlights a more nuanced outlook for certain sectors:
Cement: A GST reduction to 18% from 28% could marginally decrease overall construction costs by 100bps.
Healthcare: The GST cuts on life-saving and chronic medicines are beneficial for consumers. However, pharmaceutical companies may not see a significant volume-driven growth as these are non-discretionary items. The report also warns that a "rate inversion" could lead to working capital blockages for companies.
Textiles: The GST on the entire man-made fibre value chain has been fixed at a flat 5%, which should alleviate working capital pressures for manufacturers. Sales of low-value apparel are expected to get a boost.
Airlines: The GST on business and premium economy tickets will increase from 12% to 18%, but the impact is expected to be minimal as these travellers are generally less price-sensitive.
Power: The GST on wind and solar projects has been reduced, which should lower capital costs and encourage new additions. While the GST on coal products has increased to 18%, the simultaneous removal of the Rs400 per tonne cess is expected to moderately lower prices for most coal grades, helping to reduce electricity costs for consumers.
In conclusion, the report notes that while an anti-profiteering clause in the GST may limit the direct impact on corporate profit margins, the overall effect is a significant lift to top-line growth.
