Nilesh Shah on GST rationalisation: Boost to consumption, shield against US tariffs

Nilesh Shah, Managing Director of Kotak AMC, on Friday said the government's move to rationalise Goods and Services Tax (GST) is a next-generation reform that will stimulate domestic demand, ease inflation and partly cushion the economy against the impact of US tariffs.

Speaking to Business Today, Shah said GST rationalisation will leave more money in the hands of consumers. "It will support consumption, bring down inflation, and allow the RBI to ease monetary policy further. With higher demand, private investments will eventually pick up as capacity utilisation rises, setting off a virtuous cycle of investment and consumption," he noted.

The announcement comes at a time when India faces external challenges from steep US tariffs on its exports. India exports goods worth about $80–85 billion annually to the US, of which nearly $50 billion are currently facing tariffs of up to 50 per cent. "At 25 per cent, the impact was bearable compared to competitors. But at 50 per cent, it is more like an embargo. The government is rightly stimulating domestic demand to offset these unjust tariffs," Shah explained.

Shah said equity markets have already factored in many consumption revival measures such as the February income-tax cuts, the RBI's 100 basis points (bps) reduction in interest rates and now the GST rate cuts. He added that the upcoming Eighth Pay Commission and potential cuts in fuel prices could further support demand. "Markets may remain volatile in the short term, but the medium-term story is intact," he said.

On concerns that GST cuts may hurt government revenues, Shah admitted there will be some impact. "The rate cuts of about Rs 48,000 crore will reduce collections, but the government has many avenues -- asset monetisation, divestment, PSU dividends and the RBI's record surplus transfer. At most, there will be a marginal slippage in the fiscal deficit, driven more by lower nominal GDP growth than by higher spending," he said.

Foreign portfolio investors (FPIs) have sold over $10 billion of Indian equities in the past two months. Shah attributed this to profit booking, valuation concerns and portfolio rebalancing, besides negative global coverage of India's Russian oil imports. "There was consistent selling in the secondary market but also buying in primary markets, reflecting a switch into new-age companies. US tariffs have added to concerns, but this is not the sole reason," he said.

For investors, Shah recommended sticking to asset allocation. "There are opportunities in gold, silver, high-quality credit, long-duration bonds and equities. Yes, it is time to be overweight consumer discretionary, but moderate return expectations and be prepared for volatility," he advised.

On rising bond yields, Shah said India is better placed than many economies, with corporates and households having deleveraged since 2008. He expects 10-year yields to stay balanced around 6.5 per cent.