Proposed GST rejig saved the day for Indian stock markets, says Chris Wood

The proposal to recast goods and services tax (GST) rate by September-end saved the Indian stock markets from a sharp correction in the backdrop of steep tariffs of 50 per cent imposed by the United States (US) on the country, said Christopher Wood, global head of equity strategy at Jefferies, in his recent note to investors, ‘GREED & fear’.

Wood has removed the investment in Aditya Birla Real Estate in his India long-only equity portfolio and replaced it with an investment in Mahindra & Mahindra (M&M).

“The reason the Indian stock market has not yet reacted more negatively of late to the 50 per cent tariff threat, particularly consumption-related stocks, is the escalating policy response of the government. Income tax cuts were already implemented in the February budget. But the more positive news of late is a proposed rationalisation and simplification of GST,” Wood said.

The Trump administration went ahead on August 27 with the threatened 50 per cent tariff levied on Indian goods exports, with the main exemption pharmaceuticals.

This, according to Jefferies' estimates, amounts to an estimated $55-60 billion direct hit to the economy with the most negatively impacted sectors the likes of textiles, shoes, jewellery and gems, all of which are employment intensive.

At the bourses, meanwhile, the Nifty 50 slipped 1 per cent thus far in August 2025 amid tariff-related fears. Pharma, realty, oil & gas, bank, realty and CPSE index have underperformed by falling up to 5 per cent during this period.

The possibility of a cut in GST rates, on the other hand, spurred the Nifty Auto, Nifty India Consumption and Nifty Consumer Durables indices that gained up to 6.5 per cent during this period, ACE Equity data shows.

“Conversations in New Delhi at the end of last week make it clear that the tariffs are primarily the consequence of the American president’s 'personal pique' that he was not allowed to play a role in seeking to end the long running acrimony between India and Pakistan following the four-day military conflict between the two countries in May,” Wood said.

Slowing growth

The tariff issue, he believes, is all the more important because growth has slowed in India, particularly nominal GDP (gross domestic product) growth which is also important for equity markets. The estimates are that nominal growth will slow to 8 per cent YoY this quarter, which is below the trend growth rate in recent years of 10-12 per cent.

"The main reason for this nominal slowdown is that headline CPI inflation was at an eight-year low of 1.6 per cent YoY in July with WPI a negative 0.6 per cent YoY," Wood said.

The combination of monetary and fiscal easing, Wood said, means there could be a pickup in nominal growth in next fiscal year, and a related pickup in earnings growth. This, he believes, also explains the recent resilience of consumption stocks, in the face of the 50 per cent tariff threat, since domestic fund managers have this year tilted their portfolios away from cyclical capex plays to consumption plays.

"The 50 per cent tariffs are undoubtedly a potentially massive negative for SMEs in the employment intensive industries. This has the clear potential to impact negatively the likes of micro finance and consumer finance companies the longer the current tariff levels remain in place," Wood said.

The positive point in India, however, relative to other large Asian economies such as China and Indonesia where nominal growth has disappointed of late, is that there has been no popular disengagement from the Indian stock market, Wood said.

“Rather the culture of investing into equity mutual funds on an ongoing monthly basis remains firmly entrenched with the favoured vehicle the monthly Systematic Investment Plan (SIP). These flows are here to stay for the foreseeable future,” he suggests.