People crowd at a market next to railway station in central Mumbai. (Reuters Photo/Danish Siddiqui)

Indian Markets Welcome GST but See Challenges Ahead


AUGUST 05, 2016

Indian bond and share prices rose as investors welcomed the long-awaited passage of a goods and services tax (GST), though gains were tempered by concerns about the amount of work needed to bring the reforms into reality.

The broader NSE index pared earlier strong gains to close 0.07 percent higher, after climbing as much as 0.7 percent earlier in the session.

The benchmark 10-year bond yield was down 2 basis points (bps) at 7.18 percent.

The GST passage in the upper house of parliament paves the way for the rollout of India's single biggest tax reform since independence, one that harmonizes 11 state and central levies into a national sales tax and cuts business transaction costs.

Its passage marks a victory for Prime Minister Narendra Modi as he seeks to boost growth in Asia's third-largest economy, and is a relief for investors, especially overseas, who'd been growing impatient about the pace of reforms.

Economists project the GST could add 0.4 to 0.8 percentage points to India's economic growth within three to five years of the rollout.

"This is an encouraging sign that Modi's slow-and-steady approach to reforms is making headway," said Kenneth Akintewe, Asia fixed income senior investment manager at Aberdeen Asset Management Asia, in Singapore.

"The infrastructure to enforce the tax needs to be set up, while crucial details - such as the GST rate, exemptions and dispute resolution mechanisms - still need to be hammered out."

Fitch Ratings welcomed the move as an important signal of the government's ability to pass reforms.

"Parliamentary approval sends a further positive signal of the government's ability to enact major reforms following the passage of a national bankruptcy law in May," the ratings agency said in a statement.

But Moody's Investors Service said the short-term credit implications of GST for the sovereign "will be limited" given the time that would be needed for implementation.

Among tasks that need to be accomplished, the government and companies from sectors such as automakers and logistics will also need to implement new technology structures in preparation for the new taxes.

In the immediate-term, Nomura analysts warned the GST could negatively impact the economy as higher taxes hit consumption and push up inflation by 20-70 basis points in the first year of implementation.

"Contrary to general perceptions, we believe that the short-term impact of the GST could be mixed, but the long-term impact will be clearly positive," Nomura said in a research note.

Shares of automakers rose as the heavily-taxed sector is expected to be one of the biggest beneficiaries of a unified and national taxation system.

The Nifty Auto Index rose as much as 1.91 percent with Tata Motors gaining 4.52 percent.

Logistics firms also gained, with Shipping Corp of India up 2.58 percent and Transport Corp of India up 0.59 percent.