GST a short-term fix? Why UBS thinks India’s real boost is still coming

With global volatility creating an unpredictable landscape, where does India find its footing? For Gautam Chhaochharia, head of global markets at UBS Securities India, the answer is simple: in the wallets of its own people. As global markets face uncertainty, he’s convinced that domestic consumption will be the anchor for the country’s economic growth. He anticipates a temporary demand surge from the latest goods and services tax (GST) cuts, but doesn’t see them addressing India Inc.’s long-term woes by itself.

Despite challenges, he remains bullish on consumption, a bet underpinned by the latest tax cuts, potential pay commission outlays in 2027, and expected monetary policy easing. Chhaochharia thinks two more rate cuts are possible in FY26 amid slowing inflation and expects the impact of the previous cuts to start reflecting in corporate earnings from the December quarter.

According to him, once earnings growth momentum returns, it would be easier to defend India’s premium valuation relative to emerging market peers. But he also notes that the US’s tariff imposition and other geopolitical uncertainties currently pose serious challenges to such prospects.

Edited excerpts:

You have argued that GST cuts will boost consumption in the near term. How do you see this playing out?

Wherever product categories have seen GST rate cuts, we should see an immediate pickup in demand over the next three to six months. Packaged foods and personal care should see a direct and visible uplift as lower prices expand the consumer base. Those who were on the fence about purchasing mid-ticket durables like air conditioners and televisions, are more likely to buy now. On the discretionary side, automobiles—entry-level cars and two-wheelers, where rural and semi-urban buyers are highly price-sensitive—stand out. Hotels and airlines may also see higher footfalls. Product upgrades will further aid premiumisation.

How sustainable will this consumption upturn be?

The GST-driven boost is essentially short-term and won’t permanently lift the demand curve. The key test is whether this stimulus can generate enough consumption-led revenue for the government to offset any reduction in other fiscal expenditures. Otherwise, its impact on demand could be neutralized over time. For the upturn to sustain, stronger demand and hopefully better visibility must trigger a revival in private corporate capex, feeding into higher household incomes. Without this virtuous cycle, the consumption boost could prove short-lived.

How do you see rural versus urban consumption trends shaping up after the tax cuts?

The rural economy is recovering, but at a milder pace than expected. Tractor sales remain muted, and two-wheeler sales, though improving, are still below pre-covid peaks. UBS’s India economist forecasts 25-50 basis point rate cuts in the rest of FY26. Two rate cuts of 25 bps each are possible. This easing, combined with GST measures, is likely to give urban demand a bigger push through lower EMIs and better financing access.

So, can GST cuts alone drive an earnings recovery?

Not by itself. We believe the second half of the year should see earnings recovery driven by three factors: the low base effect, the lagged impact of monetary easing, and the GST cuts. Monetary easing typically takes a couple of quarters to filter through the economy. The earlier earnings disappointments may have reflected an expectation of immediate demand pickup post the RBI’s (Reserve Bank of India) cuts, which was unrealistic. The second half is when these measures should begin to show results. While consensus Nifty EPS (earnings per share) for FY26 has already been cut by about 2%, earnings are likely to bottom out in the September quarter.

India’s valuations are often described as rich. How do you reconcile that with recent earnings downgrades?

India is trading at about 22x forward earnings, versus the 10-year average of 20x, making it expensive on an absolute basis as well as relative to emerging market peers. Historically, this has been underpinned by India’s growth story. But following the latest FY26 EPS cut, the near-term growth-to-valuation trade-off is less attractive. However, valuation concerns should recede once growth recovers in line with expectations.

How are foreign investors looking at India right now?

Foreign portfolio investors (FPIs) have net sold about $25 billion in equities so far this year, though much of it has been offset by local mutual fund inflows of around $26 billion. However, we must note that emerging markets as an asset class have underperformed US markets in 75% of the annual rolling horizons since 2007. Within that, India still looks better placed structurally, but global investors may want growth visibility before increasing allocations.

Which sectors do you find attractive in this environment?

Tactically, IT (information technology) looks interesting because of currency tailwinds—the rupee has depreciated 2% against the dollar this year—and relatively light positioning. However, the medium-term outlook is clouded by investor concerns over adaptation to AI and automation. Meanwhile, consumption remains the core bullish theme. Within financials, select capital markets-linked businesses look attractive as some of them should see profit pools grow faster than system averages.

Markets have been range-bound. Do you expect a breakout anytime soon?

Not immediately. Local SIP (systematic investment plan) inflows of ₹27,000 crore per month cushion the downside, while a heavy pipeline of IPOs (initial public offerings) and PE (private equity) exits caps the upside. A breakout requires either a visible acceleration in GDP (gross domestic product) or earnings growth or a global shock, which can also force a derating.

What are the key risks to your outlook?

We recently upgraded India to neutral from underweight in an EM (emerging market) context, and there are three key risks to our outlook. The first is monetary easing not translating into demand. The second is slower job creation from emerging technologies. A third risk is geopolitics: tariffs or worsening global trade could derail India’s export recovery and even manufacturing revival.

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