Coming months will test business models' resilience, policy effectiveness

India’s bold move to slash GST rates across key consumption categories has injected a fresh wave of optimism into the economy. Effective September 22, 2025, the rate cuts span automobiles, consumer durables, food items, and personal care products, offering a timely stimulus to demand amid a tepid macro backdrop. 

 

As companies recalibrate pricing and inventory strategies, early signs point to a potential inflection in consumption trends, especially with the festive season in full swing. However, being cautiously optimistic won’t be a bad idea.

 

While the domestic policy shift is encouraging, global developments, particularly the US administration’s decision to impose a one-time $100,000 fee on new H-1B visa petitions, pose fresh challenges for India’s export-driven IT sector. Together, these policy changes are reshaping the near-term outlook across industries.

 

Auto Sector: Demand revival on the horizon

The auto industry is among the biggest beneficiaries of the GST rate cut. With companies swiftly passing on the tax savings, vehicles across segments have become more affordable. This is expected to unlock latent demand, particularly in the mass-market two-wheeler and entry-level passenger vehicle categories.

 

After a subdued H1FY26, the sector is poised for a turnaround. Domestic two-wheeler volumes are expected to grow in H2FY26, supported by festive tailwinds and improved affordability. Passenger vehicle sales are also likely to accelerate. Auto ancillary firms with strong domestic OEM linkages stand to benefit from the anticipated production ramp-up.

Consumer durables: Room ACs get a breather

The GST rate on room air conditioners has been reduced from 28 per cent to 18 per cent, bringing them in line with other home appliances. This correction comes at an opportune time because the demand in H1FY26 was dampened by early monsoons and high channel inventory. The rate cut, coupled with pre-buying ahead of new energy norms, is expected to revive sales in Q3FY26.

 

While the impact may be seasonal, it offers a much-needed breather for the sector and could set the stage for more stable growth in FY27. 

Consumables: Volume-led growth and formalisation

The GST rate on most food items and select personal care products has been cut to 5 per cent, down from 12- 18 per cent. This move could partially revive consumption, particularly in price-sensitive categories.  The lower tax rate could also drive formalization in categories like biscuits and namkeen, narrowing the price gap with unorganized players. Cigarettes would continue to be expensive as the GST rate would increase to 40 per cent.

 

Most segments under consumable will enjoy better benefits while a few will see limited growth. Overall, the sector is poised for volume/mix-led growth starting in Q3FY26. This GST-rate cut would also offer some headroom for price increases in the medium term (H2FY27/FY28).

IT Sector: Navigating the H-1B fee shock

In contrast to the domestic tailwinds, Indian IT firms face a new challenge abroad. While the $100k fee is not an annual fee but a one-time fee that applies only to the petition and applicable only to new visas, not renewals or current visa holders, its impact will be seen in the next upcoming lottery cycle from 2HFY27. The full impact will be known only in FY28.

 

On one side, companies may absorb higher subcontracting costs (20–25 per cent wage premium), and on the other, a 10 per cent wage inflation and a 100–200 bps margin impact may be possible. EPS for FY27 could decline by 7–14 per cent if sourcing patterns remain unchanged. Though existing visa holders and renewals are exempt, the policy could disrupt talent mobility and increase reliance on subcontractors and nearshore delivery. This move highlights a structural shift in US immigration policy that the sector must adapt to.

Conclusion: A delicate balance of tailwinds and headwinds

The GST rate cuts offer a timely and targeted boost to domestic demand, with the potential to lift volumes across auto, durables, and staples. However, global policy shifts underscore the need for strategic agility, especially in export-oriented sectors like IT.

 

In a nutshell, as India enters the festive quarter, the suggestion would be to remain cautiously optimistic. The coming months will test the resilience of business models and the effectiveness of policy in sustaining momentum into FY27 and beyond.

 

(Shrikant Chouhan is head equity research at Kotak Securities. Views are his own.)  Disclosure: Entities controlled by the Kotak family have a significant shareholding in Business Standard.