Indian bond and share prices rose as investors welcomed the long-awaited passage of the 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 Nifty pared earlier strong gains to rise 0.13%, but climbed as much as 0.66% earlier in the session. Meanwhile, the benchmark BSE Sensex 10-year bond yield was down 2 bps at 7.18%. The GST passage in the Parliament House – Rajya Sabha paves the way for the rollout of India’s single biggest tax reform since independence, one that harmonises 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.”
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.