GST rationalisation possibility may cause some discretionary purchases to be delayed: ICRA
The prospects of lower prices due to likely GST rationalisation may cause some discretionary purchases to be delayed from the second half of Q2 (July-September) FY2026 to H2 (October-March) FY2026, which could cause a blip in the demand momentum in some sectors, according to ICRA.
The credit rating agency noted that the ongoing geopolitical tensions and steep US tariffs continue to impact demand sentiments, especially for export-oriented sectors such as agro-chemicals, textiles, auto and auto components, seafoods, cut and polished diamonds and IT services.
India Inc. is poised for a steady revenue growth of 5-6 per cent YoY (year-on-year) in Q2 FY2026 (5.5 per cent in Q1 FY2026) supported by healthy rural demand, structural factors like premiumisation and the ongoing value shift towards organised players
Coupled with softening of input costs like crude oil and coal, this will result in a steady operating profit margin (OPM) in the range of 18-18.2 per cent on a YoY basis.
As a result, the credit metrics of India Inc. in Q2 FY2026 are likely to remain largely stable, with the interest coverage ratio at 4.9-5.1 times, benefitting from the festive season demand impulses and greater transmission of policy rate cuts on the borrowing rates, against 4.9 times in Q1 FY2026, opined the agency.
Kinjal Shah, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA, observed that while domestic rural demand remains resilient, urban demand is yet to recover meaningfully.
“Despite tailwinds like income tax relief and easing food inflation, recovery in sentiments would be the key for pickup in urban demand. In that context, the expected GST rate cuts could provide some stimulus to demand,” Shah said.
Premiumisation of consumption
The agency assessed that while the overall urban demand growth has been tepid over the past 18 months, premiumisation of consumption is apparent across several product categories – from automobiles to FMCG to watches.
“The product mix change is supporting headline revenue growth at a time when volume growth has been soft. Likewise, organised players in sectors like hospitality, hospitals and jewellery retail are expanding their footprint through a mix of acquisitions and other commercial arrangements supporting overall revenue growth,” ICRA said.
Investment activity
The agency said certain sectors such as electronics, semi-conductors and niche segments within the automotive space like electric vehicles will continue to see a scale-up in investments.
Further, government capital expenditure is expected to support the overall investment activity, although the headroom for growth is likely to be lower in later quarters of this year, after the upfronting seen in Q1 FY2026.
Published on August 26, 2025
