Kolkata: The GST reform uncorked by the Centre on Wednesday night has gladdened the hearts of almost everybody. It’s easy to understand why. But how can
it benefit the economy? That’s the deeper question, for if the economy is not benefitted, the benefit to the individual pocket could turn out to be short-lived. Significantly, the new GST rates and the comes at a time when the primary focus of the economic policymakers is to raise consumption in the economy and the Centre has already provided significant Income Tax reforms from the current financial year towards that end. The decision not to tax any income till Rs 12 lakh a year has already put a significant additional amount in the pockets of the salaried class. The GST reform is expected to provide tailwind to aggregate consumption.
But isn’t reduced indirect taxes supposed to reduce tax revenue of the government (as well as the states)? How will that help governments which are trying to raise investments in infrastructure as well as bring down the fiscal deficit? The answer lies in reduced prices triggering increased consumption. Let’s have a closer look.
From temporary dip to sustainable surge
It is true that revenue will dip in the few months following the new GST rates kicking in — may be October, November. In fact, data from the past show that whenever GST rates will slashed in the past — July 2018 and October 2019 — dips in revenue collection were noticed. But the lower prices triggered higher consumption leading to a bounce back of the revenues.
For example, in 2018 when the rates were rationalised, revenue collection went down by 3.05% and 2.98% in November and December of that year respectively. But the bounce back in the following months more than compensated for the temporary decline. The month-on-month growth in GST revenue collections in January, march and April of 2019 stood at 8.21%, 9.59% and 6.84%. A similar phenomenon was observed when GST rates were rationalised in July 2019. It led to a contraction of 3.80% in April 2019 and 6.40% in September 2019, but the revenue growth rate bounced back by 3.77% in October and 8.50% in November 2019, showed data furnished by SBI Research.
GST reform: A structural enabler
“… rationalisation does not necessarily weaken revenue collections. Instead, the evidence points to a temporary adjustment phase followed by stronger inflows. While an immediate reduction in rates can cause a short-term dip of around 3-4% month-on-month (roughly Rs 5000 crore, annualized Rs 60,000 crore), revenues typically rebound with sustained growth of 5-6% per month,” mentioned SBI Research, a think tank of economists of the State bank of India, in a report.
SBI Research also mentioned that the GST reform should be viewed as a long-term structural response to widen the tax base, and therefore, pave the way for higher tax revenues. “In past episodes, this dynamics is translated into additional revenues of nearly 1 trillion. Importantly, rationalisation should be seen less as a short-lived stimulus to demand and more as a structural measure that simplifies the tax system, reduces compliance burdens, and enhances voluntary compliance, thereby widening the tax base. In this broader sense, the Hon’ble PM’s vision of a streamlined GST framework is best understood as a step towards long-term revenue buoyancy and greater efficiency in the economy,” said the think tank of the largest bank in the country.
Corporate cheer
At a corporate level too, the GST reform could come as a much-needed fillip in an atmosphere of gloom created by the retaliatory trade tariff imposed by US President Donald Trump. The tax cuts comes just before the festive season when shopping is expected to surge. What is expected to take place as a matter of routine would now face the tax reform tailwind and result in increased revenues and profits for wide array of companies. Moreover, reduced slabs and easier compliance norms will benefit smaller businesses and could boost entrepreneurship, which is becoming a new category of employers in the country.
To boost consumption, Reserve Bank has also slashed the Repo Rate by 100 basis points between early February and early August. Though bond yields haven’t come down at the same rate and has prevented the transmission of the rate cut to the people in the form of lower EMIs and interest rates on loans, RBI governor Sanjay Malhotra has said that they will support growth and take necessary steps in future.
Waiting for a virtuous cycle
The government hopes that a rise in aggregate consumption will trigger a rise in private sector capex that is not taking place in the absence of adequate demand. Faster consumption and a rise in private capex can also generate more employment which is sluggish right now. More employment can lead to higher consumption. India’s economy is supposed to grow at 6.5% in the current year, which is the fastest rate among the major economies. But the government is clearly not happy with it.
The GST reforms could boost the equity markets too. While the US tariff dampened the mood of the investors over the past couple of months, the GST reform could come as a welcome positive trigger. The lower prices can lead to higher revenues and bottom line for a number of businesses, thereby boosting the Q3 and Q4 earnings.
