GST could crimp GDP, push up inflation over next new few quarters, says report

In the recently announced January-March quarter growth numbers, India's economy grew at a hugely disappointing 6.1 percent as against expectations of 7.1 percent growth, as per the Reuters poll forecast. Many experts quickly linked the sluggish growth number to the demonetisation impact. The government announcement made last year in early November resulted in a cash crunch across the country badly hurting the rural economy.

Despite the subdued growth clocked in the last quarter of the previous financial year, the government and a few economists were quick to douse the growth fear. They said India would once again attain over 7 percent growth as demonetisation effect fades going ahead.

Although it may be difficult to say how soon the note ban effect will wear off, the economy could soon be facing a challenge on the new front --  the implementation of Goods and Services tax (GST) may impact growth over the next few quarters, caution analysts. While economists and experts have concurred that GST will be a game-changer in the long-run, the near-term adverse impact on the growth front cannot be ruled out.

 GST could crimp GDP, push up inflation over next new few quarters, says report

Representational image. Reuters

Ahead of the GST rollout, several retailers have been offering huge discounts on products ranging from clothes, shoes and electronic goods to home appliances. As there is lot of uncertainty over the transition from the old indirect tax regime to GST, manufacturers and producers are keeping their inventory at minimum levels and not rushing to boost production in the near-term quarter.

“A fall in growth rate is a possibility because the transition to GST can have a fairly disruptive impact on the economy in the short term,” a BusinessLine report said quoting Sunil Kumar Sinha, Principal Economist and Director Public Finance, India Ratings & Research.

Most of the experts have projected gross domestic product (GDP) to grow in the range of 7.2-7.5 percent in the current financial year (2017-18), but haven't taken into consideration the near-term impact of GST on the economy.

Several developed nations such as Australia, Malaysia, Canada and Singapore have witnessed a fall in their growth numbers immediately after the rollout of GST. For instance Malaysia's growth fell to 4 percent by June 2016 quarter from 4.9 percent a year ago, after having implemented GDP in April 2015, the BL report said. Similarly, for Singapore, the growth fell sharply to 6.9 percent from 10.2 percent over the next one year following the rollout of GST.

However, the report also specifies that the fall in growth numbers in these countries may not be simply because of the implementation of GDP. In Malaysia, the implementation of GDP happened at a time when the commodity prices crashed in 2015, while in Canada, the GST rollout came in just before the sub-prime crisis unfolded in 2008.

Not just economic growth, India may also face upward pressure on the retail inflation front post-GST rollout, although both Consumer Price Index (CPI) and Wholesale Price Index inflation numbers announced recently showed a record fall. The CPI inflation dropped to a record low of 2.18 percent in May amid falling vegetable and pulse prices.

Many economists further that reckon tax collection, too, could be impacted in the coming quarters following the GST rollout.

Updated Date: Jun 19, 2017 12:07:50 IST