‘Modi govt.’s model for GST may not result in significant growth push’

Goldman Sachs estimates that the GST, as currently proposed, would add only about zero to half a percentage point to the annual GDP growth of India.

Wall Street firm Goldman Sachs, in a note ‘India: Q&A on GST — Growth Impact Could Be Muted’, has put out estimates that show that the Modi Government’s model for the Goods & Services Tax (GST) will not raise growth, will push up consumer prices inflation and may not result in increased tax revenue collections.

The decision to exclude from the GST items such as tobacco, alcohol and electricity and the one-per cent additional tax over and above it are among the flaws in the model that, Goldman Sachs says, will lead to these sub-optimal results from the biggest economic reform in India in recent years.

In November 2013, Goldman Sachs’ note ‘Modi-fying Our View’ had upgraded its forecast of the Indian stock market and economy based on investor perception of strong BJP performance in the Lok Sabha elections, a projection that is widely credited as one of the key triggers for the Sensex rally from under 21,000 then to a high of 29,681.77 on January 29, 2015. It closed below the 25,000-mark on Monday, a 15-month low. Goldman Sachs estimates that the GST, as currently proposed, would add only about zero to half a percentage point to the annual GDP growth of India. It has also estimated that if fixed at 20 per cent, the GST rate would increase headline consumer price inflation by about a percentage point in the year that the tax is implemented. Though, overall, the impact on inflation, it said, will depend on the rate that is implemented.

The estimate of the impact on GDP is ‘significantly lower’ than that of the National Council of Applied Economic Research (NCAER) in part, it says, due to the proposed GST excluding key taxes such as on petroleum, alcohol, electricity and real estate as well as a proposed additional up to 1 per cent tax on inter-state movement of goods. The NCAER in 2009 estimated that moving to the GST can increase India’s growth by 0.9 percentage point to 1.7 percentage point.

We think the NCAER estimates may no longer be the right metric, it said in the note released last month. The reasons it gave also include: First, NCAER uses the 2003-04 input-output table for its calculations, which is outdated. Second, the implementation of the VAT since then has already captured the state-level productivity gains in goods that were part of the study’s estimate. Third, the study assumed the GST had more comprehensive coverage, including petroleum products, which are not being considered by the Modi Government for its proposed GST. Fourth, the study assumed a much lower revenue neutral rate than currently being considered. Finally, the NCAER study does not capture the distortions which could arise from the 1-percent additional tax for inter-state movement of goods proposed by the Centre.

Its analysis of the impact of implementing the Value added Tax (VAT) in the mid-2000s suggests that the states which introduced the tax witnessed, on average, just about 0.6 percentage point higher GDP growth in the three years after implementation relative to those that did not implement VAT.

Goldman Sachs also estimated, based on cross-country evidence and the evidence from state VAT implementation, that retail inflation could rise 0.9 percentage points if the GST rate were to be 20 per cent.

Its analysis suggests that that about a third of the basket of products in the consumer price inflation index would come under the GST. The rate of price-rise for services would go up by more than a percentage point if the Centre and States settle for a GST rate of 20 per cent as against the existing service tax rate of 14 per cent. Inflation in goods could be lower by about 0.3 percentage point against the current average tax on consumer goods works out to about 22 per cent.

It also found that Asian countries which implemented GST between 1977 and 2015 all had retail inflation 1.1 percent point higher on average in the year of implementation.

Goldman Sachs does not expect large gains in tax revenues in the short term from GST for reasons that include the exclusion of items such as alcohol, which restricts the revenue gains. Also, it says, the GST rate to be announced by the GST Council is to be a revenue-neutral rate. And, another reason is the Centre’s offer to compensate the state governments for five years for any revenue shortfalls.

The GST is a nation-wide integration of goods and services tax in India. It combines about 16 types of taxes such as central excise and service tax, states’ VAT, entertainment and luxury tax, and various surcharges into a single tax.

Source: http://www.thehindu.com/business/Economy/modi-govts-model-for-gst-may-not-result-in-significant-growth-push/article7625827.ece

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