GST regime in sync to defy inflation

With expected fall in prices of daily consumer goods, the consumption will go up.

“From the perspective of an individual, of the household, of the customer, of the citizen, it is the consumer price index. That is what they see, that is what they eat, that is what they live,” were the words of former Reserve Bank of India governor Raghuram Rajan.

Now that the Goods and Services Tax (GST) will roll out in a few days, a macroeconomic segment which affects the length and breadth of the country, and one that would feel more GST impact, is related to what the common man consumes daily.

Experts believe that the government has taken due diligence in ensuring that there is no surge in prices of the consumer basket; if not fall, they suggest that one should wait for the implementation of GST.

As the timeline draws closer, there is palpable uneasiness by the stakeholders about the possible impact. Govinda Rao of the Fourteenth Finance Commission says, “Despite all the hype that this is a game changer and the reform of the century, as the idiom goes, ‘The proof of the pudding is in the eating’. Indeed taxes and death are inevitable, but at least, the attempt should be to make it painless.”

The trend
According to auditing and taxation firm BDO India, the consumer goods can be divided into three categories based on the GST impact — goods whose price will shoot up, goods whose price will come down, and goods whose price will not be impacted. The firm predicts that prices of cold drinks, cellphones manufactured domestically, jams and jellies to go up post GST. The prices of salt, bread, milk, fresh vegetables and fruits, and children’s drawing books will come down. All the commodities which are expected to remain price neutral post GST, carry a cummulative 16.367% weightage and are of daily consumption. All the other goods that fall under consumer basket are slated to come down.

“Given the intent of classifying most of the items falling under the CPI index at a lower or exempt category, it is likely that introduction of GST may have neutral or favourable impact on inflation,” says Amit Kumar Sarkar, Head of Indirect Tax at BDO India.

Policymakers’ perspective
The government, on its part, believes that there would be temporary impact, if any, on inflation. “I don’t anticipate this to happen significantly. If at all, this may be a transient impact... This, in the long run, would lead to a lower inflation and tax rates a little,” Finance Minister Arun Jaitley opined when asked about the inflationary impact of indirect tax reforms.
Though agreeing with the government’s view that food inflation will be contained, the opposition seems skeptical on the overall impact of GST on inflation. Rajya Sabha MP Rajeev Gowda points out, “Though it won’t show up on the formal measure of inflation, people are going to feel the pinch of inflation post GST. Services constitute 55% of our economy. Most are not part of CPI.”

The effective tax rates of services have increased to 18% under GST, from 15.36% currently. Well, as the prices of most daily consumption items are slated to come down, it won’t be wrong to predict that non-government expenditure in the country will go up.