News Analysis

Brace for short-term growth slowdown post GST rollout

Lokeshwarri SK BL Research Bureau | Updated on January 27, 2018 Published on June 18, 2017

Economists see disruption owing to transition troubles, but gains in the long run

As the July 1 deadline for the rollout of the Goods and Services Tax (GST) nears, uncertainty over the transition has driven businesses across the country to offload stocks at hefty discounts, halt production and even organise protests.

All this may, however, be only a precursor to the likely economic disruption in the coming quarters, given the low level of awareness about GST and preparedness for it, especially in the unorganised sector.

Most GDP growth forecasts for FY18, which are in the 7.2-7.5 per cent range, have not factored in any negative impact arising from GST.

But the experience of other countries that implemented GST in recent years shows that in almost all of them, the GDP growth rate slowed in the quarters following GST implementation. Some countries saw inflation moving higher as well.

Cross-country comparison

Australia, Malaysia, Canada and Singapore have adopted GST, and their experience of economic growth slippages in the immediate aftermath of its implementation is illustrative. Malaysia, which adopted GST in April 2015, saw GDP growth rate fall from 4.9 per cent in the June 2015 quarter to 4 per cent by June 2016. Singapore’s growth, too, fell from 10.2 per cent to 6.9 per cent over the 12 months following implementatin of GST.

A similar trend was observed in Australia and Canada as well, post-GST.

It’s possible, of course, that this decline in growth may be due to other factors. Canada, for instance implemented GST just before the sub-prime crisis unfolded in 2008; and the Malaysian transition to GST coincided with a crash in commodity prices in 2015.

Short-term volatility

Economists, however, believe that a short-term disruption in growth is likely in India too.

“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,” says Sunil Kumar Sinha, Principal Economist and Director Public Finance, India Ratings & Research.

“Many businesses are not ready with the new system, and the old system cannot be used after July 1. This can bring businesses to a standstill,” Sinha added.

“The GST transition is likely to create cash flow/margin volatility for many companies over the next few quarters. These uncertainties will still imply that businesses operate on barebone inventory levels, hurting near-term sales numbers,” says Sanjay Mookim, India Equity Strategist, Bank of America Merrill Lynch.

“We have not factored in any negative impact on the GDP due to GST. However, we acknowledge that there could be some disruption in economic activity due to GST. How that will unfold is unclear,” says Tanvi Garg, Economist, HDFC Bank. She thinks growth could become lumpy, with some quarters witnessing higher growth.

For instance, the four other countries witnessed a bump-up in the growth in the quarter preceding the GST rollout, probably because consumers front-loaded buying, as is now happening in India.

Inflation, tax collection

Canada and Australia also witnessed a spike in inflation after GST implementation, but the Malaysian government managed to rein in prices. In India, the Centre’s vigilance and execution of anti-profiteering rules are key to controlling inflation.

Most economists see tax collection too being hit in the coming quarters.

“The more intricate-than-expected GST rate structure can affect compliance and may dent the predicted expansion of the tax base. It does not, however, alter the efficiency benefits that are likely to accrue as businesses re-size, relocate and re-engineer logistics,” says Mookim.

Thumbs-up for the long run

Economists, however, concur that in the long run, GST will be a game-changer. “There will be short-term disruptions but in 2 to 3 years, GST will help growth,” says DK Joshi, Chief Economist, CRISIL.

“Over the long term, most countries implementing GST have witnessed buoyancy in tax collections and a significant improvement in their current account balances,” adds Garg.

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