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Assessing the impact of the Goods and Services Tax (GST) on India’s GDP

Jul 04, 2017

Media reports predict that the advent of the Goods and Services Tax (GST) will boost GDP growth rates by 2–2.5% in India. Some even predict 4.5% GDP growth rates (GST to boost GDP by 4.2% or Rs 6.5 lakh crore: Fed Paper: The Economic Times). The newspaper doesn’t divulge details about the referenced research note. India’s Finance Minister Arun Jaitley says the GST implementation will increase India’s gross domestic product (GDP) by 1-2 per cent.

“This (GST) has the potential to push India’s GDP by one to two per cent,” Jaitley recently pronounced at the Peterson Institute for International Economics, Washington.

GDP growth rate claims fueled by the GST

However, others offer a contrarian view:

“Utterly bogus claim that the GST would increase India’s GDP growth rate by 2 percent per year. If the GST had such a miraculous effect, then the world capitalist crisis would have vanished long ago, since the US, which does not have a GST, would simply have moved to a GST regime, adding to its GDP growth rate and that of the world economy as a whole,” says economist Prabhat Patnaik.

What does global GST rollout say about GDP claims?

In countries that have adopted the GST, there has been little GDP growth rate improvement, although globally, several countries have experimented and implemented the tax regime. Canada reduced GST rates a couple of times after implementation. There were others that were forced to increase.

In Asia, countries such as Malaysia and Singapore have adopted the GST structure and were pushed by the drive to replenish dried up coffers. Inflationary pressures too have been noticed on prices, particularly when GST rates have been higher than before. For instance, Singapore witnessed upward trend in inflation (1994) when it implemented the GST.

These are still early days for a prognosis. While the debate goes on, the tax reform is already in. Around 6 months to a year after the GST rollout, a more clear picture should arise of the scenario.

This article was first published on LinkedIn by Muqbil Ahmar

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