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GST impact on India's economy: Will it push 2% GDP growth?

Jul 03, 2017

A number of media reports predict that the advent of the Goods and Services Tax (GST) will boost GDP growth rates by 2–2.5% in India. Touted as the most radical tax reform after Independence, what is the basis of such claims? Is it econometric analysis or just hearsay? The reports making such claims present little econometric evidence to substantiate.

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 implementation of the GST 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.

Veracity of GDP growth rate claims fueled by the GST

However, others offer a contrarian view:

“The most blatant of these is the 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, no such upping of the GST rates has been witnessed, although, globally, several countries have experimented with and implemented the tax regime. In fact, Canada reduced the rate of GST 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 State’s 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.

While the debate goes on, the tax reform is in for sure. Around 6 months to a year after the GST rollout, one should be able to make a better assessment of the scenario and understand whose predictions came true with the benefit of hindsight.

This article was first published on LinkedIn by Muqbil Ahmar

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