GST rollout impact on India's economy: Will it push a two percent GDP growth rate?

Jun 30, 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 for GST rollout by July? Is it econometric analysis? What does international experience tell us? The reports making such claims should present econometric evidence to substantiate.

Some even predict 4.5% India GDP growth rates (GST to boost GDP by 4.2% or Rs 6.5 lakh crore: Fed Paper: The Economic Times). India’s finance Minister Arun Jaitley says GST rollout and 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.

Veracity of GDP growth rate claims

However, others offer a contrarian view: “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 renowned economist Prabhat Patnaik.

What does international GST rollout say about GDP claims?

In countries that have adopted GST, GDP rates have been stable, although, several countries have experimented with and implemented the tax regime. However, marginal improvements have been noticed in some countries.

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 have been noticed on prices, particularly when GST rates have been higher than before.

“Basically, GST is a radical tax reform and enterprises should be ready for it. Its effect on the general economy should be visible within the next one year. Right now, it’s too premature to comment. They would need time to adjust. We at Deskera are committed to helping enterprises adjust to the GST,” said Shashank Dixit, CEO, Deskera.

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

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