A likely overhaul of Goods and Services Tax (GST) rates, coupled with support from other measures such as personal income tax cuts, monetary policy easing, signs of pickup in job growth and improving real wages, improves the outlook for consumption and domestic demand in India, a Morgan Stanley report said on Monday.
The proposed new GST regime will likely have meaningful impact on growth, fiscal balance and Consumer Price Index (CPI) inflation, with implications for monetary policy.
In the near term, there could be some impact on volume growth as consumers potentially defer their spending until clarity emerges on the new GST regime.
“However, once new GST rates come into force, there should be a recouping of potential deferred demand alongside support through improved affordability. Indeed, lower indirect taxes are associated with improved affordability, especially for low income households since indirect taxes are regressive,” the report mentioned.
As per Morgan Stanley’s sensitivity analysis, “We estimate the total size of stimulus to be about 0.5-0.6 per cent of Gross Domestic Product on an annualised basis”.
CPI inflation could see downside of 40 basis points while fiscal balances of centre and state likely come under pressure due to revenue losses. This could be partly offset by higher GDP growth improving direct and indirect tax collection.
“We expect the net effect on growth to be positive as the multiplier for indirect tax cuts is 1.1, implying potential upside of 50-70bps,” the report noted.
In his Independence Speech, Prime Minister Narendra Modi announced next-gen GST reforms before Diwali, so as to benefit consumers, small industries and MSMEs.
Following this, the Finance Ministry laid out its proposal of a simplified two-tier GST system built on the three pillars of structural reforms, rate rationalisation and ease of living.
The proposed GST overhaul seeks to maintain one standard and one merit slab, with potential GST rates at 5 per cent and 18 per cent, respectively.
The upcoming GST council meeting likely in September, finalised new GST rates, demand during festive season, trends in headline/core CPI to assess room for policy easing, a time-line for 8th pay commission implementation, and any update on trade/tariffs, are the key parameters to track, said the report.
(IANS)
