Taking stock of five years of GST
- Before 12 months of GST implementation, Consumer Price Index (CPI) inflation was 3.66%, while it increased to 4.24% post-GST in the next 12 months.
High inflation and GST
- India is not alone in witnessing higher inflation.
- Similar pattern was observed in Australia, New Zealand, and Canada.
- An Australian Competition and Consumer Commission study showed that GST initially increases inflation.
Understanding the mechanism
- Revenue-neutral rate (RNR) is calculated so that it would not cause higher inflation.
- But revenue neutrality does not mean that prices would not go up or down.
- Weight of goods in the consumption basket and their contributions to indirect tax collections are not the same.
- Eg: food and drinks ( 46% of the CPI index), rent, and clothing are all significant parts of CPI basket that are either not taxed or taxed at low rates.
- RBI report(2017):
- Many items that GST covers are not in CPI basket.
- Effect of GST on prices was expected to be small.
- Prior to GST implementation, it was expected that prices would go down because GST harmonises indirect tax rates and eliminates the cascading effect.
- Thus, whether GST has any effect depends on how different factors affect each other.
Impact of GST on price levels
- CPI: Without GST implementation, CPI inflation would have been 3.24%.
- With implementation it increased by 1.37 %.
- CPI core inflation: Increased by 1.04pp in the post-GST period.
- GST had a positive impact on inflation of commodity groups such as paan, tobacco and intoxicants, clothing and footwear, housing, and miscellaneous sectors.
- Non-exempted food and beverages: Negative impact of 4.42% on price levels.
Rise in inflation post GST
- Reasons for rise
- Rise in the tax rate of some goods and services
- Inclusion of business activities that were not taxed earlier
- Market structure.
- Average weighted GST rate was designed to be neutral, so it might not have contributed much to higher inflation.
- When market power increases, prices increase, and profit follows.
- Joseph Stiglitz: Rising market power is bad for the economy as it raises economic inefficiency and lowers the economy's resiliency.
- Taking advantage of market power, it is possible that most firms would have passed taxes to end consumers, resulting in cost-push inflationary impact of the GST.
- GST implementation has resulted in decrease in inflation of food items and raised inflation of non-food items.
- Prior to GST implementation, market concentration measured by various indicators was rising, suggesting an oligopolistic market structure.
- This determines whether benefits of GST are passed down to the consumers or not.
- Results point out the possibility of profiteering in some segments after GST.