How a Post-GST World may Better Reflect Actual Economic Growth in India

Mon, 3 Jul Pre-Open

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With the launch of Goods and services tax (GST) on 1^st July, India is finally on its path of a one long-due structural reform. While questions still remain on the implementation and the difficulties faced by businesses, GST no doubt has the potential to be a game changer for the Indian economy.

One benefit of GST that has somewhat gone under the radar is the help to the government in making key policy decisions. As we have written in the past too, lack of data has been a major problem in framing key policy decisions.

The GDP data which is supposed to reflect economic growth has been far from reliable. It captures only the formal sector data which comprises half the total economy. This drawback was highlighted when GDP numbers were out post Notebandi. As per the numbers, GDP grew by 7 per cent for the October to December 2016 period, in comparison to the same period in 2015. This was in complete contrast to ground realities as the informal sector faced the brunt of slowdown and job cuts.

With the introduction of GST, a major issue related to data accuracy might get resolved. With the formalization of the economy, the numbers related to the economic growth and job creation will paint a much more accurate picture. The GST, which is administered through the GST Network will get data from around 3 billion invoices per month.

The dependence on Index of Industrial Production (IIP) which comes with a two-month lag will be reduced. Real time data related to manufacturing and services will be obtained. This will give a fair idea about price trends and the existing demand-supply scenario of various goods and services.

The Reserve Bank of India will benefit immensely when it makes policy decisions. Banks will be in a much better position to lend to the rural population which used to be largely ignored due to uncertainty. As a result, borrowers will be able to get much better rates than what they do now.

The share market in India is also bound to benefit from this data surge.

Investors will be in a better position to gauge the state of various sectors due to the accuracy of the macroeconomic data. Investments will be based more on realistic data rather than speculative data.

This may have the additional benefit of attracting more retail investors to the market. It is then that the formalisation cycle of the economy will reach a more mature level.

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