The report explains that the overall impact on Consumer Price Index (CPI) is expected to be around 55 to 75 basis points (bps
Expecting that the rejig in Goods and Services Tax (GST) rates is likely to boost both rural and urban demand, especially given the onset of the festival season, Bank of Baroda is estimating the net gain to consumption of around Rs 0.7 to 1 lakh crore, which amounts to 0.2 to 0.3 per cent of the gross domestic product (GDP), anticipated from September onwards.
Lower rates are expected to have a long-term positive impact, with a multiplier effect across sectors. The pass-through of these cuts will have a disinflationary effect. The report notes that easier compliance and access to cheaper raw material will enhance export competitiveness and catalyse growth in the micro, small and medium enterprise (MSME) sector.
As per the government estimate, the revenue impact due to GST is pegged at Rs 48,000 crore, which will be a direct benefit to private consumption. However, based on the assumption that lower indirect tax rates would translate to lower inflation, BoB expects a gain of around Rs 20,000 to 50,000 crore. For the same, it has assumed 100 per cent transmission. The report adds that this might not translate to the full extent.
The report explains that the overall impact on Consumer Price Index (CPI) is expected to be around 55 to 75 basis points (bps). BoB has revised downward its current estimate of headline CPI to 3.1 per cent from the previous forecast of 3.5 per cent. For core inflation, BoB expects that around 10 per cent of the bucket will benefit due to lower GST rates. On average, price drop is expected to be 7.4 per cent. Thus, the core will face downside pressure of around 30 to 40 bps in the next six months.
“Other than personal care and effects, inflation in household goods and services and education will also come down. It is to be noted that these components of inflation have remained sticky in past episodes. Thus, the government’s move has carefully nudged the demand towards these sectors,” the report adds.
The report notes that the majority of the non-durable goods where production was facing downside risk due to lower demand have been given support through lower GST rates. This will be helpful for the production of Butter, jams, fruit jellies, honey, pastry, fruit juices in the coming months. Thus, Index of Industrial Production (IIP) growth, which was thought to be pressured from higher tariffs, might get significant support from domestic demand, it says.
