Spend Or Save? GST Reform Benefits To Hinge On Household Confidence
An important aspect to watch for is whether GST rate cuts lead to a one-time spurt in consumption or a more permanent pattern overtime.
The positive impact of reduction in Goods and Services Tax announced by the government on the Indian economy will be guided by household confidence and which way the consumer leans in the 'save versus spend' pole, experts said.
"When there are GST cuts, the implicit assumption is that money in the hands of the households has more multiplier effect (on the economy) than government spending," Samiran Chakraborty, chief economist - India at Citibank, told NDTV Profit.
"Out of this tax benefit, how much will be saved and spent. This will based on houselold confidence in saving versus spending," he said.
An important aspect to watch for as per Chakraborty is whether GST rate cuts lead to a one-time spurt in consumption or a more permanent pattern overtime. "Consumer confidence is important."
At the high-stake meeting of the GST Council on Wednesday, a consensus was reached on all proposals, including the restructuring of tax slabs from four at present to only two — 5% and 18%.
The new tax rates will come into effect from Sept. 22, Finance Minister Nirmala Sitharaman said in a press briefing in New Delhi following the council meeting. The GST overhaul will reduce the tax on several household articles.
While GST tax cuts may seem like a free lunch for consumers ahead of festivities, Pranjul Bhandari the chief India economist at HSBC, has flagged uncertainties. According to her, the true impact hinges on manufacturers passing on benefits and the government compensating revenue losses.
She said that "there is no free lunch here, somebody benefits and somebody loses. I think we have to be mindful of that at this point of time." This encapsulates her view, that while ''a festive-season tax cut is great, but there are factors to be cautious about''.
Kaushik Das, chief economist - India and South Asia at Deutsche Bank, said Indian consumers may have deferred purchases of various goods in anticipation of rate cuts.
Prime Minister Narendra Modi first talked about GST reforms at his independence day speech on Aug. 15.
"This is coming as a response to US tariffs that may come down going ahead," Das said.
He also said the bond markets have reacted negatively to the announcements, but noted that the government has a good track record of maintaining fiscal discipline.
Watch the full conversation here:
