Is GST Causing the High Growth in CPI Inflation? | CORPORATE ETHOS

Is GST Causing the High Growth in CPI Inflation?

By: | December 13, 2017

The impact of demonetisation and implementation of Goods and Services Tax (GST) seems to have been adverse for the industry and consumers in the short to medium term although this is expected to turn beneficial for all in the long run.

The inflation based on Consumer Price Index (CPI) rose to a 15-month high in November at 4.88% as against 3.55% in November. The GST regime was rolled out in July 2017and following appeals from different sections of society, the GST Council revised tariff for many commodities and services. Prominent among them was for dining in restaurants and hotels-which was reduced to a flat rate of 5%. Previously, 12% was charged for non-A/c restaurants and 18% for A/C restaurants.

However, many food outlets have increased the price of the products thereby negating the reduction in GST. Sam Thomas, Managing Director of Eben Telecom Pvt Ltd based in Kochi posted a video on Facebook showing how branded food outlets such as Burger King and Pizza Hut has increased the prices from 8 to 13% after government reduced GST rate to 5%.

It is true that CPI has larger weights for cereals, milk products, vegetables which account for the major cause of inflation in recent months but processed food, food and beverages, clothing and footwear and other goods and services do have corresponding weights in the index. Such goods have been subject to increase in price due to GST.

Although industrial growth and GDP growth has picked up offlate, inflationary effect is not necessarily because of too much money chasing too few goods but by an overall increase in price creating by new taxation regime.

The Union Government had time and again advised the manufacturers to pass on the benefits of cut in GST rates to consumers but that is not happening. The government had revised the GST rates for 200 items.

The Reserve Bank of India (RBI) in its latest monetary policy review refused to decrease the repo rates as inflation seemed to be climbing. With no immediate respite seen in inflation, the possibility of rate cuts in the next policy statement also appears remote.

Meanwhile, India’s GDP growth had risen to 6.3% in Q2 FY 18 compared to 5.7% in the previous quarter reversing a declining trend in the past five quarters. Manufacturing is witnessing a revival as can be seen from 7% gross value added (GVA) by this sector. The Index of Industrial Production (IIP) data for the month of October also showed manufacturing production rise 2.5% as against 3.8% in September.

The Finance Minister Arun Jaitley held a pre-budget meeting the other day and it was stated that road map for Tax Reforms may also be announced. It was also suggested that without compromising on macro-economic stability, more incentives be given on infrastructure investment as well as to SME and Construction Sectors to make them economically viable, give farmers more remunerative prices for their produce keeping in view the target of maintain inflation between 4-6 per cent.