Did GST cuts boost demand? Here's what experts say
What's the story
India's retail inflation plummeted to a record low of 0.25% in October and 0.71% in November, largely due to a sharp decline in food prices. The recent cuts in Goods and Services Tax (GST) rates contributed to this disinflation trend, especially in October when the revised rates were fully implemented for the first time. An analysis by Mint shows that nearly 40% of items saw a month-on-month price decline during this period. But, did this boost demand? Let's see.
Tax reforms
GST Council's tax rate cuts and their impact
The GST Council has slashed indirect tax rates on nearly 400 items since September 22. The impact of these rate cuts was particularly pronounced for vehicles and consumer durable electrical goods. However, the effect is already tapering off and economists expect it to be less than previously estimated. A report by SBI estimates that the decline in CPI inflation due to GST cuts has been around 25 basis points from September to November.
Price changes
Results for consumer durables
For 299 items with inflation data, motor cars and jeeps saw a 6.8% price decline in October, the sharpest among all items. Two-wheelers followed with a 4.5% fall. Consumer durables such as televisions, washing machines, air conditioners, and refrigerators also saw price drops of 1.6-2.6%.
Inflation impact
GST cuts and their impact on inflation
While there is no denying that GST rate cuts have eased prices, they were introduced when inflation was already on a downward trajectory. The sharp rise in gold and silver prices in recent months has pushed up inflation significantly, distorting the wider disinflationary trend. Core inflation, excluding gold and silver, has remained below RBI's medium-term target of 4% since November 2023, indicating weak demand in the economy.
Consumption boost
GST cuts: A tool for boosting consumption
The primary aim of the massive GST reforms was to boost consumption, not necessarily reduce inflation. The monetary policy committee noted that GST rationalization and festival-related spending supported domestic demand in October-November. Some early signs point to a demand uptick, especially in passenger vehicle sales which saw an 11.4% YoY rise in October and 19.7% in November. However, other goods/services data remains inconclusive due to lack of robust information.