One much-talked-about point about the goods and services tax (GST) is its impact on inflation. The consensus is that it’s unlikely to have much of an effect on the Consumer Price Index (CPI), simply because food constitutes about half the CPI basket and items such as fuel also have a heavy weight.
A large part of the CPI basket is, therefore, exempt from GST. It’s unlikely then that GST will push up the official inflation gauge.
But there’s another way of considering the price impact of GST on consumers. National accounts data shows that a sizable proportion of private final consumption expenditure in the domestic market is of services. And under GST, the rate of tax on services has gone up by three percentage points.
The impact will be all the more on the middle and upper sections of society, who consume more services.
This is precisely the point made by a Motilal Oswal Securities Ltd report on GST dated 3 July. Says the report, “Importantly though, while services comprise a very small share in CPI, they account for almost 50% of the total consumption basket in the economy. Thus, while the impact of GST may not be visible in the official inflation measures, it will certainly pinch Indian consumers, as the share of services has been rising."
Will the rise in prices affect demand and therefore growth? Services related to healthcare, education and transportation may not see a decline in demand despite increase in prices, say economists. But consumers may choose to cut down on expenditure incurred on discretionary services like entertainment and dining in restaurants, etc., which could have some impact on overall private final consumption expenditure.