The GST revision can cost Rs 1.43 lakh crore to the exchequer, while US tariffs at 25 per cent will lower India’s GDP growth by 30 basis points and 50 per cent tariffs can dent growth by 70 basis points, finds HSBC.
HSBC estimates that some products will be moved to lower tax buckets from the 12 per cent to the 5 per cent bin, and from the 28 per cent to the 18 per cent bin, though a minority may be pushed up from 12 per cent to 18 per cent or from 28 per cent to 40 per cent. The cost to the exchequer will be around Rs 1.43 lakh crore or 0.4 per cent of GDP.
In the GST spirit, this could be equally split between the central and state governments. The centre has other revenue sources to count on, but states do not have as many options. They may not agree to the revenue hit as they already follow the FRBM Act whereby they must keep the fiscal deficit below 3 per cent of GSDP. Following the GST rules and cutting tax rates could be a difficult task, unless they cut other important expenditure like capex.
If the central government comes up with a compensation plan to handhold states for a few years, the funds need to be generated by a GST tax hike on some luxury and sin goods, but that would go against the efficiency principles of having fewer GST rates.
Further, the US tariffs also will dent the GDP growth. According to HSBC, 20 per cent of India’s overall exports go to the US, valued at 2.2 per cent of the GDP. However, one-third of these exports remain exempt from these tariffs. “Yet, we calculate that a 25 per cent tariff could lower growth directly by 0.3 ppt over a year, and with a 50 per cent tariff, the growth drag could rise to 0.7 ppt,” it said.
The second round and indirect impact of the elevated tariffs could be meaningful, if not more hurtful. The main non-exempted items that India sells to the US like jewellery, textiles, and food items, are associated with labour-intensive small firms, and disruption there could impact domestic consumption demand. FDI inflows and corporate capex at about 12 per cent of GDP could take a hit if India’s exporting potential comes into question.
Source from: https://www.deccanchronicle.com/nation/current-affairs/gst-revision-to-cost-rs-143-lakh-crore-1898865
