There were fewer concerns the Goods and Services Tax rollout in India will be inflationary as most essential goods and services have been exempted from the new regime, the Development Bank of Singapore said today.
The reform is set to be implemented from July 1 and will subsume most of other levies like exercise and service tax, and bring the country under a single taxation regime.
The Development Bank of Singapore (DBS) said in its economic report on India that the tax incidence is “likely to rise mainly on selected service sector categories” after the GST is implemented.
“(And) even if price increases lift these service indices by 10 per cent, headline Consumer Price Index inflation will only rise by 20 basis points,” it said adding that if producers pass on partial or full benefits of the reduced taxes inflation might soften by 20-40 basis points over the year.
According to the bank, inventory clearances were already seeing prices fall across different segments ahead of the GST rollout.
In addition to favourable supply dynamics, the risks of demand-pull inflation appear benign.
The bank said the economic impact of demonetisation reduced the Gross Domestic Product (GDP) growth to 6.1 per cent year-on-year in first quarter of 2017, down from 7 per cent in the fourth quarter of last year, and the resultant disinflationary pressures had lowered core inflation from 5 per cent in January 2017 to 4.3 per cent by May 2017.
Looking ahead, the bank said growth is expected to recover only modestly.
“We look for real GDP to rise to 7.3 per cent in FY 2018 from 7.1 per cent in FY 2017,” said the bank.
Concurrently, imported pressures are benign, with stable oil prices and stronger rupee (with 5 per cent plus vs the USD).
Food prices are expected to remain tame even after base effects wear off from July.
Supplies have been ample, along with smaller increases in minimum support prices (which in the past marked a floor for ex-farm prices) and other administrative measures.
The usual seasonal spurt in food prices during summer is also absent this year.