Retail Inflation to remain low this July thanks to GST

Retail inflation to remain low due to GST

After a record-low retail inflation during June, 2017 prior to the rollout of the GST, the forecast for the Consumer Price Index (CPI) for July expects further easing down of inflation. The Consumer Price Index is an indicator of inflation for retail goods, and is “theoretically” expected to go up, based on the increase in taxation rates after the rollout of the GST. However, this will not be the case as prices might actually come down or increase only marginally.

In spite of services getting costlier and commodities like ice-creams, biscuits and branded ghee becoming heavier on the pocket, the Consumer Price Index is not expected to go up by much from 1.54 percent recorded in June.

In fact, economists and tax experts believe that even if inflation were to rise marginally, it would only be due to factors like seasonal swing of food prices or gaps in demand and supply.

Chief Policy Advisor at EY India, DK Srivastava, said that GST will not have much impact on inflation because items like food grains and pulses, and milk will continue to attract 0 percent tax. These products constitute the greatest weight in the CPI basket, so no upward trend is expected in the CPI owing to zero taxes on these food products.

The government has fixed the rates largely based on the CPI basket, keeping prevailing tax rates for most of the items’ (such as food and milk) largely unchanged. Over the long term, the GST is expected to have a deflationary impact owing to lower logistics cost, input tax credits and overall better efficiency, compliance and uniformity across states.

Figures published by the Ministry of Statistics and Programme Implementation showed that food takes the maximum slice in the CPI basket at 45.86 percent, followed only by housing at 10.07 percent, fuel and light at 6.84 percent and footwear at 6.84 percent. Miscellaneous items accounted for 28.32 percent of the CPI pie.

As businesses resorted to stock clearance by way of offering heavy discounts during the GST transitional period, retail inflation fell to 1.54 percent in the month of June. Plunging prices of vegetables and pulses during this period did not help either.

Meanwhile, core inflation, which is generally considered a better index of consumer goods prices, has remained stubbornly high during the forecast period, consistently above 4 percent. Therefore, the Reserve Bank of India has denied a rate cut to the central government, which has been proposing the same to the central bank.

Financial experts do not expect inflation rates to rocket, simply because of higher GST rates on some items. According to them, any inflationary swings will be due to temporary disruptions in demand-and-supply as traders try to normalise their inventories, restock and adapt to the new market situation. Further, the GST is not expected to shoot up retail prices because after subsuming all the indirect taxes upon the product, the overall GST rate remains lower than the actual total sum of indirect taxes paid earlier.

The Service taxes will be going up from 15 to 18 percent, which is likely to have some inflationary impact on CPI. However, in case of housing and clothing, this will have a downward effect on inflation.

A good monsoon may also drive inflation, as there would be rise in demand and possible disruption on the supply side, but these will not constitute much rise. Experts believe that inflation will remain well within the range of the RBI targets, ie. between 2-3.5 percent in the first half of the present fiscal year and 3.5-4.5 percent in the second half of the current fiscal year.

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