NEW DELHI: India’s changeover to the goods and services tax (GST) has resonated with the Fed: A research note at the US Central Bank reckons that the biggest indirect tax reforms since Independence could enhance the Country’s gross domestic product by up to 4.2%, or Rs 6.5 lakh crore — a sum greater than the Central Government’s annual borrowing.
Apart of Federal Reserve System’s series of International Financial Discussion Papers (IFDP), the research note says that the potential gains to GDP- one of the most bullish growth estimates on the reform measure to date — will be underpinned by a surge in manufacturing output, something New Delhi has been trying to achieve for a while.
An estimate by economic think tank NCAER had earlier projected an increase of 1-2% in GDP after GST is implemented. “We find that the GST is expected to raise overall Indian welfare, and is projected to be an inclusive policy in that it would be welfare improving for all Indian States,” the paper said. The model suggests that the GST would lead to real GDP gains of 4.2% under the baseline assumptions, driven by a surge in factory production.
Growth is also driven by an increase in both domestic and international trade, it said. The GST is also expected to increase the international competitiveness of Indian companies, thus helping the Country expand external trade by 32%.
The rise in internal and external trade is expected to be carried by a surge in manufacturing production of 14%, said the paper. IFDP notes are articles in which Fed Board economists offer their own views and present analyses on a range of topics in economics and finance. In the just concluded Budget session, Indian lawmakers passed the crucial GST legislations, paving the deck for state assemblies to take up the relevant bills.