Indian Consumer Price Index could rise as much as 150 basis points putting pressure on the central bank, if the GST council chooses to raise rates for many goods in line with the recommendations of the finance commission, forecasts Standard Chartered Bank. Food and beverages are likely to be the major drivers since they have 45% weighting in the index.
“We estimate that headline consumer price index (CPI) would rise by 100-125bps in the event of an effective 1percentage point(ppt) increase in Goods and Services Tax (GDT) rates in a single move” says Anubhuti Sahay, Head, South Asia Economic Research (India), Standard Chartered Bank, India. “40bps of this would be solely due to the recent sharp increase in clothing GST”.
While the GST Council has yet to announce a change to the GST rate structure, Standard Chartered assumes higher tax brackets of 8%, 20% and 30%, up from 5%, 18% and 28% currently for various products, along with the recent hike in clothing GST to 12% from 5%.
Such an increase could raise the effective tax rate for the CPI basket by close to 1-1.25%, with an equal impact on headline CPI. Most of the impact is expected to come from clothing as has a weight of close to to 6.5% in the CPI basket).
The next most heavily impacted subcomponent is likely to be food and beverages as it has a weight of 45% in the basket, even if the potential effective tax rate rise is close to 80 bps. “Overall any GST rate increase will impact CPI adversely, though the amount and the timing of the hikes will crucially decide the actual impact on annual CPI” Sahay said.
Since many goods in the CPI basket are not subject to GST, the effective tax rate increase for the whole CPI basket would be close to one ppt even if selected GST tax brackets for a few products increased by 2-3ppt. ” We would keep a close eye on any rollback of the recently announced clothing GST hike, as this would provide a clearer indication of policy-makers’ willingness to raise taxes against the current growth-inflation backdrop; and the amount and timing of any rate revision. The impact on headline CPI would be smaller if hikes were spread over several years rather than one year” the bank’s report said.