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Insights into Editorial: GST opens up a lot of data for policymaking

Insights into Editorial: GST opens up a lot of data for policymaking



The Chief Statistician of India speaks of the economy, the meaning of the new series of GDP data, and the need to wait for the impact of demonetisation to unfold.

What has been the impact of restocking on the growth of the manufacturing sector in Q2?

During the period just before the GST was launched and the Q1 estimates, firms were clearing inventory because of the issues involved with the tax treatment of goods produced prior to the GST rollout and selling products manufactured pre-GST in the post-GST regime.

The only statistical evidence that is available is in the company filings which were made available for Q1. There, the change in stock figures was sharply negative. In manufacturing companies, the change in stocks figure is negative for Q2 as well.

Most companies draw down their inventories during the festive season and maintain an inventory balance in the slack season, partly to smooth production out.

Factory output recorded a sharp rebound in August to touch a nine-month-high growth of 4.3 per cent during the month against a downward revised 0.9 per cent growth recorded in July, according to data released by the Central Statistics Office (CSO).

The surge in industrial production in August was led by the 3.1 per cent expansion in the manufacturing sector, primarily as restocking of manufactured items picked up steam after the introduction of the Goods and Services Tax (GST) and prior to the festive season.

While the impact of post-GST restocking may have started to fade, inventory building prior to the festive season is likely to have bolstered manufacturing growth.

What more can be done to capture data of the informal sector?

The informal sector is defined as that part of the economy where the establishment does not maintain regular accounts. It is informal because it is not subject to most of the traditional ways in which you can capture data.

The informal sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than 10 total workers.

GST will certainly capture a lot more monthly data. Formally, if you look at the GST form, every producer of a good or service makes his payment and also gives some details about the production which is subject to tax. From that, conclusions can be drawn.

But, even with GST, you are not going to get the informal sector in that sense because the entities who will be filing this regular monthly return will be the larger companies, not the informal sector.

Insofar as the smaller companies are concerned, some things will be possible with the data from the composition scheme data, but it won’t be as granular as you get in the non-composition scheme GST data.

But for the informal sector, the principle source of data is through establishment surveys. Regular establishment surveys, as recommended by the taskforce under [Arvind] Panagariya, will help here.

Composition scheme under GST:

Goods and Services Tax has brought in a new regime of business compliance in India. Large organizations have the requisite resources and expertise to address these requirements. On the flip side, many start-ups and Small and Medium Enterprises (SMEs) may struggle to comply with these provisions. To resolve such scenarios, the government has introduced Composition Scheme under GST. When opting for the Composition Scheme under GST, a taxpayer will be required to file summarized returns on a quarterly basis, instead of three monthly returns (as applicable for normal businesses)

During 23rd GST Council Meeting, threshold for composition scheme has been increased to 1.5 Cr.

Does GST opens up more data for policymaking?

GST opens up a lot.

  • In addition to aggregates, we will also get data on inter-State transactions which were previously not available.
  • This will give us a much better picture of a spatial spread of economic activity.
  • Earlier it was assumed that when manufacturing has picked up, it has picked up uniformly all over India. What GST will allow us to do is get a spatial perspective on this.
  • We may well find that the pickup has taken place in X band of States and not in Y band. That sort of information will be very useful to the policy establishment when they start looking at GST data more closely.

With more than three quarters worth of data, can you now estimate the effect of demonetisation?

To quantify what demonetisation did or did not do, we would need to do a proper exercise where we would have a counterfactual compared to the post-demonetisation exercise. Statistically, that will not happen for some time because it will need long enough time series to generate counterfactuals and do the comparison.

It is important to note that all that demonetisation constituted was less than a two quarter period in which there was a currency squeeze. By and large, large entities did not show much of an impact, as revealed in corporate filings.

Then everybody said that this will be taking place in the informal sector. Not because there was any data for it, but because there must be an effect, and if it’s not in the formal sector, it must be in the informal sector. Fair enough. But the problem is that the informal sector is certainly cash dependent but it is also relationship dependent.

The demonetisation effect has been overblown insofar as the negative effect is concerned on account of neglect of this channel of credit. Further, the demonetisation story is more complicated than just the cash change story. There is a larger narrative hidden behind it in trying to promote digital transactions. What those impacts are going to be, we are still trying to see. What you do see is that the trajectory of digital transactions has changed.

Since the release of the new series of GDP data, the government has received criticism regarding the back series of the data sets using the new computation methods. By when can we expect this to be released?

The Ministry of Corporate Affairs (MCA) gave us a much bigger picture of the corporate structure.

The earlier data that we had about the corporate structure is what we had from the listed companies.

The problem we face is of using the longer series of data on listed companies and deriving a growth pattern for the full corporate structure from it. This is analytically a challenging exercise.

GST is going to give us a database about the economy which is qualitatively very different from anything we had in the past. It will give us, for example, a transactional relationship across the country which we did not have earlier. We will be able to build it into our GDP compilations and improve its quality enormously. But for somebody who asks for a back series on this methodology, the answer is not going to be easy.

This is something that it is important to recognise. When you modernise a statistical system and bring in new ways of capturing data which did not exist in the past, not simply updates of the old data, the problem of backward projection is much more difficult. This is something that time-series economists will have to live with.

How worried should one be about the Centre’s fiscal deficit numbers?

Recent CGA report says that the fiscal deficit is 96% of the total. Many economist, jumped to all sorts of conclusions which may not be true in totality.

Because, Government preponed the Budget calendar to allow government expenditure to start from April 1. There is enough evidence to suggest that that did happen. The Q1 government expenditure compared to last year was much better.

Therefore one would expect that by the end of Q2, the average government expenditure level would be higher than what it was last year.

Many expenditure management committees have pointed out that the earlier tendency of delayed bunching expenditure in the last quarter is very bad for both the quality of expenditure and fiscal management.

There were a number of recommendations about how the government should better manage its expenditure so as to minimise the amount of expenditure that takes place in the last quarter and last month.

One consequence of this is that, during the year, the fiscal deficit is going to rise because the revenue profile has not changed due to this manipulation of budget dates.

The government has made some efforts to push the revenue profile back by changing the advance tax rules but those effects will be small. By and large, the revenue profile would remain the same as last year but the expenditure profile has changed, so the logical implication is that the fiscal deficit will rise at this stage.