While it does point towards a pickup in economic activity, experts say there is more to growth than just that
For an economy battered by inflation, July’s goods and services tax (GST) collection data seems to have brought some cheer with the government saying that it indicates “very high buoyancy”. Some experts, however, have spotted plot holes in that narrative of economic growth.
At Rs 1.49 lakh crore, the GST collection July 2022 revenue was 28 per cent higher in July as compared to the same month last year when it stood at Rs 1.16 lakh crore. In a press release, the government said that for five months in a row now, the monthly GST revenue has been more than Rs 1.4 lakh crore, showing a steady increase every month. “The growth in GST revenue till July 2022 over the same period last year is 35 per cent and displays very high buoyancy,” the release said.
Even the manufacturing sector activity gained momentum in July after the S&P Global India Manufacturing Purchasing Managers’ Index (PMI) expanded to 56.7 from 53.9 a month ago, an eight-month high driven by an increase in business orders. The PMI numbers highlight an improvement in the overall operating conditions for the 13th straight month.
Along with the GST collection July 2022, the PMI, which recorded the strongest improvement in the manufacturing sector in July this year, does point towards a pickup in economic activity. But with an eye on the larger picture, experts say there is more to growth than just that.
GST Revenue Growth Vs Economic Growth
While economic recovery with increased activity is important, it is not the only character in the larger story of economic growth. Purchasing power, which is crucial to drive consumption, has been severely impacted by inflation and heightened income disparity since the pandemic struck in 2020.
Demand for FMCG goods, which is the closest proxy to purchasing power, has witnessed a slowdown amid rising inflation which has been giving the sector sleepless nights. Most companies opted for price hikes across all categories. Sanjiv Mehta, the CEO of FMCG giant Hindustan Unilever, recently spoke about how Indian markets continue to remain soft, especially through the lens of volumes and how inflation continues to remain a worry as far as purchasing capabilities are concerned.
The services sector is not doing too great either. From 59.2 in June, the services sector PMI for July fell to 55.5, the lowest since March, indicating that even when a pickup in business activity was being witnessed, the actual growth was still weak following the price pressures and weak sales. July data also highlighted a key aspect in the depleting purchasing power capability—a negligible increase in employment in India's services sector.
When it comes to the GST data, improvement in collections has a lot to do with better compliance, evidence of which can be found in the government’s release itself.
“This is a clear impact of various measures taken by the Council in the past to ensure better compliance. Better reporting coupled with economic recovery has been having positive impact on the GST revenues on a consistent basis,” the release said.
Inflation also has a role to play in increased GST collections. As GST is an ad valorem tax—based on the assessed value of the goods and services—an increase in prices will translate to increased tax burden and India’s inflation has been up persistently, even before the pandemic. In the last six months, retail inflation has managed to breach the Reserve Bank of India (RBI)-mandated 2-6 per cent target range. June’s retail inflation came in at 7.01 per cent and within the food basket, inflation in cereals and products was recorded at 5.66 per cent, meat and fish at 8.61 per cent and vegetables at 17.37.
“The GST collections reported a healthy trend, rising for the second month in a row. The 28 per cent year-on-year rise (is) a function of the economic recovery, better compliance as well as elevated inflation,” says Aditi Nayar, chief economist, ICRA.
While it is difficult to ascertain how much of the rise in the GST collection was due to the impact of inflation and how much of it was economic recovery, it would be incorrect to say that the buoyancy of collection is a solid indication of the latter.
“Even without a pickup in consumption, GST collections would have been up by 7-odd per cent because of inflation from last year. In the last one year, higher GST collections have been primarily because of increased compliance. GST collection is generally in nominal terms. When we talk about recovery, it is in real terms. Unless you remove inflation from it, it is not possible to get a correct picture (of economic recovery) from GST data alone,” explains Devendra Pant, chief economist, India Ratings & Research.
A Fuller Picture
A more relevant indicator of economic recovery can be found in the auto sales data. Big brands like Maruti Suzuki, Mahindra & Mahindra, Tata Motors and Hyundai reported single to high double-digit growth on their domestic passenger vehicles in July. Other manufacturers like Toyota Kirloskar Motor (TKM), Kia India, Skoda Auto India and Honda Cars India also saw robust growth in their domestic passenger vehicle sales. The auto industry recorded its highest-ever passenger vehicle sales in July since October 2020.
The automobile industry has been plagued with a global shortage of semiconductors since before the pandemic and the easing of that situation seems to have pushed up the sales. With 1,42,850 units sold, domestic passenger vehicle sales of Maruti Suzuki India, India’s largest car manufacturer, rose 6.82 per cent in July 2022 as compared to 1,33,732 units in July 2021. Even amid the uptick, what is important to note is that the sales of entry-level cars, like Alto and S-Presso that the middle-class buyer generally goes for, only saw a 3.2 per cent increase—from 19,685 units last July to 20,333 units this July.
Anubhuti Sahay, head of south Asia economic research, Standard Chartered Bank, feels that while sectors like automobiles, hotels and restaurants are witnessing an uptick in demand, it is mostly due to pent-up demand.
“In the case of automobiles, it was the semiconductor crisis because of which the demand was not fully met and that is playing out. There is an underlying theme of demand recovery but it is more so because of the easing of supply chain bottlenecks. The services sector, like air travel or eating out, are also doing well because of pent-up demand,” she says.
Sahay’s view reaffirms what Society of Indian Automobile Manufacturers’ (SIAM) June data had highlighted. It had said that even though car sales are back to pre-Covid levels on the back of a need for personal mobility, high inflation, heightened income inequality and increasing prices of cars have resulted in a muted buying sentiment within the middle- and lower-income sections of India that generally opt for the entry-level segment.
As per SIAM, at 55,000 units, mini passenger car sales were down 59 per cent in the first quarter of FY23 from 1,35,000 units in the same period in FY19. Sales of entry-level scooters (up to 125 cc) and motorcycles (up to 110cc), an important indicator of the purchasing capacity of India’s middle class, also witnessed a 36 per cent and 42 per cent fall, respectively, in the same period.
Macroeconomic indicators like robust GST collections might highlight a pickup in the economic activity but until it is complemented with a rise in purchasing power and employment, it is unlikely that ad valorem tax collections alone can indicate and propel consumption and growth.