India Insight-India post GST:policy review,inflation targeting and setting up of MPC

GST – a step in the right direction: After a long wait, the GST constitutionamendment bill finally got approved in the upper house of parliament (RajyaSabha). But the process is still not complete and the proposed tax reform willneed to go through several rounds (state legislative approval, setting up theGST council, deciding the GST rate, list of exemptions, IT infrastructure andfinalising the operational aspect of the tax regime etc) before it can getimplemented. In the short-term, we expect some temporary disruptionsincluding rise in services inflation and adjustment pain as both the privatesector and the government come to grips with the complexity and lag in GSTimplementation. That said, we believe GST is a key structural reform thatwould help create a uniform national market, reduce the cost of doingbusiness, increase efficiency, boost investments and lower inflation.

According to our estimates, implementation of a comprehensive GST acrossgoods and services would add, ceteris paribus, 0.7-1.2% to India’s GDPgrowth in the medium term. We believe the first (and the biggest) hurdle toGST has been cleared and now the discussions related to its roll-out(likely from Apr-17) will be ongoing over the next several weeks. We shiftour focus on the upcoming monetary policy review on August 9th, inflationtargeting and the constitution of monetary policy committee.