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How did Transition to the GST Regime Affect Inflation in India?

Author

Listed:
  • Bhattacharya, Rudrani

    (National Institute of Public Finance and Policy)

Abstract
Indian indirect tax regime shifted from multiple tax system to a uniform rate value added Goods and Services tax regime on the 1st July 2017. There have been long standing public debate on probable costs and benefits of GST regime replacing long-existed multiple tax regime. In the cost side, while producers and sellers may have to incur some fixed cost at the beginning of the regime to comply with the government rates and structures, shift to GST system is expected to reduce prices via reducing cascading effects of multiple tax layers and increasing efficiency of the logistics and distribution system. Empirical literature on both advanced and developing economies suggest mixed impact of adopting GST system on inflation. This paper contributes to this literature by investigating effects of GST system on CPI, WPI inflation and their major components namely food and core inflation in India. Applying intervention method in a multivariate framework, controlling for other macroeconomic shocks and duration of intervention endogenously identified using structural breaks in inflation series, we find a positive effect of GST on headline inflation in India via inflationary impact on retail food prices.

Suggested Citation

  • Bhattacharya, Rudrani, 2024. "How did Transition to the GST Regime Affect Inflation in India?," Working Papers 24/405, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:24/405
    Note: Working Paper 405, 2024
    as

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    File URL: https://www.nipfp.org.in/media/medialibrary/2024/02/WP_405_2024.pdf
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    References listed on IDEAS

    as
    1. Morris, Sebastian & Pandey, Ajay & Agarwalla, Sobhesh Kumar & Agarwalla, Astha, 2018. "Impact of the Proposed GST on the Consumer Price Index in India," IIMA Working Papers WP 2018-07-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    2. Tom Bolton & Brian Dollery, 2005. "An Empirical Note On The Comparative Macroeconomic Effects Of The Gst In Australia, Canada And New Zealand," Economic Papers, The Economic Society of Australia, vol. 24(1), pages 50-60, March.
    3. Robert Dixon & G.C. Lim, 2004. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 373-386, December.
    4. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    5. Bhattacharya, Rudrani & Patnaik, Ila & Shah, Ajay, 2011. "Monetary policy transmission in an emerging market setting," Working Papers 11/78, National Institute of Public Finance and Policy.
    6. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    7. repec:bla:ausecr:v:37:y:2004:i:2:p:125-138 is not listed on IDEAS
    8. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    GST ; Inflation ; Structural breaks ; Intervention method ; India;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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