So, a GST-saved extra cash shopping spree?

Now that the hurrah has settled, a bit of tempered reaction to the GST reset recommended by the GST Council on Sept 3 and rolled out yesterday. Changes in consumption will begin registering initially in trade channels and will be corroborated by high-frequency indicators, such as industrial production numbers and services volumes. The critical parameter is capacity utilisation, which will indicate whether demand primed through tax cuts is translating into a private investment revival. Effects of festival consumption will also have to be smoothed out to arrive at a true impact of fiscal stimulus. This will involve data over the next few quarters to isolate seasonal variation in the base effect. Initial indicators could also be clouded by transmission of tax changes through production and distribution chains.

GoI hopes households will use extra disposable income - in official estimation, ₹2.5 lakh cr through changes to GST and I-T slabs - to increase spending. Yet, household savings are at historically low levels, and the cash could come in handy in rebuilding them. Data for possible changes to individuals' propensity to consume and save will be available on a much longer horizon. Policymakers will be concerned with how the more immediate income effect on consumption plays out over the next few quarters, and whether it spills over into creation of additional production capacities.

India may be approaching limits of fiscal intervention to prop up demand. I-T sets in at around 5x per-capita income, and declining marginal gains would be obtained from any further relaxation. GST rates have been stabilised at 5% and 18% with little room for dips. GoI's capex cycle is maturing without the anticipated investment multiplier in evidence. It has a lot riding on a consumer demand revival to keep the economy on its growth trajectory. Ensuring tax changes work their way through the system and exhorting people to go out and spend their extra money are jolly good nudges. Equally important will be reading the data correctly when the time comes.