An economy heading for the ICU needs a functional GST urgently

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26 Aug, 2025 12:21

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Shishir AsthanaMoneycontrol Research

It seems one of former Prime Minister Manmohan Singh’s predictions is likely to come true again. Singh had earlier said that GDP growth would be impacted by 2 percentage points on account of demonetisation. Though most of the drop in GDP was on account of Goods and Service Tax (GST), Singh was partly right as GDP did fall by 2 percent. Singh had also said that hasty implementation of GST would have an adverse impact on growth.

The way things stand, the GDP number for the September quarter will be affected as badly as the June 2017 quarter, if not worse.

GST implementation is getting affected on account of procedural issues, technical glitches, delayed payments and an almost complete gridlock of systems, especially for the smaller businessmen.

Among the most severely affected entities are exporters who are working in complete uncertainty. It is reported that over Rs 1.8 lakh crore of working capital of exporters is locked up in refunds at the tax department’s end since the implementation of GST. Current account deficit (CAD) is already at a five-year high due to poor export growth.

Other entities may have more money stuck at various stages in the process. The government is in a bind over GST transition credit and is using its tax officials to find out why the claims are above its expectations.

Taking cognizance of the events Prime Minister Narendra Modi is meeting with the Finance Minister and other top officials of the Finance Ministry.

Reports on the action plan that the government is considering differ in various sections of the media. One report says that government is considering cutting its expenditure in line with the fall in revenue on account of lower tax collections. Others have reported that government is considering remedial measures to revive the economy.

Government spending is one of the main reasons why the economy has managed to keep its head above water. The last thing that the economy, markets and more importantly the government as a political entity needs is an expenditure cut. Not only will this lead to a further slowdown but also increase unemployment and aggravate the situation.

Despite various stakeholders saying that the country does not have the infrastructure in place for a GST roll-out, the Prime Minister and Finance Minister went ahead with the implementation. The government needs to come out of the situation as soon as possible to save itself from further embarrassment.

Apart from the political fallout is the risk of people losing their jobs if companies are unable to function on account of lack of clarity on GST. A reluctant banking system will freeze funding the trade during such times.

Unfortunately, the government has few options in its hand to kick-start the economy at a time when there are operational difficulties on the ground. All steps will be meaningless unless the GST system is running smoothly. Even if the government decides to increase investments in, say, infrastructure, suppliers would not be able to meet the demand unless there is clarity on the tax front.

A five-member Group of Ministers (GoM) committee has been formed to look into the technical issues. A meeting of all stakeholders and the vendor of GST software – Infosys -- has already taken place. The key outcome of the meeting was that 80 percent of the problem is expected to be resolved by October 30, 2017.

A game changer act like the GST was expected to see teething problems during the implementation. But some of the issues encountered by the stakeholders are so basic that one is tempted to think that the roll-out was not thought through properly.

Ironically, after the GST system is rectified, by the government’s own account, the increased tax base would result in higher revenue inflow which would not need any kick-starting. That being the case the government needs to focus its attention on the smooth running of GST rather than pressuring the system with new policy measures. If the government needs to show that it is working to boost the economy, it can work on the creaking banking system to keep itself busy.