GST is going to have both types of impact. It will hit at the small manufacturer and lower economic growth.
Investors buy shares today in the hope that the prices will increase tomorrow and they will make a profit. The Modi Government has pushed GST and also followed prudent fiscal policy. The overall governance in the country has also improved.
Share markets expect these policies to translate into higher growth and higher earnings in the coming year. Thus, markets are up.
However, demonetization and digital economy have hurt the informal sector and brought the growth rate down. The business has shifted from small-to-big businesses. A curtain maker from Haridwar told me recently that his business was still at a level of 50 percent before demonetization.
I do not think this situation will improve in the coming times. Reason is that customers once lost are hard to regain. A marketing manager of a large multinational company once told me that the biggest challenge before him was to ensure the availability of his goods at every shop in the country.
He explained as follows.
Say, a customer named Ram is used to buying biscuits made by a company name Indian Biscuit Co (IBC). He went to a shop and asked for IBC biscuits.
These were not available with the shopkeeper. So he bought biscuits made by another company named Bharat Biscuit Co (BBC). He found that BBC biscuits were good. So he shifted permanently from IBC biscuits to BBC biscuits.
The unavailability of a particular product even once leads to the customers trying new goods and many shift permanently.
Thus, the curtain maker of Haridwar may find that the temporary dip in his business due to demonetization has become permanent because customers have shifted to organized retail chains and are not coming back.
In this way demonetization and digital economy have had opposite effects on the share markets and the economy. Share markets are up because big businesses have got a free run. At the same time the economy is down because large numbers of small businesses are suffering.
Thus, markets are up while growth is down.
The second impact of digital economy has been a shift of people’s savings from cash to gold. The homemaker used to keep some cash in her cupboard to meet exigencies. This cash has now been forcibly taken away from her and deposited in the bank. The homemaker has become “empty.”
She is reluctant to keep her new savings in cash lest the government again demonetizes the new Rs 2000 notes, or even the old Rs 100 notes as many feared after demonetization of notes of Rs 500 and 1000.
She is anyways suspicious of the banking system. Banks can fail. They may be closed on the day that she needs the money. Moreover her savings get exposed to the male members of the family. Therefore, homemakers have shifted to keeping theirsavings in gold.
The demand for gold in the country has shot up in the last quarter for this reason. The Managing Director of Center for Monitoring Indian Economy says “There is a dichotomy. The macro-economic story is nice and even promising. But people in general are a lot less enthusiastic. Sentiments are particularly poor in urban India”.
The purchase of gold has two negative consequences for the economy. One, the consumers are spending less on consumption because they are buying gold. The Index of Consumer Sentiments in April 2017 was at 97.7 against 100 in December 2015.
Thus there is less demand in the economy and the growth rate is down. Two, the purchase of gold is deflating the economy.
Our wealth is going to other countries in payments for the gold. The air from the balloon of our economy is leaking and our balloon is shrinking. Thus the economy is doubly hit. Nevertheless, a part of the business has come to the big businesses.
Say the common man has taken a hit of Rs 20 leading to the deflation of the economy, but the big businesses have gained Rs 10 leading to buoyancy in the share markets. The net impact is that the economy has lost Rs 10 while big businesses have gained Rs 10. Thus, markets are up while growth is down.
The small curtain manufacturer of Haridwar has lost business hence GDP is down, but part of that business has been taken up by big companies hence their sales are up.
GST will put more fuel into the fire that is burning high and loud. GST will enable large companies to ship their goods with more ease across the states.
The small manufacturers will no longer be protected from competition from them. The carpet manufacturer from Haridwar, for example, had a free run in Uttarakhand because big companies of Surat and Mumbai had to face hassles in shipping their goods from Surat to this small state.
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With GST, they will ship easily and the poor man’s market will get eroded. Once again, the small man’s loss is big man’s gain.
The policies of demonetization and digital economy have hit at the common man and the small businesses, thus GDP is down.
At the same time, increased investment in infrastructure by the BJP Government, overall good governance, better law and order in many BJP ruled states, good monsoons, and low prices of imported oil are helping economic growth.
GST is going to have both types of impact. It will hit at the small manufacturer and lower economic growth. At the same time, it will make available goods produced by big companies to consumers across the country and to economic growth as well as profits of the big companies.
The final race is between the BJP policies of demonetization, digital economy and GST, which will dampen GDP growth; and investments, good governance and monsoons that will help GDP growth. Which of these factors prevails will determine whether the present positive market sentiment will prevail.
Author was formerly Professor of Economics at IIM Bengaluru
Author’s phone: 85278-29777