GST Reform and its Economic Impact - A VAR Perspective

Abstract

The tax reforms in the year 2017 spearheaded by the introduction of the GST (Goods and Services Tax) was witnessed to mixed reactions. Some saw it as a welcome tax reform that would bring all the goods and services under one umbrella, one tax. Others criticized the central government contending that the GST would hamper economic growth and would prove to be detrimental. The paper has the objective of analyzing the impact on the economy pre and post implementation of GST. The proxies used to represent the economy are IIP (Index of Industrial Production) and Nifty_Serv (Nifty Services Sector Index). The EPU Index of India (constructed by Baker, Bloom and Davis since 2012) is used to indicate the uncertainty in the economy pre and post GST implementation. The IRF analysis is carried out after constructing a VAR (Vector Auto Regression) model taking all the variables – EPU index, IIP and Nifty_Serv as endogenous. Certain other macroeconomic variables like interest rate, WPI inflation and GDP are taken as exogenous to the model. The relationship between Economic Policy Uncertainty (EPU) and IIP and the Nifty_Serv are shown by Impulse Response Function (IRF). The IRF Analysis showed a lagged negative response of the Nifty_Serv to shocks from EPU. However, the IIP, a proxy for the manufacturing sector did not show marked response to shocks from EPU. We conclude that policy uncertainty (in this case primarily GST related) had a certain adverse influence on the service sector (Nifty_Serv) but no significant impact on the manufacturing sector.