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How Did Transition to GST Regime Affect Inflation in India?

In: India's Public Finance and Policy Challenges in the 2020s

Author

Listed:
  • Rudrani Bhattacharya

    (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 1 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 costs at the beginning of the regime to comply with the government rates and structures, the 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

  • Rudrani Bhattacharya, 2025. "How Did Transition to GST Regime Affect Inflation in India?," India Studies in Business and Economics, in: K. R. Shanmugam (ed.), India's Public Finance and Policy Challenges in the 2020s, pages 177-197, Springer.
    • Handle: RePEc:spr:isbchp:978-981-96-2860-5_10
    DOI: 10.1007/978-981-96-2860-5_10
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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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