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Consumers pay more for goods and services but inflation is down; here is why

Inflation data, released on Friday, captures price movement in June while the goods and services tax, which subsumed a string of state and central levies, kicked in on July 1.

business Updated: Jul 15, 2017 08:59 IST
Suchetana Ray
Inflation data, released on Friday, captures price movement in June while the goods and services tax, which subsumed a string of state and central levies, kicked in on July 1.
Inflation data, released on Friday, captures price movement in June while the goods and services tax, which subsumed a string of state and central levies, kicked in on July 1.(Reuters)

From movie tickets to TVs to medical tests, Indians are paying more for a range of products and services under the recently inaugurated GST regime, so headlines such as “historically low retail inflation” are bound to create confusion.

The inflation data, released on Friday, captures price movement in June while the goods and services tax, which subsumed a string of state and central levies, kicked in on July 1.

It is June

Many experts believe the July data could capture the higher prices that consumers are paying on account of the new tax.

“The increase in tax rates on services in the education and healthcare sector under the GST will have to be watched out to see the impact the new tax has on retail inflation,” former chief statistician of India Pronab Sen said.

But India’s Consumer Price Index (CPI), or retail inflation, is dominated by food on which there is no tax, so its price movement will depend on the movement of commodities across state borders.

Deflation is the worry

The GST is expected to ease transportation and in effect bring down food prices. But global experience shows that the introduction of GST has led to inflationary pressures.

In fact, Malaysia had to take steps to reign in rising prices after introducing this value-added tax in 2015. The reason is that tax hikes are passed on to consumers faster than tax cuts.

“Inflation is not a bad word. Some amount of inflation is needed. It is the deflationary tendencies that we are seeing in the economy that are worrying,” said economist Mohan Guruswamy.

A good monsoon and a bumper harvest of winter-sown crops led to fall in prices of vegetables, pulses and milk products, with brought down retail inflation to 1.54% in June. Inflation in May was 2.18% and 5.77% in June last year.

Wholesale inflation also fell to 0.90 % in June, the lowest in eight months.

Falling demand

Economists also say a contraction in demand is leading to lower retail inflation. Theoretically, the GST should lead to a temporary rise in shop-end prices. But since there is so much confusion around the new tax, will it dissuade people from spending?

The point to note will be the impact of the GST on recreation, which has a 14.7% weightage in the CPI basket of goods and services. Most services under “recreation” -- from movie tickets to gym memberships -- have become costlier.

“The impact, if any, on underlying inflationary pressures is likely to be transitory. The final impact will depend on the trends in aggregate demand and output gap after the implementation of GST,” a recent Morgan Stanley report said.