Cautious optimism

Incoming data must be read carefully

Some of the high-frequency numbers released on Monday have attracted significant attention. The government data showed goods and services tax (GST) collection reached an all-time high of Rs 1.87 trillion in April, which was 12 per cent higher than that in the same period last year. Sustained, higher GST collection can not only help in managing government finances, but, being a tax on consumption, it also indicates the overall health of the economy. Further, backed by new orders and output, India’s Purchasing Managers’ Index for manufacturing increased to a four-month high of 57.2 compared to 56.4 in March. A reading above 50 indicates expansion. Besides, dispatches of passenger vehicles increased by about 13 per cent. Among other data points, coal production reached a record high, which would help power-generating companies.

Since the official gross domestic product (GDP) data comes with a significant lag, analysts track high-frequency numbers to gauge the economic momentum. The headline numbers do look good, particularly in the context that the global economy is losing momentum and is expected to slow significantly this year. Yet the high-frequency data should be evaluated with caution and in proper context. In the case of GST, for instance, collection in April reflects transactions made in March. Since March is the closing month for the fiscal year, it is likely that businesses deposited whatever was due from them before the year ended. Although the comparison with collection during the same month in 2022 is fair, a growth rate of 12 per cent should be seen in the context of overall nominal GDP growth, which includes inflation. According to the second advance estimate for 2022-23, for instance, the Indian economy in nominal terms is expected to have grown 15.9 per cent.

At a broader  level, it is important to note that the implementation of GST was expected to significantly boost overall tax collection. But the objective has not materialised so far. Overall tax collection at central level for the current year is projected at 11.1 per cent of GDP, the same as 2022-23. Indirect tax collection is pegged at 5.1 per cent of GDP. For comparison, it was 5.6 per cent of GDP in 2016-17. The primary reasons why the GST system has not performed as expected include premature rate reductions, and the reluctance to rationalise both rates and slabs. Thus, it remains to be seen how GST collection moves in the coming months. An expected decline in the inflation rate could affect overall collection.

Besides, in the context of auto sales and consumer products, it is reported that premium segments are doing better. In the absence of a sustainable revival in demand for mass-consumption products, maintaining  higher growth in the medium term would become difficult. Private investment, which is critical for higher sustainable growth, is not picking up significantly. Thus, for the current year, while some of the high-frequency indicators are encouraging, it remains to be seen how the year progresses. A significant decline in global output and trade growth will affect overall activity in the Indian economy. Further, financial-sector troubles in advanced economies, particularly the US, and tighter monetary policy will affect capital flows with implications for growth. Indian policymakers, therefore, would need to be alert and read incoming data carefully.