By removing GST and tariffs overall, the respective positive impact on exports is 7% and 6%
By Veena Jha
While the Indian government has announced a Rs 20 lakh crore stimulus package, preliminary thoughts being voiced are that this may be much smaller than envisaged. There are also concerns on how the package will be implemented. The government needs to think of quick mechanisms that can be implemented easily and can revive the economy quickly. In economic parlance, this is known as ‘low-hanging fruits’. This article focuses on export growth triggers that can help overall economy. To assess the costs and benefits of these triggers, it is essential to put some numbers on them. For this, two things that can be easily monetised and modelled are IGST and tariffs using an economic modelling exercise. The model is based on an input-output analysis of the entire economy. A change in one variable has to work itself through the value chains in the economy.
Impact on the economy
In a preliminary analysis, six sectors were selected. These include those that have low IGST such as textiles and apparel and those that have high GST such as mobile handsets and automobiles. Textiles & garments, gems & jewellery, automobiles & auto components, electronics with a special focus on mobile handsets, and pharmaceuticals together account for over 60% of Indian merchandise exports. To estimate the effects of eliminating IGST on exports, the model assumes IGST rates are reduced to 0. Economy-wide effects would be much higher if IGST on all exports were reduced to 0. In addition to estimating the impact of a quick GST refund, another exercise is done to estimate the impact of implementing zero tariffs on selected inputs for the sectors. Products selected for IGST refund and tariff reduction were listed through extensive consultations with industry associations and firms in these sectors by a team working for the EXIM Bank.
It is remarkable that by removing GST and tariffs overall, the respective positive impact on exports is 7% and 6%. This shows the weightage of these sectors in overall exports is high. With an increase in exports due to removal of IGST, imports also rise, but these are the imports required for producing exports themselves; nonetheless, the rise in exports is higher than that for imports. The relative impact of a decline in import tariff for inputs is smaller than that of IGST. This is because the number of products covered by the IGST exercise is larger than those covered by input tariff reduction.
In both these scenarios, the government would be concerned about revenue loss, particularly in case of tariff. The loss in tariff revenue due to zero tariffs on inputs as estimated by the model was $389 million (Rs 3,000 crore). In the GST scenario, since the tax had to be rebated in any case, there is no revenue loss. The gain in exports using 2019-20 as the base, however, would be nearly $18 billion (Rs 1.4 lakh crore). Even accounting for the fact that the model is a static comparative one and doesn’t account for dynamic changes, gains in all circumstances heavily outweigh the loss in revenue.
There are economy-wide effects of an immediate refund of IGST in selected sectors. Overall growth rate of the economy increases by nearly 1.5%, while exports and imports grow by 7% and 6%, respectively. Employment increases by nearly 4% and investment by 1.3%. The multiplier effects of these sectors are large as they contribute significantly to employment and investment. Most companies interviewed described an immediate refund of IGST as a priority measure, and something the government’s administrative machinery must be requested to do. This is also a ‘low-hanging fruit’ as in terms of implementation this is a ‘stroke of the pen’ exercise.
Impact on selected sectors
The effects on sectors selected for this modelling exercise are much sharper than the overall impact on the economy. Even in these cases, the effects are uneven as they stem from the rate of IGST applied to respective sectors. The sectors that have higher IGST rates will see more pronounced effects than those with lower rates.
Immediate effects of IGST removal on sectoral exports, output and employment: As the accompanying table shows, the impact of IGST would be overwhelmingly positive for exports from all sectors, with the highest effects in gems & jewellery. While the IGST in this sector is only 3%, the value added is so low that even this low rate has a major effect on the sector. Sectoral exports are estimated to increase significantly for automotive products and pharma as well. A noteworthy feature is the relatively low estimate of the impact on exports of mobile phones, while exporters of this sector have highlighted GST refund as a priority area of action.
This implies that the modelling results should be seen as the lower limit of the impact, with the likely effects being much higher. The reason is that the model does not take account of operational problems and obstacles created by these policies; especially the time and effort required to address IGST issues is not captured by the price and supply elasticities inherent in the model.
Removal of IGST would help the achievement of national objectives reflected in the table. For example, in case of mobile phones and textiles & apparel, the estimated impact on sectoral output is high, while the employment effect is higher for pharma, automotive products, and gems & jewellery. With regard to exports of mobile phones, the estimated impact of immediate GST refund (see table) should be considered as the lower limit, with the actual effect being higher. Further, the new schemes announced by the government and the aspiration of mobile phones exports to reach $110 billion by 2025, the base of the exports, output and employment would be large, implying a significant absolute change in these areas due to removal of IGST.
In textiles & garments, effects on output are very large, while exports and employment are relatively small. This is partly explained by the fact that textiles & garments (a large proportion of the industrial sector) is backward integrated and domestic markets are far more important than exports. Employment and investment effects are also positive.
Estimated impact of zero tariff on inputs on sectoral exports, output and employment: The table also shows that reducing tariffs on inputs to zero will have a significant impact on exports across sectors. For output and employment, however, the result is mixed, given the operational conditions in different sectors. The impact on exports is high because a reduction in tariffs of key inputs improves the competitiveness of products. Thus, making imported inputs cheaper has a positive impact on output, employment and exports for the sectors, especially in case of making import of manmade fibre cheaper by applying zero tariffs.
For gems & jewellery, the ratio of exports to the domestic market is high, and imported inputs provide an important part of its value chain. Reducing tariffs on these inputs to zero gives a boost to production in this employment-intensive sector, and improves export competitiveness.
For mobile phones and pharma, the import share is high in domestic production/exports, and tariffs on imported inputs create conflicting incentives for domestic products and exports. For example, the phased manufacturing programme (PMP) implemented through an increase in tariffs has resulted in domestic production of a number of inputs. This production, developed under an import substitution strategy under a tariff regime, leads to a cost-inefficient domestic output. Zero tariffs on inputs will reduce the domestic output of these products, but make exports more efficient. Thus, exports will increase, but domestic production and employment will decrease with zero tariffs on key inputs.
A strategic approach has to be evolved so that any emphasis on import substitution is adequately mitigated for exports through support and incentive/policies. The government has announced such policies for this sector, as well as certain drugs and medical devices sector. But along with the fiscal stimulus package whose value and implementation may incur bottlenecks, these two low-hanging fruits can be implemented quickly.
The author is associate, International Institute for Sustainable Development, and former head of UNCTAD office in India