Macro

GST reveals new truths about Indian economy

The new data released by the latest Economic Survey will be a treat for economists. Chief Economic Adviser Arvind Subramanian and his team have dissected the GST collection numbers to come up with unique findings, that can enable a fresh understanding of the Indian economy.

“GST will help increase our understanding of the Indian economy. I learnt at least eight new things about the economy,” Subramanian said at a press conference after the release of the Economic Survey for 2017-18. The survey promises to be a ‘vast repository’ of information created by the GST, which will ‘surely alter’ the understanding of India’s economy.

So what are these new findings?

These are mostly finer details on India's trade, internal and external, which were revealed after the transition of GST. The survey says that GST has enabled accurate statewise distribution of international export of goods and services, for the first time in history . It says that five states – Maharashtra, Gujarat, Karnataka, Tamil Nadu and Telangana account for 70% of the country exports.

Subramanian and his team have also mapped the data from the Central Statistics Office and GST collections to find out just how strong the correlation is between exports performance of states and standard of living.

The survey finds that states' prosperity and export performance have a correlation coefficient of 0.70 or in simpler terms there is a strong correlation between export performance and the standard of living in the state.

There are also interesting details on internal trade. The survey says that states that export the most are also the ones that import the most. The five largest importing states are Maharashtra, Tamil Nadu, Uttar Pradesh, Karnataka and Gujarat. And, states that trade the most are the ones that are also most competitive and have the largest trade surpluses.

The survey finds that internal trade in India is more robust than Subramanian had predicted in last year’s Economic Survey.

“Last year the Survey had estimated that India’s inter-state trade in goods was between 30 and 50% of GDP, a relatively high number compared to other countries. GST data suggests that India’s internal trade in goods and services (excludes non-GST goods and services) is actually even higher: about 60% of GDP,” it says.

There are also some interesting findings about the data on exports by individual companies. In the West, research in recent years has found the emergence of ‘export superstars’, where in the top 1% of exporting firms control as much as 50% of exports. The survey says that India’s case is in stark contrast to other countries.

“The top 1% of firms accounted for 72%, 68%, 67% and 55 % of exports in Brazil, Germany, Mexico, and USA respectively but only 38% in the case of India,” it says. However, the survey does give a caveat and says, “Indian data includes exports of services, where concentration ratios tend to be much lower than in manufacturing.”

Equally important are revelations about the formal sector.

“Finally, the GST data throw up new data that allows a better re-examination of the extent of formality/informality in the Indian economy,” the survey proclaims, as it seeks to fill the gaps in data of previous exercises to gauge the formality or informality of the economy.

The survey finds that about 0.6% of firms, accounting for 38% of total turnover, 87% of exports, and 63% of GST liability are what might be called in the “hard core” formal sector wherein they are in the tax net and also provide social security to their employees. Similarly, 87% of firms, representing 21 percent of total turnover, are purely informal as they are outside the tax net and do not provide social security to employees.

The non-farm payroll from a social security perspective is estimated to be at about 7.5 crore or 31% of the non-agricultural workforce, as per the survey. It includes the government’s non-farm payroll of roughly 1.5 crore. The formal non-farm payroll are considerably greater than current beliefs about the size of formal sector non-farm payroll.

Clearly, as more data flows in from the GST, understanding the new Indian economy will become more robust. Some assumptions will cease while others will be backed with better data. But Subramanian sums it up aptly - “A whole new world has indeed opened up to followers of the Indian economy, and much exciting new research lies ahead.”