Will GST Plug the Gap?

Mon, 5 Jun Pre-Open

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The Indian economy stumbled to register a growth of 6.1% in the fourth quarter of 2017. This was the fourth quarter of consecutive decline for the Indian economy. The impact of notebandi was felt across various sectors.

But is the slowdown a true representative of the actual impact of notebandi on the economy?

Vivek Kaul, in his column had highlighted this particular issue

• "It is clear that recorded GDP growth in the second half of FY2017[October 2016 to March 2017] will understate the overall impact because the most affected parts of the economy-informal and cash based-are either not captured in the national income accounts or to the extent they are, their measurement is based on formal sector indicators."

The corporate results for the fourth quarter of financial year 2016-17 also highlighted the slowdown in the economy. The combined results of 2200 odd companies largely showed decent numbers, but still a sharp decline from the third quarter of 2016-17. Net profit for the quarter was up by 20% Y-o-Y as compared to 31% growth in the third quarter.

The numbers for companies largely catering to the domestic market were even more disappointing. Excluding IT, Pharma, energy and financial firms, net profits declined by 19% Y-o-Y for the quarter. It's clear indication of the impact of demonetization on the economy.

With the implementation of GST expected later this year, a lot of informal companies are bound to enter the formal system. Since these firms are expected to come under the tax net due to the levy of GST, some will be inclined to go public. As per Ashishkumar Chauhan, the CEO of BSE Ltd, he expects around 1000 companies to list on BSE over the course of the next 3-4 years.

In such a scenario, any such major economic upheaval like demonetization might show a sharp decline in the GDP in future. Markets in such a scenario may be more volatile.

On a positive side though, any improvement in economy will also boost the GDP in a big way. The informal sector is currently growing at a much faster rate than the formal sector. Once these sectors are part of the formal economy, the Indian economy will get a huge boost going forward. It certainly makes for interesting times ahead for the Indian stock markets.

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