GST impact on Exports and Current Account Deficit (CAD)

Introduction

India has always followed an export policy that "Export the Goods, not the taxes." This is quite logical if India has to compete on the International Level especially with China who manufactures and supplies cheapest goods all over the world. 

Exports play a vital role in Indian economy. Exports bring in the precious foreign currency in India which helps it sustain the balance of Trade. Balance of trade is a difference in value between a country's imports and exports. Balance of trade is the largest factor contributing towards the Current Account Deficit (CAD).

Current Account Deficit (CAD)

Current Account Deficit is a situation when nation's value of imports is greater than the value of exports. It is calculated in terms of percentage to GDP. Any percentage of more than 5% of GDP will have a negative impact on the economy as the difference will have to finance either by borrowing or by inviting capital investment. Here are some of the outlined points on Current Account Deficit:

1. A developing nation like India often witnesses the current account Deficit, this is mainly due to the lack of technology and proper infrastructure.

2. If deficit is financed by borrowing, then country will have more chances to fall under debt trap. As in the long term, country will be burdened with high Interest payments and if it does not generate enough cash flow to repay the debt, then it tends to take more debt to repay the existing one and the cycle continues.

3. If deficit is financed by Foreign Direct Investment (as in the case of India), then also, it is considered as harmful in the longer run. In this case, countries growth somehow depends upon the investor confidence. If any time, country fails to attract the investment, it could lead to severe consequences.

Also, a lot of money will then be taken by the foreign company in the form of outbound investment or dividends in the longer run.

India's position

India is growing at a robust pace. Currently, India is the fastest growing economy in the world surpassing China. Hence, it is expected that India will run a Current Account Deficit which is adjusted with the capital account receipts like FDI. The biggest contributor to the CAD turmoil is the import of crude oil and gold.

India's CAD has been narrowed to the eight years low since 2008 to 1.2% of the GDP. This is mainly due to fall in process of crude oil. Once, the crude oil will start bouncing back, the import bill will again take up its shape and so will the current account deficit.

India has already placed many barriers to discourage the imports; however India has to import the goods, oil, gold etc to meet its domestic demand. Hence, it is better to increase the export to curtail the effect of rising crude oil on the current account deficit.

GST a boon for Exports

The government of India is very keen on improving the export infrastructure and export incentives to lavish the Indian and foreign players to invest in India, manufacture in India and sell anywhere. This was the idea to improve the exports from India. India aims to raise the manufacturing sector contribution to GDP to 25% from existing 16%.

As said, to achieve the ambitious target, GST will play a vital role. GST will proposed to remove the web of tax laws, unnecessary litigations, cascading effect, no proper refund mechanism of input tax on all types of export and further. Hence, it would be easier for the government to manage a single tax rather than the multiplicity of taxes. Some of the points are mentioned below;

Cost advantage via GST: Once GST is implemented the refund of input taxes would be granted, further the cascading effect will also be removed. This would reduce the most of production and will offer the cost advantage on global level which would ultimately boost the exports.

Single Tax to Manage: It would be better for government and the industry to manage the single tax rather than multiple tax laws. This will increase compliance to the law and invite lesser interest and penalties. Further, it will also create an environment of trust where things will be clearer and settled which will bring in more investment to boost industrial output and hence ultimately increases export.

Lesser Litigation: A business man never wants to indulge in the dispute or legal cases, especially with the government over the tax laws. Further, it has been observed that most of the legal cases happen due to lack of awareness about the laws. Since, GST will be a single indirect tax law, then it would surely enhance legal friendly environment.

Stronger Domestic Market:GST would directly bring in the ease of doing business with the entrepreneur. Hence, once more new business will come into market and ultimately strengthen the domestic supply helping India reduce the imports or even increase the exports.

Support to Make in India: There is no doubt that GST will support the make in India campaign. Prime Minister Modi said sell anywhere but make in India. GST with its many advantages will bring in more foreign investment and will help India to become an export hub as desired.

At last we can say that GST will have a far-reaching positive impact on exports.

Conclusion
Everyone must know the impact of GST from macroeconomic point of view.

Source

About the Author: Author is CA Paras Mehra, editor in chief for GST.HUBCO magazine a superior monthly magazine on GST in India.

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Paras mehra 
on 11 January 2017
Published in GST
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