Impacts of GST reforms on efficiency, growth and redistribution of income in India: A Dynamic CGE Analysis

Abstract

Goods and service tax (GST) introduced as a ‘good and simple tax’ on 1 July 2017 by the Modi government is the boldest measure of tax reform so far in India. The major aim of this paper is to evaluate the micro and macro impacts of the goods and services taxes (GST) using a dynamic computable general equilibrium model of the Indian economy. This is an original contribution as no such work is found in the literature. This paper applies a dynamic CGE model calibrated to the micro-consistent input-output data of the Indian economy to assess impacts of GST on the efficiency in allocation of resources among production sectors, growth of income and employment over time, the redistribution of income among households in India. While GST reforms will improve specialization in productions of goods and services among the major economic sectors of India by removing distortions in the production and distribution of goods and services, transparency it brings in the tax system will help to maintain above seven percent continuous growth rate in output, investment and physical capital. It also promotes expansion in human capital and the financial system. Anti-corruption measures including recent demonetization of large denomination notes and digitization of economic transactions along with GST reforms will add to infrastructure including construction and expansion of communication networks, massive electrification, development of rail, road, air and shipping networks. By creating better opportunities for education and training for the younger generation, health services for all continuous reforms in direct and indirect taxes will bring speedier growth of income and employment along with more balanced distribution of income.

Keywords: GST, Dynamic CGE, India

JEL Classification: C68, E62, D58, O11, O12