GST rates are not to blame for the slowdown

Pritam Mahure | Updated on September 20, 2019 Published on September 20, 2019

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New technologies have destabilised traditional businesses, impacting consumption levels. Tweaking GST rates will not help

Murmurs of the slowdown heading from bad to worse are increasing. The shortfall in GST collections, inter alia, also indicates a falling level of consumption in the economy. To address the issue of falling consumption levels, the most-talked about remedy unfortunately is reducing the GST rates for certain goods/services.

Before rate reduction is discussed, it’s essential to understand whether the GST is responsible for the current slowdown, and if not, will tweaking GST rates serve any purpose? Further, can reduction in GST rates lead to increase in consumption levels in the long run? If this is assumed to be true, then why haven’t the consumption levels increased even after reduction of GST rates over the last two years? Additionally, won’t rate reduction increase challenges of fiscal deficit management?

Prevailing reasons

Prima facie, the reasons for slowdown appear to be much deep-rooted, structural and beyond GST rate tweak, as discussed below:

Turmoil due to the shift from the ‘brick and mortar’ to the ‘online’ economy. As per estimates, at present, more than 80 crore people in India have a mobile phone (i.e. more than 60 per cent of the population). These mobile users have, right at their fingertips, access to everything from transport facilities to food, electronics to grocery, from books to medicines with certainty of delivery (less than a day in few cases); heavy discounting (including on medicines); novelty (such as latest mobiles); and endless variety with precise suggestions (such as ‘things you may like’).

For the bargain-loving consumers in India, these perks are too tempting to resist. Further, as more time is being spent on social media (thanks to a literally free Internet) consumers are preferring to order everything online.

For the hitherto brick-and-mortar shop-preferring Indian consumer, this represents a massive behavioural change responsible for lower consumption value, due to availability of multiple and cheaper options.

Everyone is now a supplier. For established businesses, rapidly growing C2C (consumer-to-consumer) platforms, such as Olx or Quikr for pre-owned goods, Mealtango for home cooked food, etc, are also emerging as competition.

Thus, C2C platforms, have literally enabled every Indian to become a supplier and compete with the established players. For existing businesses, this is another aspect of competition, responsible for reduction of their business.

Access, not ownership, is the new trend. At present, with easy access to vehicles, anyone can summon a vehicle within minutes (through apps like Ola or Uber). Due to this new-found ease, millennials or Generation Z have an aspiration to access vehicles rather than own them.

In addition, in the urban mobility space, C2C ride-sharing and car-pooling has also become a mainstream with Bla-Bla Car, GetAround, Carma etc. This has led to better utilisation of existing private vehicles/resources.

These behavioural changes also appear to be primarily responsible for the reduction in demand of vehicles, and in-turn has impacted ancillary industries (car loans, insurance).

Intermediaries are becoming extinct. In the good old days, suppliers used to manufacture and supply goods through a distribution channel, ie, distributors, wholesalers, retailers etc. However, now, a supplier (located in any part of the world) can connect directly with consumers (either through own website/app or through platforms like Flipkart, Amazon or Alibaba).

This is shrinking various intermediaries, making them redundant and curtailing their spending.

Technology is creating new frontiers. In recent times, technologies such as artificial intelligence, machine learning, the Internet of Things, robotics, 3D printing etc, have seen huge advancements.

Further, cross-pollination between these technologies is creating opportunities for new businesses but leading to a loss of business for existing entities. For example, electric vehicles have created challenges for the existing automobile sector dependent on petrol/diesel engines.

Way forward

These tectonic developments have brought challenges for businesses. Dinosaurs became extinct as the Earth’s environment became more suitable for small creatures. Now, a similar trend is being witnessed as businesses environment favours new entrants such as start-ups.

Almost every business across the world is witnessing similar challenges. Given this, businesses need to rise to the challenge to remain relevant, rather than expect tweaks in GST rates.

The writer is a Pune-based chartered accountant

Published on September 20, 2019
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