GST reforms will eventually impact market interest rates: Saugata Bhattacharya

MUMBAI: The absolute effects of GST restructuring on indirect tax collections and fiscal policy will eventually impact market interest rates, Saugata Bhattacharya, external member of the Monetary Policy Committee, told ET.

The announcement to reform the GST structure shows that growth is the government's priority even at the risk of potential fiscal slippage, economists said. This has led to the discussion on whether this will have to be complemented by monetary easing.

"In principle, monetary policy is always ready to support growth, but not at the cost of price stability. The proposed GST rate slab transition changes should initially result in a fall in prices of most goods and services," Bhattacharya said in an email interview.

"However, with the higher disposable incomes likely to incentivise consumption demand, the second-round effects of output, investment and growth on the prices of at least some goods and services are difficult to predict," he said.

He also said that the effects of transmission of repo cuts and liquidity infusion into lending rates and subsequently on credit demand also remain to be seen. A higher credit offtake will certainly complement a fiscal policy stimulus.

"The eventual effects of GST re-structuring on indirect tax collections and on the fisc need to be kept in mind. This will impact market interest rates. In addition, the effects of transmission of repo cuts and liquidity infusion into lending rates and subsequently on credit demand also remains to be seen. A higher credit offtake will certainly complement a fiscal policy stimulus," he said.

In reply to a question on the impact on India's aspirational growth targets in light of the tariffs uncertainty, Bhattacharya said the periods of uncertainty and adversity have historically been catalysts for structural reforms in India, which have been ongoing for many years. "I hope the momentum for deeper structural reforms accelerates," he said.

After reducing the repo rate by 100 basis points between February and June, the MPC unanimously decided to keep the repo rate unchanged at 5.5% in the August policy, while retaining the policy stance as 'neutral'. The minutes of the August meeting showed that members chose to pause as transmission of past policy action was underway and also due to tariff uncertainties.