Business

GST Sinks Service Sector Activity In July

Surging prices caused by the tax dented demand for services and pushed the sub-index on new business to 45.2 in July, its lowest in nearly four years.

A cloth merchant holds message papers to distribute as he attends a procession during a strike to protest the implementation of the Goods and Services Tax (GST) on textiles in Kolkata, India June 30, 2017. Credit: Reuters/Rupak De Chowdhuri/Files

A cloth merchant holds message papers to distribute as he attends a procession during a strike to protest the implementation of the Goods and Services Tax (GST) on textiles in Kolkata, India June 30, 2017. Credit: Reuters/Rupak De Chowdhuri

Bengaluru: Activity in India’s dominant service sector contracted at the sharpest rate in nearly four years in July after a new tax policy sowed confusion and sent new orders into free fall, a survey showed on Thursday.

Initial confusion on the national goods and services tax (GST) led July‘s Nikkei/IHS Markit composite Purchasing Managers’ Index (PMI), which measures both manufacturing and services activity, to sink to 46.0 – its lowest reading since March 2009 – from June’s eight-month high of 52.7.

The PMI for India’s dominant service industry dropped to a near four-year low of 45.9 in July from 53.1. June’s reading had been the highest since Prime Minister Narendra Modi banned high-value currency notes in November.

The latest survey is the first time in six months where the services reading was below the 50 mark that separates growth from contraction.

“PMI data for July highlight a reversal in fortunes across India, with the economy going into reverse mode after seeing a pick-up in growth momentum during June,” said Pollyanna de Lima, principal economist at IHS Markit.

“Most of the contraction was attributed to the implementation of the goods and services tax (GST) and the confusion it caused.”

Surging prices caused by the tax, implemented on July 1, dented demand for services and pushed the sub-index on new business to 45.2 in July, its lowest in nearly four years, from 53.3 in June.

Similarly, confusion among manufacturers over the pricing of their products after the GST was implemented dragged factory activity to its lowest level in more than nine years in July, a sister survey showed on Tuesday.

Despite initial GST disruptions, participants in the survey remained optimistic about growth in services activity over the coming year, which boosted the business expectation sub-index to an 11-month high.

“Many will question how deep an impact the GST will have on the economy in the near and long term, firms seem convinced that prospects will brighten as the new tax regime becomes clearer,” said de Lima.

The GST aims to replace multiple cascading taxes. The change should help India reclaim its position as the fastest growing major economy this year, economists polled by Reuters last month said.

On Wednesday, the Reserve Bank of India cut its policy rate by 25 basis points to 6%, which should aid growth.

(Reuters) 

  • Anjan Basu

    I am sure the govt’s master jugglers will be able to turn this unwelcome set of data on its head and prove — and proclaim– to the world how the implementation of the GST has ushered in a phase of unprecedented growth all round, most of all in the service industry. ( Remember the great good that demonetisation did to us all, including to those who lost their livelihoods or died while standing in overnight queues to draw cash from ATMs?) Right now, furious number crunching must be in progress in the NITI Ayog and its sundry ancillaries towards that end.

  • K SHESHU BABU

    With pomp, the GST was implemented from the ‘ night’ plunging most small business and pretty traders into darkness. Only the oligarchs benefited from the announcement and banks by increasing service charges ….common people gained close to nothing