columns

Updated: Jul 08, 2017 18:48 IST

The Goods and Service Tax (GST) won’t cure the common cold, but it will heal many ills bedeviling the economy. Let us count the ways. India will see the creation of genuine national supply chains, replacing the factory plus 250 kilometers radius area that defines so much of the country’s industrial production. Transport costs will fall; so should prices as cascading taxes dry up. But there will be hiccups. Any reform as GDP-boggling as this should result in a year of economic disruption.

But one GST plus point that hasn’t received much publicity is the knowledge it will create. Once GST has taken off, all B2B transactions in the country will be recorded online. The enormous data thus generated will allow Indians, for the first time, to know what is going on in their economy. And this will be a revolution.

Debates about the economy – from the size of its GDP to its growth rate, from jobs creation rates to the price of rice in Chhattisgarh – are a part of the national discourse. For the most part these are erudite and complex reruns of the five blind men of Hindoostan; the blind arguing with the blind. Here’s why.

Every quarter, economists, businessmen and wonks pore over GDP data produced by the government. Yet these quarterly figures only capture the formal sector, which is about half the economy going by the Central Statistical Organisation’s estimates of the black economy. Even many bits and pieces of the formal sector don’t come up with figures until the end of the year. So these quarterly figures only capture the goings-on in about 25% of the economy – and even these are then hotly debated. Monthly figures are in the realm of a magician’s show: “Pick a number, any number.” The informal or unorganised sector is surveyed every three or five years. But these surveys are based on questionnaires sent to businesses, which want to be invisible to avoid paying taxes and can only be described as suspect.

India’s ignorance of its economy is not a great surprise given how much of the economy remains in the 19th century. Other economies making the shift from agriculture to industry had similar problems. An American historian once wrote: “It was commonplace in the 1930s that the United States had better statistics on its pigs than on its unemployed labour.”

What is about to cut into this darkness is the shining light of the GST. Interestingly this tax will, first, shake the structure of the economy and, second, do so in a manner that will produce a windfall of economic information.

Any contractor or supplier who is part of a supply chain who does not load his invoices on to the tax software backbone, the GST Network, will put everyone else on the chain in the doghouse. At present, Indian business activity goes back and forth between the black and white economies: GST will be a parting of the waters. Either you and your partners are in the black or you are not. The gray economy, if you wish, will cease. If an artist tried to portray the post-GST economy, he would do a work in chiaroscuro.

Over the coming years, India should see its economy become much more formalised. Demonetisation helped, but GST and concurrent reforms in the real estate sector could collectively halve the informal sector’s size. The GST would make a huge chunk of the economy suddenly visible. And then it would provide an electron microscope with which to see all of this in unprecedented detail.

The Narendra Modi government knows this well. The chairman of GSTN, Navin Kumar, has spoken of this rich vein of data and the government’s plans to mine this as the “third phase” of GST. Part of the software contract for GSTN requires technology companies to provide metadata tools for the tax department, finance ministry, central bank and other government agencies to dig through all this and find out what is actually going in the Indian economy. The Central Board of Excise and Customs is setting up a directorate of analytics to crunch the data when it becomes available.

Tax inspectors would find their tasks far less arduous. Here is an example. If a manufacturer charged a customer more than the stipulated government tax on a product or service, in the past he would have pocketed the difference with impunity. A Comptroller and Auditor General of India (CAG) study found 30% to 40% of the tax paid by manufacturers to the government supposedly collected from customers was under-invoiced. Because of the cumbersome process of matching different paper documents, only three to five of such transactions are ever verified by tax authorities. And there are many such examples.

The biggest gainers from this data deluge will be macroeconomic policy bodies like the Reserve Bank of India. The country’s central bank is supposed to set interest rates, determine money supply and a dozen other things on the basis of the same thin gruel of economic data. If the bank reads the data wrongly it could trigger a balance of payments crisis a few years down the road. Or it could drive hundreds of companies out of business and thousands of workers out of jobs with unnecessarily high interest rate hikes.

Such fog afflicts other central banks as well: The US federal reserve chairman, Alan Greenspan, made his name by deciding the computer revolution was generating productivity increases in the US economy that the 100-plus economic indicators used by the bank were not catching and reduced interest rates accordingly.

After GST, the amount and nature of economic activity taking place in the economy can be determined almost in real-time and with unprecedented accuracy. Economic policy debates will be less acrimonious in India. Economic policy, however, will be far better informed. Interest rates can be set based on genuine measures of demand, investment and fiscal returns rather than guesstimates. The gains to long-term economic growth will be calculable because the sources of growth will no longer be so incalculable. What large corporations do to increase their own efficiency by using analytic tools will be done by a government.

Knowledge is power. Data is the new oil. What get’s measured, gets managed. All of that is true. But think of this: In a few years, New Delhi will be able to declare numbers about its economy with greater confidence than any other major country in the world.

letters@hindustantimes.com