Using GST as consumption proxy

Unlike private consumption data, GST can provide real-time insights into consumption patterns, economic activity, and state-wise variations

Last financial year, net goods and services tax (GST) collections (gross collections minus refunds) surged 13.4 per cent, outpacing the 9.6 per cent growth in nominal gross domestic product (GDP).

This financial year has also started strong, with the gross April mop-up soaring to record Rs 2.1 trillion, the highest monthly haul since the levy was introduced in July 2017. The data spawned by this collection ecosystem has another, unintended benefit. It can throw light on private consumption, including at the state level.

GST is a consumption-based tax, accruing to the state where goods are consumed, as opposed to where they are produced. So, state-level GST data can indicate sub-national private consumption trends.

While private consumption is the biggest driver of demand in the Indian economy, the lack of high-frequency data on it makes monitoring a challenge. Interestingly, despite strong GST collection in FY24, the National Statistical Office’s estimates show private consumption growth has trailed GDP growth.

This divergence could be because, in addition to consumption, formalisation and improved compliance are playing an important role in shaping GST collections. The number of registered GST taxpayers reached 15 million as of April 30, 2024, more than twice the 7 million in 2017. Compliance has improved as well. For instance, recently, evasions of more than Rs 44,000 crore were detected between May 2023 and January 2024 under a government drive to crack down on non-existent registrations and fake invoices.

The collection-consumption tango

GST collections move quite in sync with private final consumption expenditure. The goods and services covered under the GST ambit represent 67 per cent of the all-India private final consumption expenditure. These characteristics suggest aggregate GST could offer surrogate signals on the broad direction of private consumption, even though it is difficult to separate the impact of compliance improvement and formalisation.

Importantly, GST data also allows assessment of consumption nuances at the state level, which is useful because private consumption data is only available at the national level. Therefore, timely availability of insights on consumption using GST data, both at the national level and across states, can benefit policymakers and the corporate sector.

What our data crunching shows

We analysed GST data of 17 states, representing almost 90 per cent of the total collections. The analysis pertains only to GST collected on domestic consumption and not on imports, as data on the latter is not available state-wise.  The process yielded some interesting observations.

Last financial year, Maharashtra led with an 18.8 per cent share of the all-India GST collections. It has consistently been on top of this heap. Karnataka followed, but with a significantly lower share of 8.7 per cent. Maharashtra’s outperformance is consistent with it having the highest GDP among states and the third-largest population — both factors bolster consumption expenditure in the state. Per capita state-level GST collections provide additional insights. While Maharashtra is the numero uno even in per capita terms, there is some reshuffling when population size is considered. Haryana, Telangana, Kerala and Punjab move up the ranks while larger states such as Uttar Pradesh and West Bengal descend. Such information can indicate the demand for the kind of goods (premium vs mass) in a state and act as useful information for the corporate sector.

Teasing out demand nuances

We find a strong positive correlation between per capita GST collections and per capita incomes across states, indicating richer states have higher propensity to consume. This is also in line with a recent Reserve Bank of India (RBI) finding that consumer optimism (measured by the RBI’s Consumer Confidence Survey) improved as household income increased. The relatively affluent southern and western regions demonstrated higher consumer confidence, compared to the all-India average from September 2017 to March 2023 (Consumer Confidence in India: A Regional Perspective, RBI Bulletin, May 2024).

The relationship between the share of urban population and per capita GST collections among states is also positive, implying urbanisation propels private consumption. That said, better GST compliance in urban areas could also be a contributory factor.

Cess stories

Additional useful insights can be gleaned from the analysis of GST compensation cess data. Given that it is applied on luxury and demerit goods (particularly ones with adverse environmental or health impacts), a state-wise comparison of cess collections can throw light on this aspect of consumption. Kerala had the lowest collections of per capita compensation cess in FY24, while Chhattisgarh had the highest. The high level of per capita compensation cess in Chhattisgarh reflects primarily two features of the state.

The first is high tobacco use. The National Family Health Survey 2019-21 found a higher prevalence of tobacco use in the state (43 per cent men and 17 per cent women above 15 years) against the national average (about 38 per cent men and 9 per cent women above 15 years). The second is high coal consumption. Not only is Chhattisgarh among the top coal-producing states with large thermal power installed capacity, but it is also the largest coal-consuming state in India.

Yielding a yardstick

Without a doubt, GST has been a fundamental tax reform engendering multiple benefits in addition to buoyancy in tax collections. For instance, it has reduced the cascading impact of taxes, facilitated the move towards a common market and improved efficiencies in logistics/transportation. With improving compliance, formalisation and GST coverage, not only will the benefits increase, but the tax will also become a more useful indicator of economic activity.

State-level GST collections by commodity or at least their disaggregation into goods and services can further enhance our understanding of the economy.

The data on integrated GST on imports by states can help suggest how states contribute to India’s import bill (though it is also important to bear in mind that after landing in a state, imports may be travelling to other states, maybe after some value addition). Besides, information on compensation cess can suggest how different states fare in terms of their consumption of climate-sensitive items such as coal and other demerit goods, such as tobacco, cigarettes and pan masala.

Hence, over time, GST data can become a more real-time measure of consumption expenditure and other data-led insights into the economy at both national and state levels.

The writers are, respectively,  chief economist,  senior economist, and  economic analyst at CRISIL