GST Pass-through Across Indian Sates: Evidence from Difference-in-Differences

Abstract

This article analyses whether there exists any short-term inflationary pressure on Indian economy post Goods and Services Tax (GST) implementation. It was found that the introduction of GST showed no significant effect on the rate of change of consumer price index (CPI). Though, the effect of the GST implementation on consumer prices in India showed no significant change in the short term, the impact needs to monitored and observed for the long term, because the current state of economic conditions may have led to a delayed pass-through of the GST increase into consumer prices. To estimate the pass-through effect on prices due to GST implementation from 1 July 2017, various graphical and statistical methods are used to ascertain whether there has been any significant pass-through of GST on CPI– ordinary least squares (OLS) regression, and difference-in differences (DID) estimation technique has been used. The impact of post- and pre-implementation of GST has been analysed through DID by segregating the data set on the basis of treatment and control groups. The non-special category states have been taken as the treatment group and remaining special category states as control group. The results indicate that there is no significant evidence of upward bias in the CPI post GST implementation; these conventional estimates hold true for all states that were segmented based on revenue distribution and contribution to gross domestic product (GDP). JEL: D78, H20, H22