Over the recent past the key barometer that the government and many analysts have used to measure the growth in the economy have been higher GST Collections. However in an inflationary economy and where the unorganized sector and smaller companies are suffering due to Lockdowns and Covid waves this assumption is fallacious. It is also reflected in the Industrial Production data which has remained subdued even as GST Collections have been high.

There are two aspects to this argument. The first and second covid waves have hurt small businesses and MSME’s more severely than the larger companies. Many of the small businesses do contribute significantly to production and employment but not necessarily to government revenues due to a combination of factors. This includes a business model which avoids GST Payments due to various loopholes (haven’t all of us been offered lower rates at many shops and businesses if payment is in cash and bill not required) as well as the fact that many small businesses fall under the GST Composition scheme where they can pay a flat tax based on turnover. Therefore when small businesses come under more stress the overall GDP as well as employment suffers more than the governments tax revenue and is something that we are seeing today. As such even in months where overall Industrial Production data has been subdued we have seen good GST collections

The other big factor in the current environment is the fact that inflation is very high. For example the price of steel has moved up from Rs 40000 per tonne last October to Rs 80000 per tonne today. As such if a steel company is selling the same quantity of steel they are actually generating double turnover and also paying double or more of GST depending on their input credit movement. Since margins of all companies have expanded it implies by logic that GST increase is more than that of turnover. Similarly most Consumer Companies have increased priced by 12-15% and as such even if volumes grow by just 5% the GST collection will grow by nearly 20%. Maruti as an example has increased car prices by 8-10% since the beginning of the year. As such even if their sales remain flat the GST collections of the government will still be up 8-10%.

As the economy opens up over the next few months I expect GST collections to be strong driven by price increases and not necessarily a pick up in the economy.


As I write the markets are trading at all time highs and valuations are around 25% higher than historical valuations. The results season has been good, however that’s the dichotomy that investors are facing today. Good results driven by a low base of last year as well as an almost complete normalcy in the previous quarter followed by a severe economic shutdown and very high input cost inflation. As I write RBI’s consumer confidence survey has indicated the confidence to be at the lowest level ever. It is a reflection of the fact that consumers are uncertain about their future and likely to consume cautiously.

The difference between the first and second waves as all of us know has been that this time the impact on people, deaths, expenditure on treatments, job losses etc is higher. On top of that we also have a scenario that the RBI and Government do not have the firepower to help the economy this time. RBI Policy announced on Friday was such minor tweaking of earlier steps. Continued money printing via government securities purchases creates issues related to financial stability in the future.

The markets right now are on a huge momentum, however looking at the valuations and growth paradigm it is tough to see how the overall markets can give a very high return on a sustainable basis from here on. In this situation we need to look for specific opportunities of companies that have something going for them which will always exist in the stock markets unless we are in a severe bear market where everything falls.

As such even as overall market returns from here will be subdued there are enough opportunities in specific companies. Given high market participation by various players right now early identification and investment in good ideas gets rewarded fast.