GST to impact working capital cycle, put strain on liquidity

The introduction of GST will hurt working capital cycle for companies and availability of easy liquidity is necessary for up to four months, according to a report.

"The transition to GST will disrupt the working capital cycle of businesses in the initial phase and thus easy liquidity in the system is essential for two to four months," domestic ratings agency India Ratings said in a note today.

Easy system liquidity is necessary to minimise the magnitude of such disruption and to absorb the sudden changes in requirement of short term finance, it added.

Based on a study of 11,000 firms, it said input credit lock up could be around Rs one lakh crore, of which about Rs 50,000 crore could be blocked for about two months. This "may result in higher short term working capital requirement for businesses in the near term," it warned.

It said the task at hand is "humongous" and can be gauged from the size of closing inventory of around Rs 11.2 lakh crore as at FY16, which are at various stages of production process.

Additionally, a 3 percentage point increase in service taxes to 18 per cent may put further stress on the short term working capital requirements for businesses, it said.

It added that larger companies with stronger credit profiles will tide over the short term working capital disruption relatively easily as compared to the ones which have weaker credit profiles.

It can be noted that the systemic liquidity has been on the surplus mode for the last few months, ever since a jump in deposits post note ban, and a jump in foreign portfolio investors' inflows.

The India Ratings note said this is a cause for concern as it impacts monetary policy objective of keeping the overnight rate and the shortest end of the yield curve anchored to policy rate.

The overnight rates were substantially lower in March and April 2017, resulting in the RBI to spell out detailed actions at its April policy and sterilised Rs 1 lakh crore in excess liquidity.

"The ongoing dilemma is now, how RBI will tackle this sloshing liquidity surplus, or whether it is even necessary to sterilise such liquidity. We believe that such liquidity surplus need not be sterilised," the note said.

"The system liquidity should be at ease during the transition phase of GST. Thus in order to minimise the magnitude of such disruption at the earliest and to absorb the sudden changes in requirement of short term finance, easy system liquidity is necessary," it added.

The GST Council, at its meeting in Srinagar over the weekend, came out with a multi-tier rate structure for goods and services, which shall be applicable once the Goods and Services Tax gets applicable from July 1.

The GST seeks to convert the entire country into a single market and is billed as the biggest indirect tax reform.