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India Attempts To Remove Roadblocks To Economic Growth With National Tax

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India attempts to remove roadblocks to economic growth with national tax


Indian truck drivers currently face long waits when attempting to cross state borders. Photograph: Narinder Nanu/Getty

On a recent foggy winter morning, the line of trucks stretched for kilometres atKhanauri, a northern Indian state border checkpoint. The drivers had been travelling for days carrying factory goods. But the arduous journey on bumpy, crowded Indian roads is not their biggest problem, they say. It is long waits and laborious paperwork at regulatory checkpoints such as this – where more than 1,500 trucks stop for hours every day – that add significantly to the cost of doing business in India.

“The factory managers keep calling us anxiously with the same questions: “Where have you reached, where are you stuck?” said Dinesh Kumar, 35, a truck driver carrying yarn from the western state of Gujarat to a blanket-making factory in Punjab.

Two-thirds of India’s freight travels by road. But only 40% of the travel time is consumed by driving, according to the World Bank. The rest is spent on waiting at state border checkpoints, paying state government levies and dealing with regulatory bureaucracies that vary from state to state.

Aiming to break this crippling business barrier, India’s finance minister Arun Jaitley in December introduced legislation in parliament for a single goods and services tax that would replace the complex system of nearly 20 different taxes and levies imposed on commodities by different states. The GST, as it is known, is one of the most ambitious economic reform measures of the past decade and a dramatic step toward making it easier to do business in India, a priority for the government, officials say.

India’s recent economic growth has largely come from the boom in services such as IT, but they contribute only a tiny fraction to what is still a predominantly agriculture-dominated economy. Industrial manufacturing accounts for about 16% of India’s economic output. The government wants to raise it to 25%, andcreate 100m new jobs by 2022, a tall order in the current regulatory environment.

Prime minister Narendra Modi, who came to power in May promising to revive Asia’s third-largest economy, recently launched an ambitious Make in India campaign, aimed at boosting manufacturing and exports as China has in the past few decades.

Yet challenges remain. Despite the arrival of a business-friendly government, India slipped to 142 among 189 countries on last year’s index listing nations by ease of doing business, according to the World Bank. In 2013, India was ranked 134

And the logistical cost of manufacturing in India is seven times higher than international benchmarks, says the World Bank.

Denis Medvedev, senior country economist for India at the World Bank, called the unified goods and services tax a “game-changing economic reform” that can reduce freight time by 30% to 40% and add about 2% to the nation’s economic output in the next five years.

“It removes the element of uncertainty in the business cycle for Indian manufacturing,” Medvedev said.At checkpoints such as Khanauri, the need for reform is all too visible. Anxious drivers stand in long lines while their assistants guard the trucks and keep themselves warm over fires and drinking endless cups of milky tea.

“I have been waiting for six hours here already,” said Lakshman Singh, 38, a truck driver carrying chemicals. “There is only one counter, and the line is too long. They say they have not received the information from the previous checkpost about the passage of my truck. That’s not my fault. Two weeks ago their internet connection was down for 36 hours. Imagine how it affected business.”

The frequent stops for regulatory checks also create “more opportunities for harassment and bribe-taking by corrupt officials on some pretext or the other”, said Rajev N Gupta, co-founder of Caravan Roadways, a freight company.

In 2013, the car manufacturer Maruti Suzuki told its vendors to buy plots closer to the factory to cut logistics time and cost.

If a rationalised tax system becomes a reality, “businesses can hope to maintain lighter inventories and adopt efficient Japanese-style just-in-time manufacturing methods in India, too”, said Devesh Kapur, director of the Center for the Advanced Study of India at the University of Pennsylvania.

This is not the first time the GST bill has been introduced in parliament. The proposal got stuck several times and missed deadlines because the state governments feared losing the right to impose levies and raise revenue.

The prosperous industrial southern state of Tamil Nadu and the eastern state of West Bengal have cautioned Jaitley against rushing reform. In a letter to Modi, the chief minister of Tamil Nadu, O Panneerselvam, said the measure will have broad implications for the fiscal autonomy of states. “The centre must ensure that the states’ fears are allayed and true consensus is achieved before such a far-reaching reform is attempted,” he said.

To make the implementation more palatable, Jaitley assured the states that the national government will “compensate them for any loss” for five years.

But one business analyst said, on the condition of anonymity, “if the implementation is handled badly and the states suffer loss, it could break the country’s unity”.

The bill, which requires an amendment to the nation’s constitution, will likely be taken up for discussion and voting in India’s parliament later this month and has to be passed by two-thirds of lawmakers. Then it must be approved by at least half of the state legislatures. Jaitley said he expects the implementation to begin in 2016.

At Khanauri, the word is out that business-as-usual will soon come to an end.

“Once the new law comes, long lines will be history,” said Sanjeev Puri, excise and tax inspector at Khanauri. “State borders and checkpoints may melt away and become irrelevant. India will be one seamless market. It will be a very different world then.”


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