GEOFF HISCOCK. Long-awaited tax change raises tantalising prospect for Indian economy

Aug 13, 2016


The tantalising prospect of a 10% growth rate is on India’s economic horizon in the next few years, now that Prime Minister Narendra Modi has won legislative backing for the long-awaited goods and services tax.

On August 3, India’s upper house approved a bill to bring in a nationwide GST, creating a much simpler tax regime that will help create a unified market of 1.3 billion consumers. In theory, interstate trade barriers will come down, enabling the faster and cheaper delivery of goods across the country.

But – and it is a massive but – there are numerous obstacles to the introduction next year of what most economists agree is the most important Indian tax reform for decades. Modi still needs more than half the states to approve a constitutional amendment, parliament will need to pass at least one more bill and a special GST council needs to be set up.

If Modi gets the tax up and running by the April 2017 target, he will then be able to focus on  the many other parts of the Indian economy that need urgent attention – not least of them jobs, land reform, social welfare and infrastructure spending, where India lags well behind China.

India’s per capita income is now about US$1650 – where China was in 2005 – but its woeful record of delay, corruption and political infighting puts it 20 years behind China in the rollout of much-needed infrastructure such as better ports, airports, roads and rail links.

International ratings agency Fitch hailed passage of the legislation as a “further positive signal” of the Modi government’s ability to enact major reforms. It said that a GST would “lead to higher growth in the long run.”

Hopes indeed are riding high on what a GST might do for India, particularly in streamlining transportation costs. The expectation within India is for a GST rate of between 18 and 22%, but the final figure has yet to be thrashed out and it may prove difficult to reach consensus. Business wants it to be under 20%. Exemptions and a “merit list” of goods that qualify for a lower tax rate will add to the difficulties of implementation. And while Modi has been able to win the initial backing of most of the state governments, some big manufacturing states such as Tamil Nadu that could face revenue losses may baulk at the final hurdle.

When Finance Minister Arun Jaitley introduced the GST bill to the lower house in 2015, he proposed a starting date of April 2016 for the new tax regime. Now the target has slipped by a year – and that can’t come soon enough for Indian billionaire Adi Godrej, whose Godrej group supplies Indian consumers with a vast swathe of daily necessities such as soap, shampoo and deodorants.
According to Godrej, bringing in a GST will add up to two percentage points to India’s growth rate and represents the biggest advance since the 1991 financial reforms that first put India on the path to higher economic growth. Add the GST “bump” to a current growth rate nearing 8%, and a double-digit future beckons.

India hasn’t seen annual rates like that since the mini-boom of 2006-07, when growth peaked at 9.3%. Indian ratings agency Crisil, for example, says in its latest forecast that with a normal monsoon season this year, it expects economic growth for the fiscal year ending 31 March 2017 to reach 7.9%.

Godrej has been arguing for fundamental tax reform for 20 years, arguing that a GST would boost domestic consumption and help create the many millions of jobs that the country’s young and fast-growing workforce needs. It also would help trim the vast amounts of revenue that are lost to tax evasion and India’s “black economy.”

In a television interview just after the legislation was passed, Godrej said there was the potential in the long term for the government to reduce the GST rate “quite considerably.” He said there would be an immediate relief of about 5 percentage points on the taxation of fast-moving consumer goods. “It will be similar on almost all goods that go directly to consumers, so there will be a tremendous benefit,” he told CNBC television.

Back in 2015, Finance Minister Jaitley argued that India could become a seamless common market with a harmonised indirect tax structure that would cut production costs and reduce inflation. Like Godrej, he believes a GST can lift growth by as much as two percentage points.

Another big supporter of a GST is the national business association Assocham. While it also expects the tax to provide a 1.5 to 2% boost to gross domestic product (GDP), it is acutely conscious of the work ahead. Assocham says that the central government, with the backing of business and the states, needs to be on a “war footing” for the next seven months to get all the GST pieces in place for an April 2017 start.

Another national business association, the Confederation of Indian Industry, has hailed the GST as India’s “most significant tax reform in decades,” with the manufacturing sector in particular likely to be a big beneficiary. It envisages a much improved supply chain, and an information technology platform that will deliver a streamlined tax payment system, all leading to a 1.5 to 2% GDP boost.

The optimism in India associated with the GST is palpable. But India is always optimistic – it regularly tops global surveys which chart positive consumer sentiment. The real test will come in the months ahead, as politicians and bureaucrats at the national and state levels try to reach common ground, and then implement what amounts to the biggest financial change in India since 1991.

If Modi can overcome the vested interests who see no benefit from a GST, and if he can convince voters that even more jobs and infrastructure spending will flow from his proposed land and labour reform programs, his re-election chances in 2019 will improve.

Geoff Hiscock is the author of India’s Global Wealth Club, India’s Store Wars, and Earth Wars: The Battle for Global Resources, all published by Wiley


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