GST implementation will create a remarkable development in manufacturing industry – World Bank

Dated 27th October, 2014

Modi’s make in India campaign will work only if goods and services tax, a game changing indirect tax reform, is rolled out rapidly to eliminate regulatory difficulties at 650 border check points. Apart from creation of a single market, GST will also help in making India’s manufacturing competitive by drastically cutting high logistics and warehousing costs, the World Bank said.

The bank’s prescription assumes significance as finance minister Arun Jaitley is widely expected to convene a meeting of state chief ministers soon to discuss the revised draft constitution amendment bill. The bill is expected to be taken up for passage in the winter session of parliament beginning in the third week of November. GST is considered to be the next reform agenda of the government.

As economic reforms gain momentum, India’s growth is likely to accelerate towards its high long-run potential of 7-9 per cent. GST combined with dismantling of inter-state check posts is the most crucial reform that can significantly improve domestic and international competitiveness of Indian manufacturing firms, said the latest India Development Update of the World Bank released on Monday.

The GST offers a unique opportunity to rationalise and reengineer logistics networks in India, given the inherent inefficiencies with taxes based on the crossing of administrative boundaries. According to World Bank estimates, simply halving the delays due to roadblocks, tolls and other stoppages could cut freight times by some 20-30 per cent and logistics costs by an even higher 30-40 per cent. This alone can go a long way in boosting the competitiveness of India’s key manufacturing sectors by 3 to 4 per cent of net sales, thereby helping the country to grow and enabling large-scale job creation.

The GST will free up decision on warehousing and distribution from tax considerations so that operational and logistics efficiency determines the location and movement of goods. The Update said GDP growth expected to rise to 5.6 per cent this financial year followed by further acceleration to 6.4 per cent and 7.0 per cent in 2015-16 and 2016-17.

GST rollout will transform India into a common market, eliminate inefficient tax cascading and go a long way in boosting the manufacturing sector. The transformational impact of reform, particularly if enhanced by a systematic dismantling of inter-state check posts, can dramatically boost competitiveness and help offset both domestic and external risks to the outlook, said Denis Medvedev, senior country economist, World Bank, India. With economic reforms gaining momentum, long-term prospects for growth remain bright for India, said Onno Ruhl, World Bank country director in India. GST will in particular help in low-income states like UP and Bihar to become a manufacturing hub. Measures like skill development, creation of 100 smart cities and ensuring round the clock power supply will help the country to grow rapidly. World Bank will continue to provide a matching figure in the coming years. It has also proposed to fund Ganga Action Plan, whose components include not just its cleaning up but also making it an inland waterway.

Manufacturing in India accounts for around 16 per cent of GDP, a level that has remained largely unchanged in the last two decades and is relatively low when compared to the 20-per cent plus share in countries like Brazil, China, Indonesia, Korea and Malaysia, even after controlling for differences in per capita incomes.

State border checkpoints, combined with other delays, keep trucks from moving during 60 per cent of the entire transit time. High variability and unpredictability in shipments add to total logistics costs in the form of higher-than-optimal buffer stocks and lost sales, pushing logistics costs in India to 2-3 times international benchmarks, update said.