World Bank presses for reforms

Dated 7th October, 2014

The World Bank on Monday marginally scaled up its estimate of India’s economic growth to 5.6 per cent for 2014-15 from its earlier one of 5.5 per cent, made in June.

However, the multilateral institution advised the government to go for structural reforms, including implementation of a national goods and services tax (GST) and prudent macro economic management, to reach its potential growth. Even reducing time to carry goods from one place to another would boost competitiveness in India, it said.

"While India experienced a 'Modi dividend' based on expectations for reform, the true medium-term benefits will have to be earned through structural reforms and prudent macroeconomic management," the World Bank said in its report on South Asia.

The report said economic growth was expected to accelerate from 4.7 per cent in 2013-14 to 5.6 per cent in the current financial year and then to 6.4 per cent the next year. The year 2013-14 was the second in a row to witness below-five per cent growth. India's economy rose to a two-year high of 5.7 per cent in the first quarter of 2014-15.

In June, the Bank had pegged India's gross domestic product growth at 5.5 per cent for 2014-15 and 6.3 per cent for 2015-16.

The report said continued dynamism in the US should support India's merchandise and service exports, remittance inflows are expected to continuously strengthen domestic demand and declining oil prices should boost private sector competitiveness in the short run.

External shocks

The projections could face risks from external shocks, including financial market disruptions arising out of changes in monetary policy in high income countries (particularly in the US), slower global growth, higher oil prices, and adverse investor sentiment arising out of geopolitical tensions in west Asia and eastern Europe.

Domestically, the risks include challenges to energy supply and fiscal pressures from weak revenue collection in the short term and the impact of the 7th Pay Commission’s recommendations on public sector remuneration.

Risks could be mitigated, to a large extent, by continued progress on the reform agenda.

Anyway, India will have to further pursue a dynamic structural reform agenda and improve the investment climate, paired with prudent macro economic policy and a solid external payments position, to reap its demographic dividend and match its growth performance in the previous decade, the Bank said. It says India's economy was still below potential and reforms were on a gradualist path.

The Bank laid special focus on implementation of GST, which it said could transform India into a common market and dramatically boost competitiveness. The Centre is expected to soon come out with a cabinet note on a Constitution amendment Bill to roll out GST, after evolving a consensus with states. GST has missed a number of deadlines and is not expected to come up before April 2016, even if the Bill is tabled in this winter session of Parliament.

The Bank said supply chain delays and uncertainty were a major, yet under-appreciated constraint to manufacturing growth and competitiveness in India. Regulatory impediments to the movement of goods across state borders raise truck transit times by as much as a quarter, and put Indian manufacturing firms at a significant disadvantage with international competitors.

"State border check-points, tasked primarily with carrying out compliance procedures for the diverse sales and entry tax requirements of different states, combined with other delays, keep trucks from moving during 60 per cent of the entire transit time," the Bank said.

Long transit times and high variability or 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 two-three times international benchmarks, the Bank said.

As such, implementation of the GST is a crucial reform for improving competitiveness of India’s manufacturing sector.

"The new tax system will replace all indirect taxes levied on goods and services by the central and state governments. Its transformational impact could be enhanced by a systematic dismantling of inter-state check-posts," it said.

The reform offers a unique opportunity to rationalise and re-engineer logistics networks in India, it said, given the inherent inefficiencies with taxes based on the crossing of administrative boundaries.

GST will free up decisions on warehousing and distribution from tax considerations, so that operational and logistics efficiency determines the location and movement of goods.

Freight and logistics

Freight and logistics networks will realign according to the location of production and consumption activities, creating the hub-and-spoke models that are needed to improve freight and logistics performance, the Bank said.

Simply halving the delays due to road blocks, tolls and other stoppages could cut freight times by some 20-30 percent and logistics costs by an even higher 30-40 percent.

“This would be tantamount to a gain in competitiveness of some three-four per cent of net sales for key manufacturing sectors, helping India return to a path of high growth and enabling large-scale job creation,” it said.