Analysis | India Unshackled

Analysis | India Unshackled

Analysis | India Unshackled

By Peter Nicholls from Perth USAsia Centre | 11 Jul 2017

Analysis | India Unshackled teaser If I were to ask you what the biggest economic reform in Europe since World War Two has been, you would probably say the creation of the common market, which significantly improved productivity and wealth creation within Europe, and eventually led to the creation of the Eurozone.
 
In the late 1970s Deng Xiaoping launched a series of reforms that opened up China’s economy, enabling their entry into the WTO in 2001 and creating the world’s second largest economy. In 1991 the Indian finance minister (who would later become prime minister) Manmohan Singh embarked on a similar set of market-based reforms, designed to move the Indian economy away from its quasi-socialist settings and the License Raj economy. However India’s economic growth remained shackled by its federalist governmental structure.
 
This week, the government in Delhi implemented its goods and services tax (GST), an event that – as one would expect – excited tax accountants and gave rise to a groan of annoyance from the populace.  To look beyond the obvious headlines, however, is to understand that this tax marks the first time since civilisation began in the Indus Valley that the world’s most populous landmass has a free trade agreement with itself – a ‘common market’.
 
India gained independence from Britain in 1947 with the creation of the Union of India which would later become the Republic of India. Its central government, known as Union Government’, has always been very much a federation of states. Many of us do not appreciate that the concept of India as a nation, is not dissimilar to the concept of the European Union, and in terms of political integration, India is at least five decades ahead of the EU, if not a century.  Since independence, the Indian state has successfully melded together dozens of previously autonomous nation states.  Indians in Amritsar speak Punjabi, in Delhi they speak Hindi, in Kolkata they speak Bengali, in Mumbai they speak Marathi, and so on; the only official, unifying language is English. India’s leaders (unlike those in Europe) have done a remarkable job in keeping a vast multicultural country united, especially given its religious makeup; India is at once home to the world’s third largest Muslim population, the birthplace of Buddhism, and the country of origin  of Hinduism.
 
The GST, which came into effect on 1 July 2017, has removed 17 indirect taxes and replaced them with a single tax regime. Although the current Modi government will take credit (like all incumbent governments do), the reform has been decades in the making. Its implementation is sure to face some hurdles, (just as the GST did in Australia in 2000), especially given that the government is relying on a new system under the GST Network’s technology platform that conducts ‘invoice matching’ to administer the regime. Many question how this will ever work in rural areas where there is patchy internet access and an economy that is still largely cash-based.  At a recent business forum that I attended, the tax partners from large accounting firms were salivating at the thought of enormous fees they would earn from the inevitable teething issues.
 
It might take months, it may even take a year or two, but these implementation complications will be resolved. More importantly, over the medium term there will be an impressive increase in the tax base and a much greater capture of India’s renowned cash economy. The US Federal Reserve has suggested that real GDP will increase by 4.2 percent, and another study indicates that in eight to nine years this structural reform will enable industry to contribute a further $280 billion to the Indian economy.
 
Perhaps most significantly, the GST will remove the need for multiple tax registrations and a complex supply chain to do business at a national level. Anyone who has travelled through the Indian countryside will recall images of stationary trucks lined up for many kilometres at state border crossings awaiting tax clearance. Therefore, at a practical level, the Union Government hopes that trucks spending 30 to 50 percent of their travel time parked at the roadside will be a thing of the past. The establishment of a unified common market should enable the Indian economy to accelerate, making this an event with major regional and global repercussions.
 
More specifically, for Australia it means that the inflection point for commodities demand in India is now on the horizon. The economic strength of India is important for the United States as well, which needs a democratic, human rights-respecting potential partner for its pivot to Asia. For the rest of the continent, India’s increased growth represents an ever-larger market for its exports. Finally, as India marches towards its ambition of becoming a great power with global reach over the coming decades, a strong economy will be indispensable. So, while the GST sounds like a boring tax accounting matter, medium- and long-term implications of a common market on the subcontinent should not be underestimated.
 
Peter Nicholls is a Reserach Fellow at the Perth USAsia Centre.
 

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