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Business News/ Politics / Policy/  World Bank pushes for GST in India
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World Bank pushes for GST in India

Implementing GST will improve competitiveness of India's manufacturing and help India grow faster, says World Bank

The World Bank said GST will free up decisions on warehousing and distribution from tax considerations. Photo: BloombergPremium
The World Bank said GST will free up decisions on warehousing and distribution from tax considerations. Photo: Bloomberg

New Delhi: Identifying the goods and services tax (GST) as the single most important economic reform that the new government should push for, the World Bank on Monday said that dismantling inter-state check posts by implementing the indirect tax reform will improve competitiveness of India’s manufacturing and help India grow faster.

In its bi-annual India Development Update, the multilateral institution said 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, hinder movement of trucks during 60% 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," the bank said.

The World Bank said GST will free up decisions on warehousing and distribution from tax considerations so that operational and logistics efficiency determine the location and movement of goods. “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," it added.

According to estimates by the World Bank, halving the delays due to road blocks, tolls and other stoppages could cut freight times by some 20-30% and logistics costs by an even higher 30-40%. “This alone can go a long way in boosting the competitiveness of India’s key manufacturing sectors by 3-4% of net sales, thereby helping India return to a high growth path and enabling large scale job creation," it added.

In several television interviews recently, finance minister Arun Jaitley has hinted at a compromise with state governments to implement GST as soon as possible. Jaitley has also assured states that the centre will compensate them for losses incurred because of the phasing out of central sales tax. States want petroleum and liquor to be kept out of GST in the constitution amendment Bill. They also do not want entry tax, levied and collected by a local body, to be subsumed under GST. They also want a formal mechanism for compensation of losses arising out of GST implementation to be part of the constitution amendment Bill which is expected to be introduced in Parliament during the winter session.

Implementing GST will transform India into a common market, eliminate inefficient tax cascading, and go a long way in boosting the manufacturing sector, said Denis Medvedev, senior country economist, World Bank, India. “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," he added.

Manufacturing in India accounts for around 16% of gross domestic product, a level that has remained largely unchanged in the last two decades and is relatively low when compared with the 20% plus share in Brazil, China, Indonesia, Korea and Malaysia, even after adjusting for differences in per capita incomes.

The World Bank has projected India’s economic growth to pick up to 5.6%, 6.4% and 7% in financial years 2014-15, 2015-16 and 2016-17 respectively. In 2013-14, India’s economy grew below 5% for the second consecutive year at 4.7%.

The projections could, however, face risks from external shocks, including financial market disruptions arising out of changes in monetary policy in high income countries, slower global growth, higher oil prices, and adverse investor sentiment arising out of geo-political tensions in the Middle East and Eastern Europe, the World Bank said.

With economic reforms gaining momentum, long-term prospects for growth remain bright for India, said Onno Ruhl, World Bank country director in India. “To realize its full potential, India needs to continue making progress on its domestic reforms agenda and encourage investments. The government’s efforts at improving the performance of the manufacturing sector will lead to more jobs for young Indian women and men," he added.

Highlighting some of the significant trends in the Indian economy, the bank said growth has rebounded significantly due to a strong industrial recovery. Capital flows are back, signalling growing investor confidence as inflation has moderated from double digits, exchange rate has stabilized, and financial sector stress has plateaued.

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Published: 27 Oct 2014, 06:31 PM IST
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