GST and the remapping of India:

GST and the remapping of India:

Context:

The Goods and Services Tax (GST) will unify the nation into a common economic market, obviating the need for goods to be taxed each time they cross a state border.

New regime:

•  New tax regime could bring a shift in production and storage centres
• New tax regime could bring a shift in production and storage centres. It will require a nimble reading of where markets will grow, their logistical requirements

Pre GST regime:

Prior to GST, the internal movement of goods was subject to a number of barriers.

•  There were taxes on the inter-state movement of goods and cross-state differences in VAT structures.
•   There were cumbersome inspections, especially at state borders.
•  A recent World Bank-funded study, undertaken by the Ministry of Road Transport and Highways, used GPS-time-stamped data of freight trucks to suggest that roughly 20 per cent of the transit time is spent at the border on verification of documents.

GST regime:

• GST will eliminate taxes on inter-state movement and harmonise the VAT structure across states (except for exempted goods).
• GST is expected to result in a significant increase in internal trade — by as much as 30 to 40 per cent, according to some estimates

Other factors:

Beyond the increase in internal trade, other economic factors are at play that can significantly alter the economic map of the country.

• Large transport costs, production benefits by locating itself near the largest market to minimise transportation costs.
• A reduction in transport barriers, as is the case with GST, can change the location of production within a country quite dramatically — away from the largest market to low production-cost locations, thus diluting the home-market effect.
•  The relocation of production away from the United States to China in the last couple of decades was driven in significant part by the lowering of transport costs.
• With the removal of barriers within India, another related outcome is the geographic centralisation of production and warehousing.
•  Another possibility is the agglomeration of economic activity in the more productive states.

Key points:

•   As economic corridors change, the demand for new investment in transport and logistics infrastructure will increase.
• Supplying this demand will require a nimble reading of where markets will grow and where new investments will be necessary
•    Logistical inefficiency in India amounts to around 4 per cent of the GDP — this could well increase as the GST intensifies logistical needs Infrastructure is often identified as a “binding constraint” to growth.

Solutions:

•   Much economic and political effort will be required to arrive at optimal investment choices — on the modal mix, the balance between road and rail, air and water, on the location of the vaunted multi-modal logistics “parks”, on technology adoption and on the setting of standards to support inter modal transport inter alia — and to achieve efficient funding.
• India’s economic destiny will crucially rely on its ability to anticipate, support and leverage its evolving economic geography.
• China’s economic trajectory could teach us, productivity and growth require intention and provisioning.