PIB February Week 1 – Internal economic integration of India

• The Survey suggest that on the question of creating one economic India, technology, economics and politics have been surging ahead.
• Perhaps, it is time for the laws to catch up to further facilitate this surging internal integration.
• It finds high levels of internal trade between states: India’s internal trade-GDP ratio at about 54 percent is comparable to that in other large countries.
• The extent to which the Constitutional provisions facilitate the creation of one economic India is discussed in a final section.
• The first-ever estimates for inter-state trade flows indicate that cross-border exchanges between firms amount to at least 54 per cent of GDP, implying that domestic trade is significant.
• Both figures compare favourably with other jurisdictions: de facto at least, India seems well integrated internally.
• A more technical analysis confirms this, finding that trade costs reduce trade by roughly the same extent in India as in other countries.

The Survey shows that:-

• Smaller states Uttarakhand, Himachal Pradesh and Goa trade more; the net exporters are the manufacturing powerhouses of Tamil Nadu, Gujarat, and Maharashtra
• Otherwise agricultural Haryana and Uttar Pradesh are also trading powerhouses because Gurugram and NOIDA, respectively, have become part of the great Delhi urban agglomeration.
• Intra-firm trade across States is surprisingly large (about 68 per cent of inter-firm inter-state trade), and is affected by trade costs to a greater extent than inter-firm trade.

However, there is a potential dampener on the finding that trade in goods is high within India.

• The high level may be a consequence of the current system of indirect taxes which in some important cases perversely favours inter-state trade over intra-state trade.
• If true, the GST by ironing out these oddities will normalise inter-state trade in the country.
• This may reduce trade in some cases, and yet have a positive impact on tax revenue because of improvements in compliance, competitive enhancements and other channels.
• It may be noted the Indian Constitution provides the Centre and States considerable freedom to restrict trade and commerce.
• The needs of creating one economic India were actually subordinated to the imperatives of preserving sovereignty for the states.
• In practice, courts’ interpretation of these constitutional provisions have also been in favour of protecting the sovereignty of states over economic integration.