India: United nation?

Twenty-five years after the passage of sweeping legislation that liberalized the country’s economy, India remains a notoriously difficult place to do business. Rated the most bureaucratic nation in Asia, it ranked a woeful 130th in the World Bank’s latest “Ease of Doing Business” report – just behind the West Bank and Gaza.

India nevertheless remains a global bright spot: the world’s fastest-growing major economy expanded 7.9% in the first quarter, following 7.5% full-year growth in 2015.

Now that the country’s upper house of Parliament has approved the introduction of a landmark Goods and Services Tax (GST), there is every reason to believe that doing business in India will become much easier – and that the long-term growth outlook is even brighter.

Although the GST still requires approval from the lower house and the support of at least 15 state legislatures, passage is widely expected, representing a huge victory for the government of Prime Minister Narendra Modi.

Indeed, the importance of the GST can hardly be overstated.

The bill will replace the current system of indirect taxation – a crazy quilt of levies imposed by each of the country’s 29 states – with a single, unified regime for the trade of goods and services. It will create, in essence, a common market of 1.3 billion consumers.

Passage of the bill will make internal trade far more seamless – putting an end to the common sight of endless queues of trucks idling at dusty state borders, where weary, paan-chewing lorry drivers fill out reams of paperwork.

While implementation may prove disruptive in the short term, and associated costs will be high, the GST should add between 0.5-1.5% to annual GDP over the longer term.

The introduction of a unified and simplified tax regime will also spur employment, especially in the manufacturing sector, and encourage greater foreign investment, helping to reduce the country’s already shrinking current account deficit.

Described by one executive as “India’s reverse Brexit moment,” the GST was a long time coming. First mooted by Modi’s own Bharatiya Janata Party 16 years ago, devolving power from the states – in any way – has always been a hard sell in this country with a much stronger sense of regional, rather than national, identity.

India has 22 officially recognized languages, written in 13 different scripts, with over 720 dialects. The truth is that, beyond cricket and Bollywood, not much unites this ethnically dissimilar and geographically fragmented nation.

Shashi Tharoor, the Indian statesman, has remarked that while the United States proudly proclaims its faith in the ideal of “E pluribus unum,” or “Out of many, one,” India’s motto could be “E pluribus pluribus,” or “Out of many, many.”

From that perspective, India much more closely resembles the European Union – the country’s second-largest trading bloc, after the Gulf Cooperation Council – than it does the United States. That’s also why the comparison between the GST and the Brexit vote is so apt.

At a time when the forces of protectionism are ascending, with nativists like Donald Trump threatening to introduce 45% tariffs on Chinese imports and build a wall at the Mexican border, India has taken a significant step in the opposite direction.

It remains to be seen if the Modi government can meet its April 2017 deadline for enactment of the GST. There’s also the possibility, however remote, that the required constitutional amendment will fail.

For now, though, the outlook for this endlessly fractious and extraordinarily bureaucratic country looks brighter than ever.

Frank Vranken, chief strategist at Puilaetco Dewaay Private Bankers, a member of KBL European Private Bankers

 

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