World Bank Advised for reforms including implementation of GST

The World Bank on Mon­day mar­gin­al­ly scaled  up its esti­mate of India’s eco­nom­ic growth to 5.6 per cent  for 2014–15 from its ear­li­er one of 5.5 per cent, made in June.

How­ev­er, the mul­ti­lat­er­al insti­tu­tion advised the gov­ern­ment to go for struc­tur­al reforms,  includ­ing imple­men­ta­tion of a nation­al goods and ser­vices tax (GST) and pru­dent macro eco­nom­ic man­age­ment, to reach its poten­tial growth. Even reduc­ing time to car­ry goods from one place to anoth­er would boost com­pet­i­tive­ness in India, it said.

“While India expe­ri­enced a ‘Modi div­i­dend’ based on expec­ta­tions for reform, the true medi­um-term ben­e­fits will have to be earned through struc­tur­al reforms and pru­dent macro­eco­nom­ic man­age­ment,” the World Bank said in its report on South Asia.

The report said eco­nom­ic growth was expect­ed to accel­er­ate from 4.7 per cent in 2013–14 to 5.6 per cent in the cur­rent finan­cial year and then to 6.4 per cent the next year. The  year 2013–14 was the sec­ond in a row  to wit­ness  below-five per cent growth.  Indi­a’s econ­o­my rose to a two-year high of 5.7 per cent in the  first quar­ter of 2014–15.

In  June, the Bank had pegged Indi­a’s gross  domes­tic prod­uct growth at 5.5 per cent  for 2014–15 and  6.3 per cent for 2015–16.

The report said con­tin­ued dynamism in the US should sup­port Indi­a’s mer­chan­dise and ser­vice exports, remit­tance inflows are expect­ed to con­tin­u­ous­ly strength­en domes­tic demand and declin­ing oil prices should boost pri­vate sec­tor com­pet­i­tive­ness  in the short run.

Exter­nal shocks
The pro­jec­tions could face risks from exter­nal shocks, includ­ing finan­cial mar­ket dis­rup­tions aris­ing out of changes in mon­e­tary pol­i­cy in high income coun­tries (par­tic­u­lar­ly in the US), slow­er glob­al growth, high­er oil prices, and adverse investor sen­ti­ment aris­ing out of geopo­lit­i­cal ten­sions in west Asia and east­ern Europe.

Domes­ti­cal­ly, the risks include chal­lenges to ener­gy sup­ply and fis­cal pres­sures from weak rev­enue col­lec­tion in the short term and the impact of the 7th Pay Commission’s rec­om­men­da­tions on pub­lic sec­tor remuneration.

Risks could be mit­i­gat­ed, to a large extent, by con­tin­ued progress on the reform agenda.

Any­way, India  will  have to fur­ther pur­sue a dynam­ic struc­tur­al reform agen­da and improve  the invest­ment cli­mate,  paired with pru­dent macro eco­nom­ic pol­i­cy and a sol­id exter­nal pay­ments posi­tion, to reap its demo­graph­ic div­i­dend  and match its growth per­for­mance in the pre­vi­ous decade, the Bank said. It says Indi­a’s econ­o­my was still below  poten­tial  and reforms were on a grad­u­al­ist path.

The Bank laid spe­cial focus on imple­men­ta­tion of GST, which it said could trans­form India into a com­mon mar­ket  and dra­mat­i­cal­ly boost com­pet­i­tive­ness. The Cen­tre is expect­ed to soon come out with a cab­i­net note on a Con­sti­tu­tion amend­ment Bill to  roll out GST, after evolv­ing a con­sen­sus with states. GST has missed a num­ber of dead­lines and is  not expect­ed to come  up before April 2016, even if the Bill  is tabled  in this win­ter  ses­sion of Parliament.

The Bank said sup­ply chain delays and uncer­tain­ty were a major, yet under-appre­ci­at­ed con­straint to man­u­fac­tur­ing growth and com­pet­i­tive­ness in India. Reg­u­la­to­ry imped­i­ments to the move­ment of goods across state bor­ders raise truck tran­sit times by as much as a quar­ter, and put Indi­an man­u­fac­tur­ing firms at a sig­nif­i­cant dis­ad­van­tage with inter­na­tion­al competitors.

“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, keep trucks from mov­ing dur­ing 60 per cent of the entire tran­sit time,” the Bank said.

Long tran­sit times and high vari­abil­i­ty or 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 two-three times inter­na­tion­al bench­marks, the Bank said.

As such, imple­men­ta­tion of the GST is a cru­cial reform for improv­ing com­pet­i­tive­ness of India’s man­u­fac­tur­ing sector.

“The new tax sys­tem will replace all indi­rect tax­es levied on goods and ser­vices by the cen­tral and state gov­ern­ments. Its trans­for­ma­tion­al impact could be enhanced by a sys­tem­at­ic dis­man­tling of inter-state check-posts,” it said.

The reform offers a unique oppor­tu­ni­ty to ratio­nalise and re-engi­neer logis­tics net­works in India, it said, giv­en the inher­ent inef­fi­cien­cies with tax­es based on the cross­ing of admin­is­tra­tive boundaries.

GST will free up deci­sions on ware­hous­ing and dis­tri­b­u­tion from tax con­sid­er­a­tions, so that oper­a­tional and logis­tics effi­cien­cy deter­mines the loca­tion and move­ment of goods.

Freight and logistics
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, the Bank said.

Sim­ply halv­ing the delays due to road blocks, tolls and oth­er stop­pages could cut freight times by some 20–30 per­cent and logis­tics costs by an even high­er 30–40 percent.

“This would be tan­ta­mount to a gain in com­pet­i­tive­ness of some three-four per cent of net sales for key man­u­fac­tur­ing sec­tors, help­ing India return to a path of high growth and enabling large-scale job cre­ation,” it said.