Over the last few months, a slew of reforms have swept the Indian economy. Deregulation of diesel prices, rise in gas prices, and development on the black money front are some of these that deserve a mention. With the tailwind of lower commodity prices, especially crude prices, the Indian economy seems set on the path of recovery. The story has further taken an interesting turn with Mr. Modi's recently launched 'Make in India' campaign. A country that so far has been notorious for ranking low on the parameter of ease of doing business is planning an image makeover, with manufacturing sector as its major tool. However, before that happens, India needs to implement a critical and much awaited - Goods and service tax (GST) reform. The World Bank believes that new taxation system can be a game changer for India. We could not agree more on that.
Simply put, implementation of GST means that tax will be collected on value-added goods and services at each stage of sale or purchase in the supply chain. It will replace all indirect taxes on goods and services by the Indian Central and State governments. It will create a single, unified Indian market. In contrast to current system where multiple state border checkpoints along with other delays lead to longer transit times and higher logistics and warehousing costs, the new system will cut freight time and reduce warehousing costs. Further, it will leave less scope for corruption and leakages. Doing away with all these inefficiencies will lead to higher contribution to GDP from manufacturing sector. Not to mention more job creation.
However, implementing GST will be challenging. One of the biggest roadblocks in its roll out is state governments' reluctance. A lot of states are apprehensive that GST will be adverse for their financial autonomy. Hence, convincing them will mean coming up with the fair revenue sharing model that does justice to all. And arriving at such a formula could take long. To give you an idea, GST has been in the works since 2000. But despite its potential benefits, it is yet to see the light of the day. We hope the new Government will wake up to the need of this reform and do the needful. Only then will India be able to realize its dream of becoming a global manufacturing hub and a reformed economy.