"Implementing the GST will transform India into a common market, eliminate inefficient tax cascading, and go a long way in boosting the manufacturing sector. The transformational impact of reform, particularly if enhanced by a systematic dismantling of inter-state check posts, can dramatically boost competitiveness and help offset both domestic and external risks to the outlook. ," said Denis Medvedev, Senior Country Economist, World Bank, India.
According to the Update, India's longer term growth potential remains high due to favorable demographics, relatively high savings, recent policies and efforts to improve skills and education, and domestic market integration. Improved growth prospects in the US will support India's merchandise and services exports, while stronger remittance inflows and declining oil prices are expected to support domestic demand, the Update added.
The projections could, however, face risks from external shocks, including financial market disruptions arising out of changes in monetary policy in high income countries, slower global growth, higher oil prices, and adverse investor sentiment arising out of geo-political tensions in the Middle East and Eastern Europe.
Domestically, the risks include challenges to energy supply and fiscal pressures from weak revenue collection in the short term, the Update said. However, risks could be mitigated to a large extent by focusing on reforms that help the manufacturing sector.
Manufacturing in India accounts for around 16 percent of GDP, a level that has remained largely unchanged in the last two decades and is relatively low when compared to the 20-percent plus share in countries like Brazil, China, Indonesia, Korea and Malaysia, even after controlling for differences in per capita incomes. .
The Update said supply chain delays and uncertainty are a major, yet underappreciated, constraint to manufacturing growth and competitiveness. Regulatory impediments to the movement of goods across state borders raise truck transit times by as much as one 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 percent of the entire transit time. High variability and 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 2-3 times international benchmarks, the Update said.
The GST offers a unique opportunity to rationalize and re-engineer logistics networks in India, given the inherent inefficiencies with taxes based on the crossing of administrative boundaries. It will free up decisions on warehousing and distribution from tax considerations so that operational and logistics efficiency determines the location and movement of goods, it added.
Link to the Update: http://documents.worldbank.org/curated/en/2014/10/20320065/india-development-update-india-development-update
[1] The financial year refers to fiscal year ending March 31, 2015.
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