Jubilation over passing GST Bill justified?

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(Brig (retd) GB Reddi)

Political jubilation over unanimous passing of GST Bill after decade long delay is most quixotic and ironic. Political gridlock has been temporarily resolved.

However, all political parties and leaders are responsible for the most absurd prevarication and procrastination in passing the Bill knowing its benefits said to be numerous. By unifying the country’s multiple overlapping tax regimes, it could lower manufacturing costs, promote interstate trade, boost consumption and tax collection, and expand India’s economy by up to two percent.

If so, people of India lost nearly 10 years of double digit GDP growth due to political squabbling among parties and leaders to deny credit.

Can some economic expert compute the loss in real terms and present the data to the people of India? At even one percent increase of GDP at PPP rate today (around US $8,000 billion), it simply implies annual setback of US $ 80 billion annually.

The ruling BJP has modified the GST Bill by adding provisions to remove the country’s 1 percent interstate tax and to guarantee state reimbursements for up to five years of lost tax revenue.

Surely, raucous political posturing has resulted in the loss of a golden opportunity to steer the course of the nation and its people to prosperity.

None can deny that the passing of the Bill, although delayed by 10 years, is a significant achievement. But, it is only the first step.  There are many more obstacles to cross. At least now the political leadership must rise to the occasion and ensure its smooth final passage followed by effective implementation.

Otherwise, the GST Bill too would be like any other legislation fit to be dumped into a waste paper basket.

Next, majority of state governments must ratify the Bill within 30 days. Two, there are other associated bills that need to be passed during the winter session. Likewise, implementing the bill at the local level, which is rife with corruption, will be an undertaking of its own.

Modi has set the target to achieve its goal of expanding manufacturing’s share of gross domestic product to 25 percent by 2022, which is contingent also on passing land and labor reforms.

As usual, the Congress party will selectively thwart land and labor legislation, capitalizing on anti-government sentiment among farmers. Similarly, labor reforms are also a Himalayan challenge.

Nehru tried to implement Soviet-style industrialization to reduce the country’s dependence on foreign manufactured goods. But, he failed to implement much needed agricultural, land and education reform. The legacy of Nehru’s policies — overbearing state regulation and a byzantine regulatory system known as the “License Raj” — endured.

Thus, Nehru undermined his industrialization projects. Quite a few factors impeded the country’s progress toward industrialization. Today, agriculture remains the biggest source of jobs in India, employing nearly 50 percent of the labor force, though it contributes just 16 percent of GDP.

After a balance of payments crisis forced India to seek an emergency loan from the International Monetary Fund in 1991, things began to change. As a condition for the loan, the IMF demanded austerity measures, and then-Finance Minister Manmohan Singh began to dismantle the License Raj, the first step toward freeing the economy from overregulation. In the wake of those reforms, the country’s economic growth rate effectively doubled to 6 percent. From 1980 to 2012, manufacturing — which forms three-quarters of India’s industrial sector — saw its share of the economy hover around 16 percent. During the same period, the services sector’s portion grew from 40 percent to 57 percent, turning the classic economic development model on its head. Now the shortcomings of that approach are catching up with India’s economy.

According to one classical arc of economic development, as agrarian societies meet the basic needs of their people, economies transition to manufacturing before developing services sectors. The development of India’s economy, however, followed a different trajectory.

Even though India’s economy, which grew at a 7.6 percent rate in 2015, is the fastest-growing in the world, job creation in the country has fallen to its lowest point since 2009. In launching “Make in India” campaign in 2014, Modi outlined a plan to increase the manufacturing sector’s share of India’s gross domestic product to 25 percent by 2022 and to add 100 million more manufacturing jobs (currently, manufacturing constitutes 16 percent of GDP and employs some 50 million people).

Robust growth of manufacturing sector remains elusive despite “Make in India” sloganeering. Surely, there is no magic wand in the hands of Modi and the BJP to create such large number of jobs by 2019 that is next elections.

Good to set higher targets; but pessimism over economy persists, which remains fragile and unsteady due to its monsoon dependency, political instability and other factors. Even disruption like oil prices escalation can give a dramatic downturn or war.

Next, as per economic analysts, the GST Bill may boost inflation by 2 per cent points, which can be politically disastrous.

Furthermore, the 7th Pay Commission has provided for more disposable income in the hands of government employees.  In the past, inflation was the fallout of every single Pay Commission. So, its fallout on inflation is but natural.

Conjointly with the GST Bill inflation fallout, people should be prepared for higher rates of inflation.

In sum, political jubilation over the passage of the GST Bill may appear a stellar performance with leaders cutting across the entire political spectrum except Tamil Nadu leaders; but the real fruits of growth and equitable distribution of wealth needs to be experienced to be believed.

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