One of the unfortunate legacies of British colonial rule in India is a permanent civil service that tends to subvert any change that it deems against its interests, even when such change is promoted by elected officials. This is one reason why change in India is often two steps forward, 1.9 steps back. A case in point is India’s newly passed Goods and Service Tax (GST).
The GST was supposed to solve a long-standing problem of Indian intra-national trade. Unlike say the US common market, Indian states erect tariff and non-tariff barriers against the products of other states. As a result, production is allocated inefficiently–Indian firms with high costs hide behind barriers and produce too much while Indian firms with low costs can’t expand sales to other states and so produce too little.
(Canada, by the way, also has this problem. It’s often cheaper for a Canadian firm to ship to the US than to another province in Canada. You can find similar problems in Southern Africa where it is cheaper for South Africa to import produce from South America than from Zambia, as this excellent video discusses.)
In addition to the inefficient allocation of production, barriers to internal trade have also raised India’s transportation and logistics costs.
At the Walayar checkpoint in southern India, lines of idle trucks stretch as far as the eye can see in both directions along the tree-lined interstate highway, waiting for clearance from tax inspectors that can take days to complete.
Delays are so bad that textile entrepreneur D. Bala Sundaram has stopped sending his trucks to the international container terminal at nearby Cochin, instead diverting them hundreds of kilometres to a smaller regional port and onwards via Sri Lanka…
Two-thirds of India’s freight travels by road. But only 40% of the travel time is consumed by driving, according to the World Bank. The rest is spent on waiting at state border checkpoints, paying state government levies and dealing with regulatory bureaucracies that vary from state to state.
The sad irony is that India spends billions improving its roads only to force its trucks to stop at state border checkpoints, sometimes for days, undermining the gains from the investment in roads.
The GST was going to simplify all this with a single umbrella tax creating one-tax, one-nation. Alas, the dream is being subverted. The law created a GST council of federal and state ministers and through this council the GST is rapidly becoming more complex and convoluted. First, one-tax was changed into four and with numerous exemptions the final number may end up being more like seven or eight.
Second, as I witnessed traveling between Uttar Pradesh and Rajasthan recently, the trucks are still lining up and may continue to do so:
The revolution the proposed goods and services tax (GST) promised might not be all that rosy because it would be hobbled by the need for an e-permit to be flashed at inter-state borders as the states insisted the old analogue practises continue.
The states seem to have gotten their way and will continue with the old ‘permit raj’ system, undermining one the biggest gains of GST.
The E-permit, by the way, sounds modern but don’t be fooled. Like India’s e-visa there is really nothing e about it–it’s just modern labeling for an old system.
Eventually the GST will be beneficial to India but it’s two steps forward, 1.9 steps back.