Implementation of the goods and services tax, accompanied by dismantling of inter-state check posts, is the most crucial reform needed to improve the competitiveness of India’s manufacturing sector, according to the World Bank’s latest India Development Update, which forecast the country’s economic growth in FY15 at 5.6%.
The World Bank’s suggestion comes in the backdrop of the government getting ready to table the Constitution (115th Amendment) Bill in the winter session of Parliament, seeking to redefine the taxation powers of the federal and state governments prior to introducing a new indirect tax system.
GST roll-out is expected to add about 1.4 percentage points to India’s economic growth rate as it creates a single market across the country and removes tax cascading. Once the Constitution is amended, it might still take one to two years to have the new indirect tax regime in place. The Update — a biannual analysis of the Indian economy — said currently, truckers in India lose 60% of transit time at road blocks, tolls and other stoppages, leading to logistics costs that are 2-3 times higher than international benchmarks.
If this time is cut by half, logistics costs could fall by some 30-40%, making Indian manufacturing more competitive internationally, and leading to higher job creation, it added. Roads currently carry over 60% of the country’s freight.
Elaborating on the high logistics costs faced by Indian manufacturing firms, the Update pointed out that in the auto-components sector while compensation of employees as percent of net sales was 7.1%, logistics cost was 10.4%. In the textiles sector, the same employees compensation was 6.2%, while logistics was as high as 13.3%, and in the heavy engineering sector, the employees compensation was 8.6% and the logistics costs was 12.2%.