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India’s Modi and Jaitley Succeed With GST Reform – But There’s More And More Difficult Necessary

India’s Prime Minister, Narendra Modi, has succeeded in get the Goods and Services Tax through Parliament. This is perhaps the most ambitious economic reform since the 1990s and it’s a thoroughly welcome one as well. To explain the Indian situation in American terms, it’s as if each US state were a separate economy with its own customs barriers and duties. What the GST does is set up the Indian economy to be as the US one is – one national market. The outcome of this is expected to be both a bolus of growth and also a generally faster economic growth rate off into the future. However, welcome though this is there are other reforms which also need to be made. The reforms to the bankruptcy code already achieved were welcome – but it’s the labour and land markets which now need that refreshment of complete reform.

So, good news but more needs to be done:

…the man Friday of the Modi government Arun Jaitley resoundingly secured the approval for the Constitution (122nd amendment) Bill that is purported to put in place “a harmonised structure of goods and services tax (GST) and for the development of a harmonised national market for goods and services”.

The importance of this is not that it is one tax rate. It’s that it isn’t multiple tax rates – if that makes some sort of sense. For the multiple tax rates across states within India meant customs checks within India, at those state borders. This vastly increased the price of transport across states. There’s one estimate that this change will reduce the cost of trucking by some 50%. That is, we’re seeing India being turned into a single market, along the lines of the (very much smaller in terms of people) European Union or US. And markets are one of those things where bigger really is better. The more people you can trade with, with less interference, the richer youwill become.

But India remains loosely united politically and economically. While the country has two large national political parties, almost every state has one or more powerful parties of its own, and ruling coalitions in state capitals, as well as in New Delhi, are often cobbled together by unlikely coalitions. Each state also has its own tax laws, and interstate goods transport is highly regulated. Trucks line up at state borders as if entering another country. The tax chaos creates a huge headache for Indian businesses, scares off foreign investment and keeps prices for consumers high.

 So, that’s that problem at least partially dealt with. But more remains to be done:

Removing a jumble of taxes on interstate trade caps Modi’s push to make India more business-friendly since his landslide victory in 2014. The reform agenda now shifts to deregulating labor and land, tasks that can be tough to reconcile with political interests among India’s rural masses — especially given key state elections in the run-up to a 2019 national vote.

The truly stark number here is that, according to one estimate at least, 90% of Indians work in the informal economy. That might not be all that surprising when you think that there are still hundreds of millions in the abject poverty of rural peasantry. But even in urban areas some 70% of all employment is in the informal sector. The lesson from this is that the current system of regulation is simply not fit for purpose. Sure, we can righteously insist that workers must be protected at work, must get overtime, paid holidays, all sorts of things. But if the vast majority of the population are working in the unregistered economy then quite clearly our insistences aren’t working, are they?

My own opinion, and I emphasise this is opinion, is that the situation is so bad that India would do better to simply blow up the entire labour code. Come back to the subject in a decade or two when growth has had its effect, but for the moment accept the basics of the current reality. That vast majority of workers just aren’t covered by the current regulations. So, free everyone from them, reduce the costs of compliance with the bureaucracy. The growth that would come from that free market free for all would more than compensate for the loss of protections to that small minority that currently get them.


-source- http://www.forbes. com/sites/timworstall/2016/08/08/indias-modi-and-jaitley-succeed-with-gst-reform-but-theres-more-and-more-difficult-necessary/#593a5064ad23

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