Robust growth in external trade to drive GST success

A US Federal Reserve report forecasts that the Goods and Services Tax (GST) has the potential to hike India's GDP by nearly $100 billion.

The US Federal Reserve has confirmed what many people, including Prime Minister Narendra Modi and Finance Minister Arun Jaitley, have been saying for a long time. Countering nay-sayers, they have maintained that the Goods & Services Tax (GST), which will come into force from July 1 this year, will push India into a higher growth trajectory and improve India's GDP growth rate to 8 per cent and beyond.

Now, an International Financial Discussion Paper (IFDP) at the US Federal Reserve (FED) has calculated that the rollout of GST could increase India's GDP by Rs 6.5 lakh crore ($100 billion) or 4.2 per cent. It did not mention the time frame by which this will be achieved. The additional output is almost double the government's borrowing programme of Rs 3.48 lakh crore ($54 billion) for the current financial year.

The growth will be led by a surge in manufacturing and is expected to lead to a 32 per cent improvement in external trade and 29 per cent rise in internal trade. This is significant as the growth in external trade is bound to lead to greater flows of outbound investments from India.

This will not only increase India's share of global trade, which is currently pegged at a little more than 2 per cent, but also facilitate further integration of the country into the global supply chain - a key prerequisite for shared regional and global prosperity. And ironically, at a time when some countries are pulling up the drawbridges on foreign investments etching national boundaries in cast iron, this expansion in India's global trade and investments will come on the back of stitching together India's 29 states and seven Union Territories, which currently operate as discrete trading zones, into one common market.

The FED estimate of GST's growth potential is higher than any other study. The National Council for Applied Economic Research had earlier calculated a 1-2 per cent improvement in GDP growth rates over three to five years as a result of GST. “We find that the GST is expected to raise overall Indian welfare, and is projected to be an inclusive policy in that it would be welfare improving for all Indian states,” the IFDP said.

As we have pointed out several times in the past, the falling barriers to internal trade, the resultant lowering of corruption and increase in efficiency and logistics will drive this uptick in economic performance. This improvement in manufacturing and external as well as internal trade can lead to a spurt in jobs - the missing part of the otherwise buoyant Indian economic equation so far.

This will provide a tremendous boost to the economy and take it past the 8 per cent threshold - subject, of course, to the Monsoon god obliging the country with another bountiful year. If these ceteris paribus conditions are fulfilled - and there are reasons for optimism on this count - Modi will have delivered on his promise of ushering in achcche din (good times).

A caveat will be in order here: Modi's party, BJP, and the coalition he heads, NDA, still don't have a majority in the Rajya Sabha, the Upper House of Indian Parliament. As a result, he still needs to carry the Opposition with him to get Bills passed. It has been calculated that the BJP-lead NDA will get close to a majority in the Rajya Sabha only in 2019, when the next general elections will be due. So, big ticket but politically contentious legislative reforms such as an easier land acquisition law to replace the one brought in by the previous Congress-led UPA government in 2013 will have to wait for the new government that will take office in May 2019.