Sin­gle and Suc­cess­ful

A flour­ish­ing uni­fied do­mes­tic mar­ket calls for amend­ing re­stric­tive laws

The Economic Times - - The Edit Page - Swami­nathan S An­kle­saria Ai­yar

In1947, many for­eign­ers ex­pected In­dia to break up into frag­ments. Cleav­ages of lan­guage, re­gion and re­li­gion seemed enough to doom unity. In­dia’s great­est achieve­ment — ow­ing a great debt to Nehru — has been to sur­vive and thrive as a uni­fied coun­try (not­with­stand­ing break­away move­ments in Kash­mir and Na­ga­land).

Bol­ly­wood was an­other great unifier. Hindi films and song­sters like Lata Mangeshkar found ready au­di­ences in non-Hindi states. Tamil Nadu had a vi­o­lent anti-Hindi ag­i­ta­tion in 1965, but later Tamil stars like Ra­jinikanth and Ka­mal Haasan be­came big Hindi film names. Western (Nana Patekar) and Ben­gali stars (Ut­tam Ku­mar, Sharmila Tagore) rose high in Bol­ly­wood, cre­at­ing a uni­fy­ing pan-In­dian cul­ture.

A Trade Called Unity

Dis­courses on In­dian unity gen­er­ally leave out trans­port and trade. But this year’s Eco­nomic Sur­vey re­veals that both in­ter­nal travel and in­ter­nal trade are much higher than be­lieved ear­lier, high by global stan­dards, and will rise fur­ther af­ter the im­ple­men­ta­tion of goods and ser­vices tax (GST). Thus, mi­grants, man­u­fac­tur­ers and traders have bound the coun­try to­gether too.

Adecade ago, Ejaz Haider, a top Pak­istani edi­tor, as­serted while con­vers­ing with me that In­dia’s unity was not a po­lit­i­cal but eco­nomic suc­cess, thanks to its huge sin­gle mar­ket. Wrong, I replied, In­dia had a thou­sand in­ter­state and in­ter­city bar­ri­ers, and was not a sin­gle mar­ket at all.

Goods from Delhi paid en­try tax to en­ter Ma­ha­rash­tra and oc­troi to en­ter Mum­bai, and the com­bined tax in­ci­dence could be 15%, as high as cus­toms duty on some im­ported goods. In­dia was a griev­ously splin­tered mar­ket, not a uni­fied one.

With the in­tro­duc­tion of GST, politi­cians claim we will at last have “one In­dia, one mar­ket, one tax rate”.

That’s not quite right: GST ex­cludes real es­tate, al­co­hol, to­bacco and petroleum prod­ucts. So, a big chunk of the econ­omy will face state tax bar­ri­ers. More im­por­tant, states of­ten in­voke the Es­sen­tial Com­modi­ties Act to ban the move­ment of po­lit­i­cally sen­si­tive goods. Still, GST will be a game changer.

The Eco­nomic Sur­vey re­veals that In­dia en­joyed high in­ter­state move­ment of goods and peo­ple even be­fore GST. New es­ti­mates us­ing rail­way data show that an­nual work-re­lated mi­gra­tion is nine mil­lion, al­most dou­ble the ear­lier es­ti­mate.

Farm­ers in the north­west and south com­plain that mi­grant agri­cul­tural labour has plum­meted. De­spite this, over­all mi­gra­tion (es­pe­cially to ur­ban ar­eas) is vi­brant. Ru­ral-ur­ban mi­gra­tion within states has ac­cel­er­ated. North­east­ern­ers, once mis­taken for Chi­nese, are now a vis­i­ble part of the work­force in big ci­ties. A pan-In­dian work­force has emerged.

New data from the GST Net­work sug­gest that in­ter­state ex­changes of man­u­fac­tured goods amount to at least 54% of GDP. Al­most half of this is the ex­change within branches of the same firms, an as­ton­ish­ingly high fig­ure. It shows that cor­po­ra­tions have help bind the coun­try to­gether through man­u­fac­tur­ing and trad­ing link­ages that were min­i­mal at In­de­pen­dence. This has boosted both econo- mic growth and po­lit­i­cal unity.

In­dia’s in­ter­nal trade/GDP ra­tio of 54% leaves out agri­cul­tural goods, which are also mas­sively trans­ported across In­dia. So, 54% is a gross un­der­es­ti­mate. Even this un­der­es­ti­mate im­plies that In­dia’s in­ter­nal trade is 1.7 times its for­eign trade. That com­pares well with other coun­tries at the same eco­nomic stage.

A Fuel Called Trimurti

Large­coun­tries­nat­u­ral­ly­haveahigher ra­tio of in­ter­nal trade to GDP than small ones. In­dia’s 54% ra­tio (re­mem­ber, this es­ti­mate ex­cludes farm prod­ucts) is much less than the US’ 78% or China’s 74%. But it is far more than the 20% of the EU, which was formed specif­i­cally to cre­ate sin­gle mar­ket. In­done­sia, an­other large de­vel­op­ing coun­try, has in­ter­nal trade of only12% of GDP. Canada, big­ger in area than the US, has a 20% ra­tio.

How­ever, a caveat is in or­der. In­dia has a crazy patch­work of area-based tax breaks that in­duce cor­po­rates to move to Sikkim or Hi­machal Pradesh, not for com­mer­cial rea­sons but tax ar­bi­trage. This ar­ti­fi­cially in­creases in­ter­state trade. Fi­nance min­is­ter Arun Jait­ley has promised to phase out area-based tax breaks, elim­i­nat­ing this dis­tor­tion.

Economists sing praises of gains from in­ter­na­tional trade. Sim­i­lar gains flow from in­ter­nal trade in a large coun­try like In­dia, such as spe­cial­i­sa­tion, scale economies, de­risk­ing and ex­per­i­men­ta­tion in dif­fer­ent states to cre­ate in­no­va­tive so­lu­tions. Im­proved con­nec­tiv­ity is an im­por­tant rea­son for In­dia’s faster growth since 2000.

Ru­ral roads have ex­panded enor­mously, as have the ar­te­rial na­tional high­ways. Tele­com has pen­e­trated most ru­ral ar­eas (though broad­band still lags be­hind). Fi­nally, ru­ral elec­tri­fi­ca­tion has reached all but a few parts of the coun­try, even though its qual­ity is spotty. Roads, tele­com and elec­tric­ity con­sti­tute a Trimurti of con­nec­tiv­ity that has ac­cel­er­ated In­dia’s GDP growth since 2000. The Trimurti has fa­cil­i­tated the cre­ation of new pro­duc­tion cen­tres, and the trans­port of that out­put across In­dia.

Yet, much more needs to be done. The Es­sen­tial Com­modi­ties Act is a se­ri­ous bar­rier to in­ter­nal trade, es­pe­cially of agri­cul­tural com­modi­ties. So is the Agri­cul­tural Pro­duce Mar­ket­ing Com­mit­tee Act that obliges farm­ers to sell only through lo­cal man­dis. These laws must be amended if In­dia is truly to be­come one mar­ket, and reap the full eco­nomic and po­lit­i­cal gains of a sin­gle mar­ket.

Dar­jeel­ing tea or mango juice?

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