Thursday, August 4, 2016

Making India flat (reducing economic unevenness): GST will help a lot

In a big country, there will be unevenness in the resources spread. So will be availability of skill sets and wages too. But people migrating helps it reduce the gaps in wages and skill availability. When it comes to materials, good infrastructure and efficient transportation can help reduce the pricing inefficiencies across markets within India. But the earlier tax system, dominated by different outlooks by respective State Govt.’s had made the playing ground unequal especially for manufactured goods. Take the example of manufacturing of a two-wheeler, its assembly plant is in one state but the raw materials, spare parts come from different states. Tyre's, batteries, spark-plug, speedometer, steel to make chassis do come from different states and attract different tax rates. So producing the same two-wheeler may cost different in different states for the same manufacturer. And the final product too will attract different tax rates when it is being sold. These variations would reduce or cease to exist as GST comes into play. States Govt.’s will lose their power to levy more taxes or to promote any segment with less taxes at their will as there will be one tax collected by the central Govt. and states will to have to collect their share from it. But they have not lost their entire power as few major businesses like liquor are kept out of GST. Yet, this is a welcome move in integrating manufacturing and trade in India and making it one platform and one market.

At the surface level, GST is a great tax reform. It reduces pricing variations and thus promotes trade. That is economics. But it will affect social structure over the long term as it will reduce variations in wages too. Now average incomes of those working in West Bengal and Goa vary a lot. Similarly employment levels are not the same in Kashmir and Kerala. That was because trade was unequal in those states and some of it was due to different tax policies adopted by their state Govt’s. As those taxes get scrapped and the benefits of GST begin to spread, those states who lacked advantage would find themselves at the same level playing field with those states who dominated trade before. So both trade gaps and income gaps will begin to reduce across states making India a homogeneous country economically. India needs to remain diverse in cultures but not in incomes. And GST will help promote it.