National Council of Applied Economic Research
No doubt the rolling of GST is a right move towards making India into a one-market with one tax and with interstate barriers to trade being removed. While GST is facing the teething problem with multiple rates a high cost of implementation it is expected that these problems would be sorted out paving a way for efficient movement of merchandise across the country in a span of one or two years. This would give a big boost to the manufacturing sector as the same is more dependent on raw materials and components for their production and they can source their inputs at lower costs from across the country. However there are some valid reasons why this utopia may not be realised soon.
Faulty connectivity puts brakes on GST benefits
Firstly because of the absence of seamless connectivity in India Indian manufacturing industries has put unduly emphasis on vertically integrated production process or have ensured their components accessories are located near the mother plant so that logistics barrier does not hamper production. No doubt the production cost would have come down if they have not adopted this production structure. However once this has already been set up it is unlikely that the entrepreneur would alter the status at an incremental cost in a short-time horizon. This transition may take place over a medium (four-five years) time horizon.
Secondly it is generally argued that interstate movement of merchandise would be simplified with the introduction of GST. While there is a merit in that argument it comes with a pinch of salt. GST does not encompass all merchandise. There is a long list of items which are not under the purview the GST. Thus GST would not automatically imply that the border check post would be abolished. Thus the red light would still be there.
Thirdly most of the interstate movement of merchandise on road operate through non-container mode. Container merchandise traffic is yet to catch up on the Indian scene. They are less likely to be struck in the inter-state border or elsewhere within a state as they generally follow ditto the rule of the road. The paper works for inter-state movement of goods are usually complete for them. Non-containerised merchandise traffic by trucks face the maximum hindrances in the inter-state movement of goods. GST or no-GST their status would not change significantly in foreseeable future.
Red-tapism: A bane for commercial vehicles
By and large highway trucks are overloaded in India. A sizable number of trucks does not possess pollution/goodness of fit certificate. As a result they are at the mercy of highway patrols. The police personnel patrolling the highways invariably put up barricades on the roads in the name of checking to secure bribes. These rent-checking activities will not cease in a day in spite of rollover of GST because these para-tariffs are not at all accounted in GST schemes. Incidentally rarely an overloaded truck or same without pollution/goodness of fit certificate is seized in spite of repeat violations. The practice is to let the truck move once the speed money is paid. The overloading of the truck is a serious menace in India. It not only reduces the lifespan of a truck it adds to pollution as an overloaded truck has to be driven at a lower gear for a longer distance. Given the current tax structure of a commercial vehicle in India it is not really possible for a transporter to replace the fleet unless a large incentive is given to this sector. Thus the improvement in on-road logistics in respect of non-containerised cargo seems to be a pipe dream.
Poor infrastructure: A detriment for benefits
The conditions of the India national highways have generally improved. However truck transportation within India is still subject to long sections of congested roads in poor condition. The state border crossing is typically congested due to increased urbanization. The scope of widening the road is limited due to encroachment by inhabitants on the public land.
Traditionally the cost of logistics in India as compared to the overall product cost is around 13-14% which is comparatively higher as compared to the global averages of around 10% (in the developed economies). We are walking on the right path. But we have miles to go before overland road-logistics are sorted out and the sector needs significant investment. Are the stakeholders including policy-makers are willing to bite the bullet?
By Sanjib Pohit
(The writer is Senior Fellow at the National Council of Applied Economic Research. Views expressed here are personal)