India's parliament has just passed "the most significant tax reform since independence", says Una Galani on BreakingViews.com. The bill paving the way for a single, national rate of GST (the equivalent of VAT) on goods and services to replace a bewildering patchwork of different levies in the country's 29 states had been stuck in the legislature for years. The news shows that Prime Minister Narendra Modi can "compromise to get things done".
India is less of a single market than the EU, as Mihir Sharma points out on BloombergView.com. The states' tax systems aren't interconnected, while licensing scheme and regulations also vary. This incoherence is a key reason why India's companies tend to be smaller than their global rivals. "The moment you grow out of your home state, even if just to open a warehouse elsewhere, your paperwork increases exponentially."
Now businesses will be able to benefit from economies of scale; rather than replicate supply chains on a state-by-state basis, they can distribute products from a single warehouse, notes The Economist. Fiddly tax codes and exemptions car sales are subject to six different levies at various rates will be swept away. The efficiency gains could boost the growth rate by 1%-2% a year, economists have estimated.
Start your trial of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
It could be some time before the benefits materialise, however. At least 15 state legislatures will need to back the measure, as it is an amendment to the constitution. It is not expected to be derailed, but important issues such as setting the actual rate, and which goods and services could be exempt, have yet to be settled by the new GST Council. In other words, it may be watered down to some extent.
Latest Videos FromMoneyWeek
There is still plenty to do on the reform front, however, says a BloombergView.com editorial. A single market for tax should be accompanied by a single market in land and labour, for instance. Parliament should also tackle the pointlessly complicated licensing system. Still, this new tax shores up Modi's reformist credentials, says Capital Economics.
Since 2014 India has adopted an inflation target, cut fuel subsidies, and lifted limits on foreign investment in the railways, aviation and defence industries. It has hitherto been reluctant to prise open the retail and banking sectors, "the two areas of the economy in greatest need of increased competition".
For now, the reform may make the central bank more inclined to cut interest rates, reckons Bloomberg.com. It will reduce supply chain inefficiencies and cut costs, thus bearing down on structural inflation. Core inflation is dropping too. The economy is already growing at a healthy clip. The longer-term outlook, meanwhile, remains compelling.
As asset managers Manning & Napier note on SeekingAlpha.com, it has become a "world-class hub" for IT services, consulting and business process outsourcing. Demographics also bode well, with the working-age population set to expand faster than in any other big economy. One way to gain exposure is through the Aberdeen New India investment trust (LSE: NII), which is on a discount to net asset value of 13%.
