KHANAURI, India – On a recent foggy winter morning, the line of trucks stretched for miles at Khanauri, a northern Indian state border checkpoint. The drivers had been traveling for days carrying factory goods. But the arduous journey on bumpy, crowded Indian roads is not their biggest problem, they say. It is long waits and laborious paperwork at regulatory checkpoints such as this – where more than 1,500 trucks stop for hours every day – that add significantly to the cost of doing business in India.
“The factory managers keep calling us anxiously with the same questions: “Where have you reached, where are you stuck?” said Dinesh Kumar, 35, a truck driver carrying yarn from the western state of Gujarat to a blanket-making factory in Punjab.
Two-thirds of India’s freight travels by road. But only 40 per cent of the travel time is consumed by driving, according to the World Bank. The rest is spent on waiting at state border checkpoints, paying state government levies and dealing with regulatory bureaucracies that vary from state to state.
Aiming to break this crippling business barrier, India’s finance minister Arun Jaitley this month introduced legislation in Parliament for a single goods and services tax that would replace the complex system of nearly 20 different taxes and levies imposed on commodities by different states. The GST, as it is known, is one of the most ambitious economic reform measures of the past decade and a dramatic step toward making it easier to do business in India, a priority for the government, officials say.
India’s recent economic growth has largely come from the boom in services such as information technology, but they contribute only a tiny fraction to what is still a predominantly farm-dominated economy. Industrial manufacturing accounts for about 16 per cent of India’s economic output. The government wants to raise it to 25 per cent, and create 100 million new jobs by 2022, a tall order in the current regulatory environment.
Prime Minister Narendra Modi, who came to power in May promising to revive Asia’s third largest economy, recently launched an ambitious “Make in India” campaign, aimed at boosting manufacturing and exports as China has in the past few decades.
Yet challenges remain. Despite the arrival of a new, business-friendly government, India slipped to 142 among 189 countries on this year’s index listing nations by ease of doing business, according to the World Bank. Last year, India was ranked 134.
And the logistical cost of manufacturing in India is seven times higher than international benchmarks, says the World Bank.
Dennis Medvedev, senior country economist for India at the World Bank, called the unified goods and services tax a “game-changing economic reform” that can reduce freight time by 30 to 40 per cent and add about two per cent to the nation’s economic output in the next five years.
“It removes the element of uncertainty in the business cycle for Indian manufacturing,” Medvedev said.
At checkpoints like Khanauri, the need for reform is all too visible. Anxious drivers stand in long lines while their assistants guard the trucks and pass the time by keeping themselves warm over fires and drinking endless cups of milky tea.