Suman Bery: A night to remember

Though the road ahead for GST is pretty long, Wednesday's landmark legislation is good news for world economy

Wednesday night's Rajya Sabha debate (and vote) on the Constitutional amendment Bill to enable the goods and services tax (GST) was a heartening moment, primarily for Indian policy and politics, but also for a global economy short of good news.

Reviewing the numbers recently, I was startled to see that in purchasing power parity (PPP) terms the Indian economy is now 40 per cent larger than that of Japan, and just about half the size of the US economy. Indian growth of six per cent therefore is equivalent to American growth of three per cent, a rate which was formerly commonplace for the US but has been elusive in recent years. And as India continues to outperform, its relative contribution to world growth and output can only grow.

As foretold a decade ago by the then chief economic advisor Arvind Virmani, we are now firmly in an era where China, India and the US, in that order, are the dynamos of global growth. While the economy of the European Union (for now including Britain) is almost as large as that of China, unresolved issues in the fiscal architecture and the banking system of the Eurozone prevent it from contributing as it might to global growth. So, largely unheralded, Indian policy choices have become systemically important for the world.

For both Indian and global eyes, there was much to gladden the heart in the spectacle that unfolded live on our screens, courtesy Rajya Sabha TV. There was first and foremost the patient explanation by both the Opposition (in the presence of the former finance minister P Chidambaram and former minister for commerce and industry, Anand Sharma) of the basis for their insistence on a pre-specified GST rate. There was the equally thoughtful, plausible and cogent response of the current Finance Minister Arun Jaitley on the unprecedented "pooling of sovereignty" that the constitutional amendment represented and the unique role that the GST Council was expected to play.

The fact that the debate took place in both Hindi and English imparted a sense of rootedness to the discussion. More broadly, there was a sense of gravitas, significance and maturity of a kind that befits a discussion in the upper chamber of Parliament but which is not always on display. I have not been following the twists and turns of the GST saga sufficiently closely to know what lay behind this sudden outbreak of civility but as an interested Indian citizen I was mighty grateful and proud of what was on display.

When I moved to India in 2001, after a quarter century spent living in the US, I was surprised by the degree to which in both countries the Constitution remains the Ark of the Covenant. Of course, our Constitution is much wordier than that of the US, and much more frequently amended (this is the 122nd amendment). The US is a society of contract and immigration whereas we are a culture of custom and social continuity. The debate on Wednesday reminded me once again of the central importance of our Constitution for all its infirmities, to the conduct of our public life.

While there is a long road ahead before the GST becomes a reality, there should be no minimising the political achievement that Wednesday's vote represents. I know Brazil's fiscal arrangements much less well than Parthasarathi Shome, who is a long-standing tax advisor to that country. But I trust he would concur with my assessment that Brazil has repeatedly failed to move its indirect tax system from an origin-based to a destination-based system, which is what India's GST will be, and which is critical to boost competitiveness and avoid "cascading".

This failure is largely because the major manufacturing states notably São Paulo (Brazil's equivalent of a Maharashtra or a Tamil Nadu), have been unwilling to cede control of an important tax base. Such hesitation may partly explain the walk-out by the AIADMK contingent (in power in Tamil Nadu) in the Rajya Sabha on Wednesday night. It might be argued that it is easier to ram through change in a parliamentary system than in a presidential. While Canada moved quickly to introduce its GST in the early 1990s, the tax has remained contentious in the decades that followed. The unanimous votes in favour of the Bill on Wednesday will count for a lot going ahead.

So how consequential might the GST be if successfully implemented? It is worth reminding oneself that China's explosive growth in the 1990s was partly triggered by a major reform of its system of fiscal decentralisation. The GST in this sense forms a logical complement to the increased devolution of revenues implemented by the present government pursuant to the 14th Finance Commission. As Vijay Joshi recently pointed out in these pages, India's fiscal infirmities are at least as grave and stubborn on the expenditure side as on the revenue side. Progress has been incremental rather than radical even though the direction of travel has been appropriate, particularly where fuel subsidies are concerned.

Even where reform of indirect taxes is concerned there is the conceptual issue of whether a reform like this leads to a one-time gain in the level of output as resources get reallocated more efficiently, or whether the boost to productivity is sustained over time. It is the latter that is needed if the growth rate is to rise, but I am not persuaded that there is a basis in theory for arguing that such dynamic gains are inevitable.

For all that, the signaling effects of Wednesday night's vote are surely extremely positive. The fact that the government of the day made the effort to cultivate the Opposition to reach a consensus speaks volumes. For a government lacking space for stimulative policies, either fiscal or monetary, a positive confidence shock is an imaginative way, indeed perhaps the only way, of restoring the animal spirits needed for a rebound in private investment.

The writer is a former member of the Prime Minister's Economic Advisory Council and senior fellow, MasterCard Center for Inclusive Growth. Views are personal.

Twitter: @sumanbery