Smaller States trade more

Updated - February 01, 2017 11:43 am IST

Published - January 31, 2017 11:13 pm IST - NEW DELHI:

A vendor displays the swiping machine at his shop at Big bazaar in Palakkad. Small-scale vendors are the worst hit after the demonetisation of higher-value notes as most of them still do trade in the conventional mode. — Photo: K.K. Mustafah

A vendor displays the swiping machine at his shop at Big bazaar in Palakkad. Small-scale vendors are the worst hit after the demonetisation of higher-value notes as most of them still do trade in the conventional mode. — Photo: K.K. Mustafah

Smaller States such as Uttarakhand, Himachal Pradesh and Goa trade more while the net exporters are the manufacturing powerhouses of Tamil Nadu, Gujarat, and Maharashtra, according to the Economic Survey.

One other finding on internal trade between states, of the first-ever estimates for interstate trade flows, is that cross-border exchanges between and within firms amount to at least 54% of GDP (in 2015), implying that India’s interstate trade is 1.7 times larger than its international trade of 32% of GDP.

Belying their status as agricultural and/or less developed, Haryana and Uttar Pradesh appear to be manufacturing powerhouses because of their proximity to national capital region, according to the Survey.

A potentially exciting finding for which there is tentative, not conclusive, evidence is that while political borders impede the flow of people, language (Hindi specifically) does not seem to be a demonstrable barrier to the flow of goods, the Survery found.

Higher than Canada

India’s aggregate interstate trade (54% of GDP) is not as high as that of the U.S. (78% of GDP) or China (74% of GDP), but substantially greater than provincial trade within Canada and greater than trade between Europe Union countries (which is governed by the “four freedoms”: allowing unfettered movement of goods, services, capital, and people).

The costs of moving (within India) are about twice as great for people as they are for goods, the Survey said. However, it said there is a potential dampener on the finding that trade in goods is high within India.

Explaining the puzzle of ‘why does India trade so much’, the Survey noted: “This (high level of trade in goods) may be a consequence of the current system of indirect taxes which perversely favours interstate trade over intra-state trade, especially in the cases of final consumption items, exempted goods or goods that are input tax credit ineligible. If true, the GST (Goods & Services Tax) by ironing out these oddities may normalise interstate trade.”

The pre-Budget document added that, “One market and greater tax policy integration but less actual trade is an intriguing future prospect.”

The Survey also found that intra-firm trade across states is, surprisingly large — that is, at least 68% of inter-firm trade. Also, intra-firm trade is affected by trade costs to a greater extent than inter-firm trade. “It is also surprising given the Constitution favours preserving state sovereignty over one market.”

On the question of creating one economic India, technology, economics and politics have been surging ahead, adding that “perhaps, it is time for the laws to catch up to further facilitate this surging internal integration,” according to the Survey.

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