Harnessing the strengths of each State

An integrated common market in India can boost inter-state trade based on comparative advantage

August 18, 2015 02:09 am | Updated March 29, 2016 04:01 pm IST

The problem with the European Union (EU) at present is that it has built a monetary union without a corresponding political union. In India, on the other hand, the political union has been fairly successful, but there remain significant improvements to be made in becoming an economic union. Having a common currency is not adequate for an economic union. What is required is a free trade area within the Union of India.

India’s internal trade, which amounts to less than 15 per cent of GDP, is much lower than that of the EU (20 per cent of its GDP) and the U.S. (40 per cent of GDP). In the quest for achieving a larger share of the global market, our policymakers often forget that India has one of the biggest markets within its own boundaries. With 1.25 billion people, India should concentrate on increasing inter-State trade, and allowing manufacturers in India to take advantage of its large market.

The 29 States and 7 Union Territories in India are geographically diverse, possessing a diverse wealth of natural resources and human capital. As a first step, it is necessary to encourage States to develop an agricultural and industrial policy framework that can promote their comparative advantages. There is very little literature on this. One paper by Rajarshi Majumder and Dipa Mukherjee in the Journal of Industrial Statistics (2014) tries to identify the comparative advantage of States in relation to efficiency and total factor productivity.

Part of the problem lies in there being a lack of reliable data on the quantity and value of products exported from a State to other Indian States or to other countries. Within India, nearly 63 per cent of goods are transported through the road network, yet there is no official data on their value, origin or destination. The good news, however, is that the 13th Finance Commission stressed the need to compile inter-State trade data, so as to facilitate the Goods and Services Tax (GST). With the right kind of data, it would be easy to calculate State-level comparative advantages using the revealed comparative advantage method, which will help in building better value chains in the country.

The biggest barrier to inter-State agricultural trade today is the market-distorting rules and regulations, of which the Essential Commodities Act (ECA) and the Agricultural Produce Market Committee (APMC) Act are the prominent ones. The ECA empowers the government to declare any commodity as essential and thereby impose restrictions on stocking and selling it in the free market. The APMC forces farmers to sell their agricultural produce to the government-regulated local mandi s, which robs them of their freedom to sell their produce in better paying areas that might lie outside the State boundaries. There was some scope for improvement on this front when there was a proposal to introduce The Agricultural Produce Inter-State Trade and Commerce (Development and Regulation) Bill, 2012, which would integrate the individual domestic markets for farm produce into a single national market. However, the Bill did not make it through. It is imperative for the present government to consider reviving this legislation.

In the case of manufactured goods, the biggest impediment is the plethora of tax regimes and varying rules and regulations in different States. Much of this can be solved by the implementation of a well-designed Goods and Services Tax (GST) to replace the existing system of multiple taxes such as VAT, CENVAT, Central Sales Tax and Octroi. Further, there is service tax to be paid on transportation charges apart from the varying compliance costs. There are also various inter-State regulatory requirements that involve detailed documentation like permits, waybills, tax invoices and delivery notes. Add to this the poor road infrastructure and it can be easily seen how ‘Make in India’ requires a lot more work. Finally, in order to increase inter-State trade, it is important for each State to have its own specific industrial policy that is consistent with its comparative advantage.

Chinese economist Justin Yifu Lin provides plenty of examples of how industry-targeted policies have worked for different economies. He recommends that each country, State, in this case, should locate a high-growth economic region with similar resources but with a higher income. He contends that this is precisely the manner in which economies have achieved high growth rates in the past. Britain targeted the wool industry of the Netherlands in the 16th century. France, Germany and the U.S. targeted steel, machinery and ship-building industries of Britain in the 19th century. Japan did the same with the U.S. automotive industry, which was then followed by the South-east Asian economies.

Thus, in order to achieve a fully integrated common Indian market with 1.25 billion potential consumers, removal of inter-State barriers is a significant first step. There has been some progress with the proposal of the common national agricultural market and the introduction of the GST. These, however, need to be enacted and even then, it will just be the first step. Much more needs to be done.

( Anupam Manur is a policy analyst at Takshashila Institution, an independent, non-partisan think tank and school of public policy. )

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