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How PM Modi transformed India's economy

Vasudevan Sridharan
August 28, 2018

Last year, India introduced one of the biggest tax reforms in the country. Although experts say that the Goods and Services Tax (GST) has the potential to uplift the economy, its execution is still a work in progress.

India - Phone digital payments
Image: Getty Images/AFP/I. Mukherjee

The Goods and Services Tax (GST), which aims to bring India's 1.3 billion-strong population under a single market for the first time since the country's independence from British rule in 1947, came into force in July, 2017, after a lengthy parliamentary process.

The ambitious tax regime is a complete reset of one of the world's most complex and multi-layered economic systems.

The finance ministry described the GST as an "unprecedented reform in Indian taxation" and a "fitting tribute to the spirit of cooperative federalism."

A destination-based tax, the GST subsumed a gamut of indirect taxes existed in the South Asian country and ironed out a taxation structure that was fragmented and convoluted.

But the rickety execution of the tax reform has come under criticism. Prime Minister Narendra Modi's government has made hundreds of amendments to the tax system since its introduction in 2017.

Read more: India to launch Goods and Services Tax (GST); its biggest ever fiscal reform

Initial hurdles

The initial months of GST's implementation were marred by a stuttering IT infrastructure while taxpayers kept struggling to understand the system, billed as "completely paperless."

Last month, the government announced a major overhaul to the taxation structure and as many as 191 items were removed from the highest tax bracket of 28 percent, effectively leaving out just 35 items in this bracket.

Stewarded by a special GST council comprising finance ministers of the federal and state governments, the consolidated system brought about 4.8 million new entities under the tax net. 

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Despite widespread fears that the GST would trigger inflation in the short run, the retail inflation has averaged less than 5 percent in the past 12 months.

One of the criticisms against the GST is that it has not been able to merge multiple tax rates into a leaner structure. Prime Minister Modi admitted that despite tax reforms, India's economy is unlikely to have a single tax market.

"It would have been very simple to have just one slab but it would have meant we could not have food items at zero per cent tax rate. Can we have milk and Mercedes at the same rate?" Modi said in a recent interview.

Read more: India's long struggle to create a common market

A partly successful regime

"The GST is a positive development," Bipin Sapra, an economic consultant, told DW. "But it is still not being utilized to its full capability. It requires certain changes, which include the introduction of efficient and simple procedures," he added.

Sapra underlined that the cost of most of the commodities across the country has been stable barring some exceptions that witnessed a marginal increase.

The analyst said the GST is moving in the right direction, with industries beginning to feel its effects.

"The simplification of the compliance process should be an immediate priority. Getting GST to work to its full potential and getting the entire system online should be the second priority. Streamlining the refund process both for services and goods should also be addressed quickly through legislative work. These are crucial steps," Sapra said, adding that it would take another year to fully assess the GST's benefits to India's economy.

Pratik Jain, partner at PwC indirect tax firm, says that Modi's government should be happy about the GST ahead of the 2019 general election.

"The country's tax base has expanded and income tax collections have also gone up. Partly, it can be attributed to the GST since it is a self-policing mechanism. Evading tax under GST is more difficult than before," Jain told DW.

"The last 12 months have been phenomenal. I expected more disruptions given the complexities and political dynamics in a diverse country like India. But there have been no mass protests against the GST. This has turned out to be smoother than what was expected," he added.

Read more: One year after demonetization – Has India eliminated 'black money'?

Modi’s reforms weaken Indian economy