The Goods and Services Tax (GST), one of the biggest reforms in India's indirect tax structure, is likely to revolutionise the Indian economy in an unprecedented manner. As envisaged, GST will propel GDP growth to newer heights, lower income disparity and simplify decision making of businesses. The GST rollout will be a strategic milestone for the nation as its implementation will have a far-reaching impact on the Indian economy.
It will substantially lower the indirect tax incidence over a period, which will reduce the cost of manufactured goods. For instance, in the automobile sector, India currently operates at an indirect tax incidence of 32-40% based on the class of cars, whereas China operates at 17% and the global average GST is 16%.
Due to higher indirect tax incidence, our manufactured goods are far more expensive. Lowering of indirect taxes will boost domestic consumption of goods by 7 to 10 times as it will bring in disproportionate price elasticity effects which will drive India's economic growth in the next decade. There will be huge benefits of moving to a system that taxes goods and services at the last stage or at the stage of consumption. For corporates, it simplifies decision making as companies can now focus on business efficiency rather than tax benefits.
GST removes multiplicity of taxes across states and will create a single national taxation system and a common market. This will mean selling goods closer to the markets by creating fewer modern and at scale warehouses and an efficient inbound and outbound supply chain from these warehouses. As the above transformation happens, logistics sector will play a big role to ensure the full benefits of GST flow through the economy. The sector will be required to build efficient asset footprints (warehouse and trucks), adopt immense amount of technology and reduce turnaround time with increased predictability.
While India is one of the lowest transportation cost markets, it's also one of the most inefficient logistics markets (at 14% of the GDP). The missing piece in these two seemingly opposite assertions is "inventory".
In the US, in 1970s, inventory was 55% of logistics spend base, when the logistics spend was 16% of the GDP. The spend has now reduced to 7-8% of the GDP with inventory cost at only 10% of this spend base. Currently, Indian inventory spend (losses, obsolescence, wastage) can be up to 50-60% of the overall logistics spend. If it were to get to the US level of logistics efficiency, significant amount of capital can be unlocked through inventory.
For a USD 2-3 trillion economy, this could mean a potential of USD 200 billion wasteful inventory spend being available to deploy in productive value creation, thereby, further propelling the economy's growth.