When a Singaporean government trade agency held a session on tax legislation last month in a fellow Asian country, it might have seemed a routine gathering, the sort of ho-hum session attended by mid-level executives in chambers of commerce the world over. This, however, was not your typical snoozy briefing of arcane tax law over coffee and snacks. The International Enterprise Singapore seminar featured India, pegged by the World Bank as the world’s fastest-growing economy. The subject matter was the country’s goods and services tax (GST), the most dramatic tax reform in its history and one widely dubbed “a game changer” in local and international financial media.
More than 100 companies turned up to the seminar, a testament to the intense interest in the GST among the South-east Asian city-state’s leading businesses. Singaporean companies are already the top foreign direct investors in India, and Singaporean officials have been exploring the GST as a potential opportunity to invest further in the South Asian giant.
They are not alone. From Tokyo to Abu Dhabi, Sao Paulo to Beijing, businesses and governments across the emerging world are trying to understand the impact of the GST on the investment environment, as well as on growth prospects for the Indian economy. As large emerging markets such as Brazil and Nigeria struggle with slow growth, China faces a slowdown, and Turkey presents myriad political risks, India has emerged as the brightest of emerging market bright spots. In the first half of this year alone, foreign investors bought more local shares on India’s stock market – $8.23bn – than in the previous two years combined.
Foreign Investors’ Purchase of Local Indian Shares
Source: Nikkei Asian Review, 2017
Dramatic reformsThe jury is still out on some of Prime Minister Narendra Modi’s dramatic reforms, but the sentiment in the broader investor community is positive. “This may be the beginning of something truly momentous,” wrote Hugh Smith of Thomson Reuters last year in a comment piece that captures the bullish ‘Modi trade’ among investors. Or take Avinash Vazirani, manager of the Jupiter India Fund, who simply says: “India is taking historic steps. It’s a very exciting time for investors.”
So just what will the GST mean to some of India’s leading foreign Asian investors, or its key emerging world trade partners? The Nikkei Asian Review noted that the rush to Indian equities has been driven by “bets that the [...] Modi-led government will be able to pass major reforms”. The CEO of Singapore’s largest bank, DBS Group Holdings, also cheered Modi’s reforms, arguing they would increase transparency and improve the business climate.
The GST is a key part of Modi’s policy quiver. The plan simplifies a byzantine structure that will replace 15 indirect taxes with one nationwide tax. The GST will also bind India’s states under one tax structure, easing intra-Indian trade and investment. Under the old system, a tire manufacturer in, say, Gujarat paid a tax to send its goods to another Indian state. This meant, in effect, India was not a common market among its own states. It also meant a cascading tax structure that made end goods more expensive than necessary, as mentioned in this GST video explainer. Others disagree, noting that some bank credit cards, insurance companies, and hotels have said the GST will make their prices higher, not lower, adding to its general complexity.
One tax, one nationStill, when the GST is implemented on July 1, 70 years after the country gained independence, India will finally become a common market rather than a collection of 29 states. This has tremendous implications for domestic manufacturing and foreign investment, and the world’s consultancies are churning out reports explaining the new tax system, one that still retains a fair share of complexity, as noted above.
Journalists and commentators have taken to referring to the reform as “One Tax, One Nation”, and when it was first passed by the Parliament, in August 2016, The Economist declared it Modi’s “ most important reform to date.” Business leaders have also cheered, with Sachin Bansal, founder of the e-commerce company FlipKart, tweeting the reform “will not only unlock huge productivity but also create millions of formal sector jobs”.
Modi clearly sees the GST as a dramatic moment in his premiership. To wit: He has called for a special midnight session of the Parliament to herald its launch on July 1. The move evokes Jawarhalal Nehru’s historic ‘Tryst with Destiny' speech in a midnight session on August 14/15, 1947, declaring India’s independence. In calling his own midnight session, Modi is essentially saying: This is no ordinary tax overhaul; this is India’s history, another tryst with destiny. Modi often waxes poetic about the GST as part of the realisation of a dream of ‘One India, Great India.’
After the spirited speeches, however, Indian businesses and states will face the reality of implementing the reforms, of which there are already deep concerns. The aviation ministry has asked for a two-month delay, expressing worries airlines are not ready for the new tax tiers, and the All India Manufacturers Association has asked the government to postpone implementation.
Redefining the role of cashImplementation will not be free of dislocation. New software must be installed, staff trained, and old ways discarded. But Modi proved India can be surprisingly resilient to dramatic moves when, in November 2016, he banned 500- and 1,000-rupee notes – 86% of all banknotes in circulation – to formalise the economy and root out corruption.
The early chaotic days gave way to a semblance of normalcy, leading emerging markets business scholar Bhaskar Chakravorti to ask in Harvard Business Review in March: “Did India just pull off a monetary and political miracle?” The answer is complex. On one hand, pulling 86% of a country’s bank notes out of a cash-heavy market is inherently destabilising, but India emerged with “no obvious scars”, according to Chakravorti. Still, he posed some serious questions about the “success” of demonetisation, questioning its utility in the fight against corruption and noting the pain it inflicted on India’s poor. Ultimately, he argued, the ‘big narrative’ that Modi is ‘doing something’ overcame the other details, with his party riding to subsequent electoral victories, most notably in March in the populous state of Uttar Pradesh.
A ‘big narrative’ also appears to have emerged in the business community that the GST is good for foreign direct investment (FDI). President of the Asian Development Bank Takehiko Nakao points to tax rationalisation as a key to attracting FDI, looking to the GST as a positive step. India also rose to eighth in the ranks of the annual AT Kearney Global FDI Confidence Index, with more than half of investors pointing directly to the GST as the main reason.
Asia and Middle East commercial alliances potential growth spotsOver the past year, Japanese investors have poured into India’s retail, textile, consumer, and food and beverage industries, in addition to the country’s traditional focus on industrial investments. Japan is building 12 industrial parks across various Indian states, seeking to create economic corridors across the country. It is hard to imagine it taking such a leap without the GST.
Elsewhere, Saudi Arabia’s national oil company, Saudi Aramco, is looking to set up a petrol station network in India in alliance with French oil major Total. India is set to overtake China as the fastest-growing market for fuel imports over the next few years. The Abu Dhabi National Oil Company has also agreed to set up a strategic storage facility in the south Indian city of Mangalore as part of a $75bn investment plan announced during Abu Dhabi Crown Prince and Deputy Supreme Commander of the Armed Forces Mohamed bin Zayed’s visit to New Delhi in January. Though not directly linked to the GST, these initiatives are a bet on India’s growing economy – which is partly dependent on successful implementation of the tax.
In addition to overall UAE investment, the commercial city of Dubai is also poised to benefit from an accelerating India. Dubai has long positioned itself as India’s Hong Kong, a hub for trade, travel, and transport. Its flag carrier Emirates Airline – dubbed “India’s national airline” – operates 183 weekly flights between India and Dubai, and Indian carriers add another 300 flights per week. The busiest air routes out of India last year were Mumbai-Dubai and Delhi-Dubai, according to Indian government data. Dubai has become India’s gateway to the world, where Indian middle classes take holidays or connecting flights to Europe and beyond.
The UAE is one of India’s most important trade partners, surpassed only by China and the US, accounting for more than 8% of its total trade. What’s more, nearly 12% of India’s exports go to the UAE, second only to the US, according to EU figures. China, too, will benefit from India’s rising consumer demand story.
Thus, countries such as the UAE, Japan, China, and Singapore – with deep commercial ties to India – are likely to be well-positioned to benefit from India’s growth story, one that could take a significant leap at the stroke of midnight on July 1.