India’s Economy: Water Problems and Tax Reform

      The dominant narrative of the struggle for global hegemony pits a rapidly ascending China against a more stagnant United States seeking to maintain its position as the world’s sole superpower, but from an economic standpoint the 21st century could very well belong to India. With a more advantageous and growth oriented population pyramid and fertility rate India is roundly expected to leap past China as the world’s most populous country in as little as a decade, and will not face the same troubling uptick in dependency ratios as its powerhouse neighbor or the OECD nations (1,2). Short term projections forecast India continuing to grow at a steady rate of just over 7% while China’s economy slows down (3,4). However, the South Asian state faces internal and close to home hurdles if it is to meet the most optimistic predictions, and become a leading economic power. 
 
Monsoon Dependency
 
     Especially visible this summer is the continued dependency of large portions of the Indian economy and population on the fickle pattern of drought and monsoon. Well over half of India’s 1.2 billion-person population depends on agriculture for a living. Agricultural land makes up 60% of the total land area in India but only 1/3 of this is irrigated, the rest depending on the monsoon season, from which the country gets ¾ of its annual rainfall in a 4-month span between June and September (5). As this year’s monsoon season approached a crisis mounted; After two years of weak monsoons and sweltering temperatures, well over 330 million people were facing acute water shortages (6). Output of major cash crops had plummeted, as farmers delay planting in expectation of further water shortfalls. Soybean production, for example, had plummeted to an 11-year low (7). This not only puts the population of farmers and their families at risk of malnutrition and starvation as incomes dwindle and belts tighten, but also increases the price of these goods across the country. 30% of India’s population is below the poverty line, and for these hundreds of millions rising food inflation can be the difference between life and death (5). As a corollary, when agricultural shortages push up inflation they also force the central bank to be warier towards the interest rate cuts it wants to make to incentivize business investment and boost growth (8).
 
     Thankfully, this year’s monsoon is bringing much needed relief to India’s water-starved population, ending the two-year drought and increasing crop planting. Unfortunately, even successful monsoon seasons bring negative consequences. Severe flooding happens at least once every 5 years (8). Already this year more than 300 people have been killed as rainfall hammers the parched earth, and over a million are living in temporary shelters. The BBC estimates that the floods have affected almost 9 million people thus far9. Indian government, likely at the state level, needs to improve protections against extreme rainfall events, planning proactively rather than reactively. This need will become more urgent as instances of extreme rainfall increase with the changing climate. The Intergovernmental Panel on Climate Change predicts that rainfall patterns in India will become more erratic, and that the amount of extreme weather events will increase, especially in the peninsular regions (9).  
 
     Of even more concern than improving the resiliency of infrastructure to flooding is a larger shift in farming practice to make Indian farmers’ water usage more sustainable and reduce dependence on the monsoon season for successful harvests and planting planning. The Water Resources Group estimates that about half of the demand for water in India will be unmet by 2030. There are 20 major river basins in India, 14 of which are already categorized as water-stressed, and contain ¾ of the Indian population (10). This problem is not unsolvable, and the solution lies in agricultural reform. 85% of India’s water consumption is by agriculture, and Indian farmers are highly inefficient in their use of it. Water is used twice as productively by Chinese rice farmers than their Indian counterparts, and these trends are mirrored across most crops (10). Indian farmers heavily pump groundwater—often growing water-heavy crops in areas unsuited for them, which is economically feasible thanks to subsidized electricity. They use more of it than China and America combined, and the water table is suffering. 
 
     Projects to alleviate the suffering of farmers tend to focus on meeting their insatiable demand, building canals and other artificial waterways to divert rivers and relocate water to the driest regions (6,10). Instead, the government should seek to reduce demand and help farmers implement more sustainable farming and watering practices so they can weather dry years more easily and tax the dwindling groundwater less. As the population booms, more efficient and less volatile agriculture will be a necessity. 
 
Progress on Tax Reform
 
     On a more positive note, India’s central government took a huge step forward this month towards simplifying the byzantine and fragmented tax code. On August 3rd a constitutional amendment that allows for the creation of a Goods and Services Tax (GST) passed the upper house of parliament (11). This move has been in the works for years, with the introduction of a GST promised by the previous government as early as 2010. 
 
     Previously, India’s constitution gave states the power to tax goods, and the central government the power to tax services. Though strange, this seems as though it could work. However, the central government also has the ability to levy an excise duty on goods at their point of manufacture (12). Thus, under the current system, producers of goods are taxed by the central government, and goods are again taxed as they move from state to state within India and are ultimately sold.
 
     One obvious problem is the prolific amount of double or cascading taxation, as manufactures are taxed multiple times by revenue collectors from the central and different state governments. A second issue that arises is the need for economic checkpoints along state borders, to ensure that taxes are paid. These checkpoints bring two unintended consequences. The first is major transportation slowdowns and delays. The Economist reported in 2009 that waiting at checkpoints can add over 30 hours to the cross country truck drive from Kolkata to Mumbai (12). This is essentially a doubling of the time and cost of transporting goods in India, deterring foreign investors and businessmen who would love to reach a wide swath of India’s huge consumer market. The second problem with the checkpoints is that they are plagued with corruption, and inspectors are often charging their own taxes before allowing vehicles to cross the border, adding further cost and uncertainty to the already complex process of moving goods across state lines. 

     Of course, not all business owners simply accept the onerous paperwork and cost or decide to sell simply within their own state. The lack of a streamlined tax system is a major contributing factor to the highly developed informal economy in India, in which goods escape taxation all together, depriving governments of revenue needed for much needed budget balancing and investment in human development and infrastructure. The difficulty of tax compliance drives many businesses to black market suppliers. Only 8.5 million out of an estimated 63 million enterprises in India pay taxes (13). With a simplified GST system, more businesses might opt for the legal route as the risk of law breaking begins to outweigh the benefits. 
The next step for the implementation of a GST is the ratification of the constitutional amendment legislation by at least half of India’s states, and then another parliamentary bill containing the specifics of the tax. The winter session of Indian parliament begins in November—such a bill could be introduced then (11). If all goes according to plan, and negotiations between the central and state governments over the tax rates are amicable, India could begin implementing the GST in the next year. 
 
     In a final system, there will be a GST for each of India’s 29 states and 7 federally administered union territories, a federal GST, and a central/state integrated one for inter-state supplies of goods and services (14). Though this may seem complicated, and it will take time to implement, it is leagues simpler than the current confusion. All that needs to be done for a given good is determine which tax’s jurisdiction it falls under, and then that tax is added to the good’s final price. An important note to make here is that the burden of the tax is being shifted from producers to consumers. Canada, Australia, and New Zealand all saw one-time increases in inflation after implementation of a similar tax, driven by suddenly higher prices (11). Over time the burden should distribute more equally as base prices are pushed down, feasible thanks to lower tax costs for producers.  
 
     India’s GST makes the country more attractive to FDI, will increase legitimate and total intra-country trade, and will increase government revenues. It is important progress for a country with such economic potential but so many problems left to solve. Further reform on income taxes and economic interactions across individual states is needed. Infrastructure requires a serious upgrade, but the budget deficit is already unfortunately wide. Serious conflict flash-points exist to both the East and West, and charting a geopolitical course that does not submit to either the US or China will be difficult. But India’s economic potential is widely recognized, and with proper management investors will continue to pour in and trade will continue to grow. A successful transition from a rural majority dependent on environmentally inefficient agriculture will be another key to long term growth and a shift to a higher standard of living for the population as a whole.
(1) Kottasova, Ivana. “Biggest Populations in 2050: Mover over Russia and Mexico. Here comes Africa.” CNN Money. CNN. 18 August 2015. Web.
 
(2) “Attitudes about Aging: A Global Perspective.” Pew Research Center. 30 January 2014. Web.
 
(3) “New Growth Projections Predict the Rise of India, East Africa and Fall of Oil Economies.” Harvard Kennedy School. 7 May 2015. Web.
 
(4) “India to be world’s highest growth nation in 21st century: IBM study.” Business Standard. 10 December 2015. Web.
 
(5) “South Asia: India.” The World Factbook. Central Intelligence Agency. 29 July 2016. Web.
 
(6) “Why India has a water crisis.” The Economist. 24 May 2016. Web.
 
(7) Parija, Pratik. “India Soy Crop Seen Rebounding from Decade Low on Monsoon Boost.” Bloomberg Markets. Bloomberg. 17 August 2016. Web.
 
(8) Abraham, Thomas Kutty. “India’s Monsoon.” Bloomberg Quick Take. Bloomberg. 10 August 2016. Web. 
 
(9) Rowlatt, Justin. “India Climate: What do drowning rhinos and drought tell us?” BBC. 6 August 2016. Web. 
 
(10) “India Infrastructure Report 2011, Water: Policy and Performance for Sustainable Development.” Infrastructure Development Finance Company. Oxford University Press. 2011. Web.”
 
(11) Krishnan, Unni. “What’s the Big Deal About India’s Goods and Services Tax? Q&A.” Bloomberg. 2 August 2016 Web. 
 
(12) “Tax reform in India: Trickle Through”. The Economist.  17 December 2009. Web.
 
(13) Edens, Rob. “Why is India’s GST such a big deal?” The Diplomat. 16 August 2016. Web.
 
(14) Biswas, Soutik. “Why India’s GST is one of the world’s most complete tax reforms.” BBC. Web.

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Image: © Matyas Rehak | Dreamstime.com - Flooded street in Varanasi