Lingerie Delayed as $517 Billion India Jam Idles Trucks: Freight

Sukhchain Singh stops his truck,
loaded with Lovable Lingerie Ltd. (LLL) camisoles and Revlon Inc. (REV)
makeup, at a checkpoint on the Punjab state border in northern
India. He slumps in his seat, resigned to a long, long wait.

“It often takes three or more hours to get permits and tax
clearances for my cargo,” said Singh, eyeing a line of 30
trucks ahead. Such delays on many of India’s 28 state borders as
guards enforce local levies from sales taxes to entry fees stoke
freight transport costs. McKinsey Co. puts them at 13 percent
of gross domestic product versus 9.5 percent in the U.S., where
there are no such tariffs.

The government’s solution: a uniform goods and services tax
applied across India to subsume most state charges, reducing the
need for border checks. The overhaul, which the nation’s Finance
Commission projects may yield a $517 billion economic boost, is
more than two years behind schedule as gridlock in policy making
contributes to the weakest Indian growth in nine years.

“It’s the single biggest reform,” billionaire Adi Godrej,
chairman of Mumbai-based Godrej Group, which includes retail and
industrial units, said in an interview. “Implementation of the
goods and services tax will add 1.5 to 2 percentage points to
the GDP growth rate. I’m afraid some politicians and bureaucrats
don’t fully understand the tremendous economic benefits. We take
too much time in implementing good decisions in India.”

The revamp seeks to swap about 15 state and federal levies
for one at the time of sale. Preventing a product being taxed
more than once would spur commerce, while casting a wider net
over services would help buoy revenue, according to the Finance
Commission.

Boosting Stocks

The commission, a panel appointed by the Indian president,
estimated the step will lead to an economic gain of as much as
28.8 trillion rupees ($517 billion) in a 2009 report.

A simpler tax structure that frees up goods movement would
help contain inflation as well as boost stocks, said Jagannadham Thunuguntla, a strategist at SMC Global Securities Ltd. in New
Delhi. Companies such as Allcargo Logistics Ltd. (AGLL) in Mumbai,
Chennai-based Sical Logistics Ltd. (SICL) and Transport Corp. of India
Ltd. in Gurgaon, Haryana, are among those that may gain, he said.

Manufacturing will benefit as costs fall since the tax rate
on goods will drop to 20 percent, less than an array of levies
amounting to as much as 28 percent now, said Mumbai-based Sachin
Menon, head of indirect tax at KPMG in India. Services, by
contrast, will be more expensive with a 16 percent tax, he said.

Services make up about 57 percent of Indian GDP and
manufacturing 16 percent, Finance Ministry data shows. That adds
pressure for steps to quicken factory growth and create jobs in
a nation where most people live on less than $2 per day.

Economic Slowdown

The expansion in the $1.8 trillion economy in the 12 months
ending March 2013 will probably hold at the 6.5 percent pace of
the previous year, which was the slowest since 2002-2003,
according to the Reserve Bank of India.

Inflation averaging more than 7 percent in 2012 and a
faltering global recovery have hurt growth. Graft allegations
and discord in the ruling Congress party-led coalition have
paralyzed policy making, blocking Prime Minister Manmohan Singh’s efforts to spur investment. The rupee has plunged about
17 percent against the dollar in the past 12 months

“The absence of a common market is making India less
attractive as an investment destination,” said Sajjid Chinoy,
an economist at JPMorgan Chase Co. in Mumbai who used to work
at the International Monetary Fund. “GST will make India a more
competitive production base because you get rid of all the
cross-border distortions.”

Truck Delays

Truck delays average five to seven hours at state lines as
officials enforce levies including a 2 percent tax on sales of
goods from one state to another, said P.C. Sharma, chief
executive officer of Transport Corp. of India’s express division.

As a result, even a journey time of a week for the 2,137-
kilometer road trip from the capital, New Delhi, in the north to
Chennai in the south is considered good, he said.

That implies a speed of 12.7 kilometers an hour in a nation
where about 65 percent of freight moves on roads. That’s about
one-third of the top running speed of Olympic gold-medal
sprinter Usain Bolt.

Intercity Indian trucks with two to three people in the cab
average 80,000 kilometers a year, versus 400,000 kilometers in
the U.S. for two-driver teams, because of jams and long delays
at border posts, the World Bank estimates. Checkpoint stoppages
may cost up to 23 billion rupees annually in lost trucking hours,
according to the lender.

There are 177 interstate checkpoints in India, the Ministry
of Road Transport Highways said in February.

Parliamentary Deadlock

Singh’s government set April 2010 as the target for
introduction of the goods and services levy. A failure to push
through necessary constitutional changes in parliament or strike
deals with states over compensation for any revenue losses has
stalled the overhaul.

The opposition Bharatiya Janata Party forced the
legislature to adjourn for a sixth day yesterday as it called
for Singh to quit. It was responding to an Aug. 17 report by the
chief auditor that claimed the government may have lost 1.86
trillion rupees by giving away coal blocks rather than
auctioning them.

Finance Minister Palaniappan Chidambaram said last week he
still hopes the bill for the goods and services tax will be
passed before the end of the fiscal year that began April 1.

Others are less optimistic, seeing the possibility of
procrastination beyond the general election due in 2014.

“You have a chance that sometime in October 2014, it can
be implemented,” said Satya Poddar, a tax partner with Ernst
Young in Gurgaon, adding that the interstate tariffs are unique
to India. “It’s a question of when, as opposed to if. All
political parties realize the benefits of GST.”

That’s little consolation for trucker Sukhchain Singh as he
mulls the border delays slowing deliveries of Mumbai-based
Lovable Lingerie’s slips and New York-based Revlon’s lipstick.

“My first name means happy and content,” he said. “But
I’m neither because of checkpoints.”

To contact the reporter on this story:
Tushar Dhara in New Delhi at
tdhara1@bloomberg.net.

To contact the editor responsible for this story:
Stephanie Phang at
sphang@bloomberg.net.

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