KHANAURI, India — On a recent foggy winter morning, the line of trucks stretched for miles at Khanauri, a state border checkpoint in northern India. The drivers had been traveling for days carrying factory goods. But the arduous journey on bumpy, crowded roads is not their biggest problem, they say. It is long waits and laborious paperwork at regulatory checkpoints such as this — where more than 1,500 trucks stop for hours every day — that add significantly to the cost of doing business in India.
“The factory managers keep calling us anxiously with the same questions: “Where have you reached? Where are you stuck?” said Dinesh Kumar, 35, a truck driver carrying yarn from the western state of Gujarat to a blanket-making factory in Punjab.
Two-thirds of India’s freight travels by road. But only 40 percent of the travel time is consumed by driving, according to the World Bank. The rest is spent on waiting at state border checkpoints, paying state government levies and dealing with regulatory bureaucracies that vary from state to state.
Aiming to break this crippling barrier to business, Finance Minister Arun Jaitley this month introduced legislation in Parliament for one goods-and-services tax to replace the complex system of nearly 20 different taxes and levies imposed on commodities by different states. The G.S.T., as it is known, is one of the most ambitious economic reform measures of the past decade and a dramatic step toward making it easier to do business in India, a priority for the government, officials say.
India’s recent economic growth has largely come from the boom in services such as information technology, but those contribute only a tiny fraction to what is still a farm-dominated economy. Industrial manufacturing accounts for about 16 percent of economic output. The government wants to raise it to 25 percent and create 100 millionjobs by 2022, a tall order in the current regulatory environment.
Prime Minister Narendra Modi, who took office in May promising to revive Asia’s third-largest economy, recently launched an ambitious “Make in India” campaign, aimed at boosting manufacturing and exports as China has in the past few decades.
Yet challenges remain. Despite the arrival of a new, business-friendly government, India slipped to 142 among 189 countries on this year’s World Bank index ranking nations according to ease of doing business. Last year, India was ranked 134.
And the logistical cost of manufacturing in India is seven times higher than international benchmarks, says the World Bank.
Denis Medvedev, senior country economist for India at the World Bank, called the unified goods-and-services tax a “game-changing economic reform” that can reduce freight time by 30 to 40 percent and add about 2 percent to the nation’s economic output in the next five years.
“It removes the element of uncertainty in the business cycle for Indian manufacturing,” Medvedev said.
At checkpoints such as Khanauri, the need for reform is evident. Anxious drivers stand in long lines while their assistants guard the trucks and pass the time by keeping themselves warm over fires and drinking endless cups of milky tea.
“I have been waiting for six hours here already,” said Lakshman Singh, 38, a truck driver carrying chemicals. “There is only one counter, and the line is too long. They say they have not received the information from the previous check-post about the passage of my truck. That’s not my fault. Two weeks ago, their Internet connection was down for 36 hours. Imagine how it affected business.”
The frequent delays to trucking caused by regulatory checks also create “more opportunities for harassment and bribe-taking by corrupt officials on some pretext or the other,” said Rajev N. Gupta, a co-founder of Caravan Roadways, a transportation company.
Last year, the automobile manufacturer Maruti Suzuki told its vendors to establish operations closer to the factory to cut logistics times and costs.
But if a single, rationalized tax system becomes a reality, “businesses can hope to maintain lighter inventories and adopt efficient, Japanese-style just-in-time manufacturing methods in India, too,” said Devesh Kapur, director of the Center for the Advanced Study of India at the University of Pennsylvania.
This is not the first time the G.S.T. bill has been introduced in Parliament. The proposal has stalled several times in the past and missed deadlines because state governments feared losing the freedom to impose levies and raise revenue.
Officials in the prosperous industrial southern state of Tamil Nadu and the eastern state of West Bengal have cautioned against rushing the reform measure.
In a letter to Modi, the chief minister of Tamil Nadu, O. Panneerselvam, said the measure will have broad implications for the fiscal autonomy of states. “The center must ensure that the states’ fears are allayed and true consensus is achieved before such a far-reaching reform is attempted,” he wrote.
To make the implementation more palatable, Jaitley, the finance minister, assured the states that the national government will “compensate them for any loss” for five years. But one business analyst said, on the condition of anonymity, that “if the implementation is handled badly and the states suffer loss, it could break the country’s unity.”
The bill, which requires an amendment to the national constitution, is likely be taken up for discussion and voting in the next parliamentary session, which opens in February, and has to be passed by two-thirds of lawmakers. Then it must be approved by at least half of the state legislatures. Jaitley said he expects the implementation to begin in 2016.
At Khanauri, the word is out that business as usual will soon come to an end.
“Once the new law comes, long lines will be history,” said Sanjeev Puri, the excise and tax inspector at Khanauri. “State borders and checkpoints may melt away and become irrelevant. India will be one seamless market. It will be a very different world then.”