The Advent of GST: A necessity for ‘Make in India’

The manufacturing sector in India can play a vital role in furthering the country’s aspirational economic growth, developmental agenda, and the government’s target to provide employment opportunities to millions of Indian youth in the coming years.

Which is why the ‘Make in India’ initiative launched by the Government of India in 2014 is considered as a step in the right direction, and is critical for propelling the much needed growth in the manufacturing sector, while also aiming to raise its contribution to the GDP from 15 per cent to 25 per cent by 2022. The initiative seems to be making significant progress and has attracted greater interest and investments, as was witnessed at the recent ‘Make in India’ week held in February 2016.

Leveraging on its indigenous strengths of democracy, demography and demand, India is a market place in itself especially due to the ‘Make in India’ initiative which has allied with several initiatives that aim to facilitate the ease of doing business, infrastructure development, skill development, digital penetration in India, as well as transform taxation reforms.

From these myriad initiatives, the current white paper focuses on one of the most significant taxation reforms, Goods and Services Tax (GST). It covers the need for GST, how its impact is thorough, extending beyond tax and affecting every part of the business decision, providing a specific focus on the supply chain aspects.

GST could result in an inevitable holistic business transformation, which should lead to a new target operating model for the organisations that aim to improve profitability, cash flow, sourcing, pricing, distribution foot print as well as their Enterprise Resource Planning (ERP) systems.

In order to leverage upon this opportunity, it is important that organisations understand the potential impact of GST. They need to consider redesigning operating models, systems, processes and supply chain architecture to devise an effective implementation plan and finally execute programme management on various work streams across the value chain.

From the supply chain perspective, this may lead to a disruption in the network around six key elements, viz warehouse locations, geographical coverage, manufacturing locations, product plant mapping, manufacturing architecture, and supplier network.

Introduction

The ‘Make in India’ initiative, and its key enabling initiatives launched by the Government of India, aim to provide impetus to manufacturing in the country, thereby increasing the overall economic growth to make it self-reliant. The sector has seen growth at an annual average rate of 5.77 per cent between 2011 and 2015, and the ‘Make in India’ campaign is expected to be one of the major initiatives to target manufacturing sector growth of 12 per cent to 14 per cent in the next three to five years. For this growth rate to become a reality, investors in India and overseas may have to invest significantly in manufacturing.

One of the major stumbling blocks observed over the years is the lack of ease of doing business in India. Realising this, the government had proposed many initiatives towards its facilitation; one such key initiative involved simplification of the tax structure of India and the introduction of Goods and Services Tax (GST). First proposed in 2006-07, GST subsumes several of the current indirect taxes, creating a unified tax structure for the country. The proposed framework is likely to impact overall business operations, including production, business processes, business models and geographical locations, and is expected to be beneficial to the economy and the industry.

Amongst the several reform initiatives, this white paper contextualises the ‘Make in India’ initiative and looks at the impending GST legislation as an enabler to ease of doing business in India. It subsequently drives through the point that from the supply chain perspective, organisations and their people must take the initiative to study the impact of GST, re-orient themselves, and implement the necessary changes to become ‘GST ready’.

Opportunities and challenges to Make in India

The ‘Make in India’ campaign was launched on 25 September 2014 by the Government of India to facilitate the higher share of manufacturing in the GDP from 15 percent, to 25 per cent by the year 2022, through commensurate Indian and foreign investments. Other important objectives were fostering innovation, enhancing skill development, and building some of the leading manufacturing infrastructures that can help India develop into a global manufacturing hub.

Through ‘Make in India’, the government is offering opportunities to businesses via the three ‘D’s of India — democracy, demography, and demand – supported by strong indigenous strengths of a rising youth population, paired with a robust federal government structure. The demographic strength lies in the country being young, with 58 percent of the population being below the age of 29 years3. With aging populations rising in several developed nations, including the U.S. and Japan, this demographic potential offers India and its growing economy a sturdy advantage. The socialist and democratic setup of the country to has its edge over many of the emerging markets, with the demand being reflected by the GDP growth potential and FDI inflows.

Over the next decade (2016-25), the nominal GDP of India is expected to grow at a CAGR of 8.2 per cent. In order to contribute 25 per cent to the GDP, the manufacturing sector may need to grow at a CAGR of 11.2 per cent to reach an estimated size of INR 54 trillion.

From a sectoral perspective, industrial manufacturing and automotive sectors are expected to form a significant portion of the manufacturing sector in the future, with the former expected to grow at a CAGR of 14 per cent to reach an estimated INR30 trillion by 2025, and the latter is expected to contribute to nearly INR10 trillion by the same year.

India ranked ninth in Foreign Direct Investment (FDI) procurement in 2014 worldwide, rising from rank 15 in 2013. The FDI inflows amounted to USD34 billion in 2014, which is 22 per cent higher than the previous year. This is a positive development, especially when global FDI inflows fell by 16 per cent to USD1.23 trillion5. Manufacturing FDI is on the rise in India, with automotive evolving as one of the most lucrative sectors. The current FDI policy is expected to further endorse India’s status as a preferred destination for global investors.