Economic Survey 2016-17: Chapter-10 – One Economic India: For Goods and in the Eyes of the Constitution

In this chapter, the survey has analyzed the degree of economic integration done in last 70 years while keeping in focus the inter-state trade within the country. India’s internal trade to GDP ratio is around 54% which is comparable to that of other large countries. However, there is enormous across states in terms of their trade patterns. Key points from this chapter are as follows:

De facto, India is economically integrated internally

The first ever estimates for inter-state trade in the country show that India’s inter-state trade to GDP ratio is 54%, which is 1.7% larger than international trade. This figure is not as high as that of United States (78% of GDP) or China (74% of GDP) but still higher than many other large economies.  Thus, this figure says that at least de facto, India seems to be well integrated economy.

Balance of Trade between States

The states with the positive balance of trade include large manufacturing states such as Gujarat, Maharashtra, Tamil Nadu as well as small states such as Delhi, Haryana, UP {particularly due to manufacturing hubs located in them such as Noida, Faridabad, Gurgaon etc.} On the other hand, states such as Uttarakhand, Himachal Pradesh and Goa are among the most trade balance deficient states in India.

Further, the survey notes that in many cases, the inter-state trade between contiguous states exceeds the intra-state trade!

These figures are surprising for few reasons. Firstly, we have read so far that inter-state trade in India suffers due to friction caused by differences in state laws and taxes. We still witness five kilometer long jams created by trucks on state borders. Secondly, the survey suggests that the high levels of inter-state trade despite of fictions is because the current system of taxation creates distortions where the inter-state trade is more profitable than the intra-state trade due to value added offsets. This implies that goods are purposely moved across the borders {or at least shown moved across the border}.

Thirdly, the survey points that this anomaly {inter / intra-state distortion} may lead to a pullback in inter-state trade in case GST is implemented.  This premise becomes important to understand and assess the impact of GST implementation.