New India Tax Seen Tempering Trade Growth With Imports at Risk

  • Maersk sees decline in India’s 2017 containerized trade growth
  • Benefits of GST depend on implementation of new tax: Dedenis

Economic reform has slowed the flow of cars, electronics and furniture into India and the roll out of a national sales tax may temper import growth for the rest of this year, according to Maersk Line, the South Asian unit of the world’s largest container shipping company.

Imports are more sensitive than exports to the goods and services tax, which debuts July 1, and it will take three quarters to fully understand the impact, Franck Dedenis, managing director of Maersk Line said in an interview. Overall, import volume growth dropped to 5 percent in the first quarter, from 13 percent a year earlier, and the trend in April was the same, he said. That’s acting as a drag on the expansion in container-trade volumes, according to a report from the company published Monday.

“I don’t think we will see the double-digit growth of last year, because last year was -- in terms of import and export -- a very, very strong year,” Dedenis said. India’s trade volume growth in 2017 could fall to 7 percent to 8 percent from 10 percent in 2016 as GST tempers domestic consumption and, therefore, imports, he said. 

Consumers and businesses have become cautious as the Indian government moves from the disruption of demonetization, which sucked 86 percent of currency out of circulation in November, to an overhaul of the tax system that’s seen as the biggest since independence in 1947. The sweeping reform will unify more than a dozen separate levies in a bid to free up trade. Yet, uncertainty remains over the effective implementation of GST and businesses have pointed to the complexity of the tax-filing system and doubts over whether onerous state-border checks will end.

Read: Why Business in India Will (Probably) Get Easier: QuickTake Q&A

“In the consumer durable space, we foresee the introduction of GST creating
an initial market confusion and thereafter being embraced,” said Ajit Nambiar, the chairman and managing director of BPL, a manufacturer of consumer electronics. “While there is some uncertainty on the GST tariffs for certain consumer durables, we believe that there will be marginal impact on pricing.”

Growth in India’s containerized-trade volumes fell to 7 percent in the first three months of 2017, from 10 percent a year ago, as import growth dropped and exports sustained the previous period’s 8 percent expansion. Demonetization and a lack of clarity on GST slowed domestic demand, according to the Maersk Line report.

GST can make Indian exporters more competitive in the long run as they leverage economies of scale and more flexibility in planning logistics, though much will depend on how the new tax regime is implemented, Dedenis said.

“The value of GST is in ease of doing business and simplification,” he said, adding that these benefits may not eventuate unless the government gets rid of administrative paperwork and reduces the complexity of tax fillings.

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