Make in India: Tax Reform as Job Creation

August 10, 2017 1:30 PM

By 2050, at least 280 million young people will enter the job market in India. Yet India is losing 550 manufacturing and service jobs per day as it adopts new technologies. A new countrywide value-added tax that supersedes India's numerous indirect taxes may deliver over 10 million new jobs and temporarily alleviate pressure on the labor market.

India is frequently cited among the countries that stand to lose the largest number of jobs due to new technologies. A 2016 World Bank study, for example, estimates that 42 percent of formal sector jobs in India will be obliterated at the current pace of wage increases and technology adoption. Many of these jobs are occupied by well-paid accounting, logistics, and call-center professionals, who are part of global value chains.

To counter this troubling trend, the government has pushed through a major reform of indirect taxation, adopted in July 2017. The nationwide value-added tax, known in India as the goods-and-services-tax, replaces over a dozen excise duties, services taxes, and interstate customs duties and surcharges, as well as the state-level value-added tax and the interstate entry tax, which are charged as goods cross borders between Indian states. Of India's 29 states, 22 have already approved the tax reform and are scrapping tax and customs checkpoints to comply with it.

The tax reform, originally contemplated in 1999, failed twice to pass in parliament until it was adopted by Prime Minister Narendra Modi's government this year. The short-term effects of this reform are reasonably well documented: A quarter million accounting and training jobs have been created to help the approximately 30 million businesses deal with the new tax. Beyond this immediate effect, interstate trade is bound to increase, as the current system encourages suboptimal production chains within states. Economists at the US Federal Reserve Board estimate that the long-term effect will add 4.2 percent of GDP to India's manufacturing output. With current technology, this macroeconomic expansion is the equivalent of adding 10.5 million new jobs.

For most countries, creating over 10 million jobs is reason for jubilation. For India, it is one step towards meeting the needs of its growing young population. In late July 2017, I met Prime Minister Modi and learned about his “Make in India” program, which aims to provide employment for 100 million workers by increasing the GDP share of manufacturing from 12 to 25 percent by 2025. This estimate seems overly ambitious, but so did the adoption of a single value-added tax across India just a few months ago.

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