Trump and Xi could learn from Modi's pragmatic freer trade policies

The self-defeating tariff war between the US and China comes at a time when India has adopted a more liberalised approach writes India Inc. CEO Manoj Ladwa.

US President Donald Trump has fired his opening salvos in what could escalate into a full blown trade war between the US and China, the world's two largest economies. This is ironical and, in my opinion and in the opinions of millions of people around the world, self-defeating and, potentially, ruinous for the world at large.

It is ironical that this is happening at a time when India, a late convert to the free market, is structurally opening up its economy to easier and freer trade. Just to recap, the Trump administration has imposed penal tariffs on $34 billion worth of Chinese exports to the US. Not one to take such action lying down, Xi Jinping's China imposed retaliatory tariffs on the same amount of imports from the US.

Having made his point, however unjustified, it would have been wise if the US refrained from further escalation. But like the proverbial bull in a China shop (sorry for the bad pun), Trump reacted by proposing a 10 per cent levy on $200 billion worth of Chinese exports. China has challenged this before the World Trade Organisation (WTO).

Most people are scrambling to figure out exactly what is going on. The US and China are the world's largest trading economies by a good margin and the biggest beneficiaries of free trade. Many American products have a large proportion of inputs made in China.

Many others are, in fact, fully made there. This unfolding trade war couldn't have come at a worse time for India. The country has opened up to the world and is, in many ways, unrecognisable from what it was just four years ago.

The Goods and Services Tax (GST), which was launched a year ago in India, has turned the country from a market of 29 states, each with its plethora of tax laws, into one common market, much like the European Union (EU). Compliance, transparency and revenues have all improved and the increasing formalisation of the economy is resulting in substantially higher tax collections. Consider this: After hitting an all-time high of $15 billion in April this year, GST has netted about $14.1-14.3 billion in the two following months - considerably higher than the average pre-GST indirect tax collections of about $13 billion per month.

Let me quickly add that these are impressions based on what are still early days for the new tax and that final judgment will have to await further passage of time. But if the old proverb “morning shows the day” is anything to go by, then Indian Finance Minister Arun Jaitley, who invested considerable time, effort and personal political capital on generating the consensus that made GST possible can breathe easy.

In the 12-month period from July 2017 to June 2018, the number of registered tax payers has risen dramatically by 75 per cent from 6.4 million to 11.2 million and compliance level rose to 65 per cent in April compared to 55-57 per cent six months before. This proves that at least a part of the country's infamous shadow (called “black” in local parlance) economy is coming into the tax net.

This is also evident from the rise in advance personal income tax and corporate tax collections. And this, in turn, should lead to an improvement in the ease of doing business. But in my opinion, the greatest benefits of GST go beyond mere numbers on revenue generated. I feel this new regime will help integrate India further into the global value chain by making transactions seamless, honest and easy. At a time when the two greatest beneficiaries of free trade are digging the grave of free trade, the secret of their success, Trump and Xi could learn from the pragmatic policies of Modi.