World Economy

Next Global Trading Block May Be India

Next Global Trading Block May Be IndiaNext Global Trading Block May Be India

A new Common Market is being formed. It has a bigger economy than the whole of sub-Saharan Africa, more states than the European Union has members, and twice the population of North America. It’s called India.

For more than six decades since independence, India’s 29 states have operated almost as separate countries. They set their own taxes, charged import duties on goods from neighboring states, had their own politics, culture and even languages, Bloomberg reported.

Prime Minister Narendra Modi is trying to change that, using his popularity among voters to replace more than a dozen levies with a single goods-and-services tax by next April, leaning on state governments to amend labyrinthine labor and land laws, and revamping the Soviet-style Planning Commission. To win support from states, he’s pledged them a record share of federal tax revenue.

“There are 29 mini Indias within one big India and they are modifying their approval process, procedures to make themselves competitive,” said Ajay S. Shriram, 61, chairman and senior managing director of DCM Shriram Ltd., a business with interests in sugar, chemicals and cement that has plants and offices in at least five states. “States are trying for their own economic development, which will help improve the ease of doing business and boost the country’s growth.”

Given the size of India’s states and a predicted growth rate of at least 7.5 percent over the next five years, the potential benefits of integration for investors are huge. In population terms, Uttar Pradesh is equivalent to Brazil, Maharashtra would be Mexico, while Bihar is on par with the Philippines. Telangana, India’s 12th-largest state, is comparable to Canada.

“India’s states can be compared to major countries around the world,” McKinsey analysts including Jaidit Brar wrote in a report in October. “Understanding their evolution and making the right bets from a five- to 10-year standpoint is critical to being well positioned for growth in the Indian market.”

Should Modi succeed in forging a single market, the biggest winners could be some of the poorest states. Like the boom for EU newcomers from Central Europe in 2004, growth in laggard states may consistently outpace the national average as India’s lopsided economy begins to balance out.

Eight Indian states accounted for about 45 percent of the $1.8 trillion gross domestic product in 2012, led by Haryana and Maharashtra, the McKinsey report said.