India rolls out its General Goods and Services Tax tomorrow and all the predictions are that it will be of significant benefit to economic growth in the sub-continent. The reason being that, for the first time, the Indian economy will at last be some at least simulacrum of one national economy rather than a series of state bound ones. The benefits of this being something we've known since Adam Smith and David Ricardo--trade makes you richer and the how much richer is defined by the area over which you can freely trade. The interesting thing here is that this is entirely contrary to the sort of economics that Mahatma Ganhi proposed, a nation of small scale and local production and consumption. That proposal being very like the current fad for "buy local" among the sillier types in the west these days and really, only a proposal to make us all distinctly poorer.

This GST move is therefore a good one, richer Indians being in all our interests:

After 17 tumultuous years, a nationwide Goods and Services Tax (GST) will rollout from midnight tonight, overhauling India's convoluted indirect taxation system and unifying the $2 trillion economy with 1.3 billion people into a single market. GST, which will replace more than a dozen central and state levies like factory-gate, excise duty, service tax and local sales tax or VAT, is India's biggest tax reform in the 70 years of independence and will help modernise Asia's third largest economy.

The reason it took so long is precisely because of that original vision of Gandhi. He thought that people would be better off by a system of local production--that was the point of the home spinning and weaving idea--and that large scale and long distance trade was simply not what was wanted. It's possibly even true that people who live that way are richer in some spiritual sense. But then again, maybe not, as the absolute poverty that is the inevitable result of labour intensive agriculture and the consumption of only locally produced goods leads to, at times at least, mass starvation, not a notably spiritually uplifting experience.

As Smith pointed out, as Ricardo refined, it is the division and specialisation of labour which creates wealth--that sort of wealth that stops a third of children dying before their 5th birthdays--and trade is the way in which we can distribute the resultant increase in production. The more we can divide and specialise the richer we shall be, thus the greater area, the more people, across which we can do so the richer we shall be. India's problem was that until the GST each state was, in trade terms, much more like a separate country than just a unit of the larger one. That restrained that internal trade and left people poorer:

At midnight on June 30, the historic Central Hall of Parliament will witness the launch of the Goods and Services Tax (GST). The event will have attendance ranging from veteran actor Amitabh Bachchan to industry doyen Ratan Tata. The last midnight event in Parliament was held in 1997 on the occasion of the golden jubilee of Independence.

Not sure that the GST ranks up there with the jubilee of independence to be frank but it's certainly going to be a significant boost to the economy:

The Goods and Services Tax (GST) is an indirect tax, that is, it is a tax levied on the consumption of goods and items, versus a direct tax that is levied on income.

It replaces a plethora of central and state taxes, such as excise duty, service tax, sales tax, with a single tax structure.

Indirect taxes are a good idea, it's possible to raise the same revenue with less economic distortion than with direct taxation. But the real point here is that there's just the one system across all states. Thus the state borders stop being barriers to trade--each Indian can now trade with more people. Specialisation can become really extreme--back 15 years there was a time there when I was the only person in the world who did my job. Quite seriously, for a couple of years (and for a decade over 50%) all 100% of the scandium used in the lighting industry passed over my desk. Tiny business of course, but it did mean that everyone in the world buying a metal halide light bulb was trading, however indirectly, with me. Also, that no one else had to apply themselves to that work, thus they could specialise in something else, to my benefit.

As I've said before this GST is a good idea:

It's enjoyable, if rare, to be able to point to a government enacting sensible economic proposals. After all, as Ben Bernanke said, 90% of the use of economics is in telling people why their plans won't work. It's only the other 10% which entails suggesting or advising upon sensible things. And a move to taxing consumption, which is what the GST does, is indeed one of those few good things that we can applaud.

The IMF has also indicated that it thinks this is a good idea:

"The government has made significant progress on important economic reforms that will support strong and sustainable growth going forward," Tao Zhang, Deputy Managing Director of the International Monetary Fund, told PTI in an exclusive interview. "We expect that the goods and services tax (GST), which is targeted to be applied starting in July, will help raise India's medium-term growth to above 8 per cent, as it will enhance production and the movement of goods and services across Indian states," the IMF official said.

And yes, Gandhi's idea of local production and consumption really was a bad idea:

This will rub rather a lot of people up the wrong way but still, here goes. Gandhi's economics were terrible and there's still a bit too much lip service paid to those ideas today. The homespun and the direct making of salt were very powerful political arguments, successful actions against the British (yes, my forefathers, although the only known familial connection to the sub-Continent came post-Partition) most certainly, but as the basis of an economy they were and are ruinous. Because deciding upon an economy of local peasant production means that everyone has to live at the standard of living of a peasant. There's just no way to escape this as Brad Delong points out:



Think of it: If international trade is bad--if we should be self-reliant at the national level--then the same argument applies at the state level. If interstate trade is bad----if we should be self-reliant at the state level--then the same argument applies at the municipality level. If inter-municipality trade is bad--if we should be self-reliant at the municipality level--then the same argument applies at the neighborhood level. And so we get all the way down to the basic bedrock of human society: the hamlet or band community of less than 100, say 75. How much could any 75 of us produce as a group if we couldn't trade with outsiders? About $1,000 a year per worker. A United States that tried to be self-sufficient at the hamlet or band level would be lucky to have a national income of $160 billion, one hundredth of the $16 trillion we have.

All of which gives us the lesson from this GST in the rich countries. Think of one of the standard green and environmentalist prescriptions at present. That we should all eat locally grown food, that we should buy local, that we should retreat from trading with the world. Well, if everyone, including Uncle Tom Cobbleigh, is predicting more trade in India making Indians richer, then obviously less trade among ourselves is going to make us poorer, isn't it?

The trade resulting from the division and specialisation of labour is the very thing which makes us rich. Thus the GST will make India richer--and also the Green call for local production will make us all poorer.