FILE - In this June 30, 2017, file photo, Indian Prime Minister Narendra Modi speaks at an event a day before the implementation of the nationwide Goods and Services Tax in Ahmadabad, India. Modi came to power on a euphoric wave of promises to boost the economy. Three years later, India's economic prospects are looking decidedly more grim. India's economic expansion has slowed to its lowest level in three years. (AP Photo/Ajit Solanki, File)
Narendra Modi, prime minister of India © AP

Narendra Modi’s push to boost Indian exports is being undermined by the problems plaguing his government’s new tax system, companies have warned, with tens of thousands of exporters struggling to meet their short-term funding needs.

The Indian prime minister unveiled a new goods and services tax in July, which ministers hope will significantly boost economic output by turning the country into a single market for the first time. But it has been beset by technical problems and design flaws, threatening business confidence and contributing to a sudden drop in gross domestic product.

In September, it emerged that businesses lodged claims for tax credits worth nearly $10bn for the first month of the GST — far greater than ministers had been expecting.

As they look to increase tax revenues, officials have delayed paying credits to exporters, who have to pay their tax and then claim the cash back under the new system. Under the old regime, exporters did not have to pay tax at all on the supplies they bought.

$274.7bn

Value of India’s exports in 2016-17, a rise of 4.7%

“Small and medium exporters are finding it especially tough, as they are not able to take out bank loans to fund their working capital while they wait for tax credits to be paid,” Ajay Sahai, director-general of the Federation of Indian Export Organisations (FIEO), said.

Mr Sahai estimates there are about 100,000 small and medium-sized exporters, up to 40 per cent of which are now facing difficulties.

The problems threaten Mr Modi’s aim of boosting exports, which he has made a part of his economic policy under the “Make in India” slogan. Until recently that policy had been relatively successful, with exports rising 4.7 per cent in 2016-17 to $274.7bn — the steepest in five years.

But that progress has stalled. In September the Reserve Bank of India announced India’s current account deficit had jumped to a four-year high of $14.3bn, as imports rose at double the pace of exports.

Meanwhile economic growth has also slowed, falling from 7 per cent at the end of 2016 to just 5.7 per cent for the quarter ending on June 30.

The dip has triggered a rare bout of infighting within the ruling Bharatiya Janata party, with Yashwant Sinha, the former finance minister, accusing the government of making a “mess” of the economy.

The FIEO has warned that the economic problems will probably be worse in the coming months as a result of the cash crunch. “Many companies are not able to sign new sales contracts right now because they cannot guarantee they will be able to meet them,” Mr Sahai said.

This week representatives from the organisation met ministers in Delhi and were reassured that the claims would be paid before the next tax filing date, according to Mr Sahai.

But some warn that the damage is already being done, especially as India’s banks are already saddled with billions of dollars’ worth of bad loans.

“This is particularly a problem for companies with weaker balance sheets, as banks are not going to lend to them,” said Niraj Rathi, associate director of ratings agency India Ratings.

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