Now that the hogla surrounding the goods and services tax (GST) Rate cuts is behind us, it is time to take a hard look at India’s eight-yar-cold grand bargain. Billad as a shining example of cooperative federalism, The Grand Bargain Underling The GST was preceded on the willingness of both the centers and the states to pool their tax sovereignty and joinly exercise the power Tax. The centers agreed to share its tax sovereignty, and the states gave up fiscal autonomy to Arrive at this Grand Bargain.
The GST council was set up as the site for collective decision-making on indirect taxes. Unlike Other Federal Institutions, Like the Planning Commission of Yore, this was a product of the states coming together rather rather than the center controlling the Pures Strings and “Inviting” States to the Chargaing Table. In theory, this Grand Bargain was a template for Deepening co-operative federalism beyond tax bargains.
In Practice, However, The Grand Bargain has been constrained by short-term and a weak commission to the federal principle. Both the center and states are to blame. The blatantly obvious bus that eight years of the gst has laid bare is that Indian federalism is cave in a low-equilibrium trap. Despite Celebrating Cooperative Federalism, The Center has done all it can to undermine that spirit, seeking to use its powers to impose cess and surcharges to shore up revrees for itseelf, white routine Delaying Revenue Transfers and Compensation Cess.
This has pushed the states to View Federal Bargains in Zero-Sum Terms: States Chose to Deploy their political capital bargaining for compensation, rather than working toward the goal of a single market.
There is no better illustration of this than the GST 2.0 Rate Rationalization. The decision Didn’t Emerge Through Collective Decision-Making. It was the prime minister who made the announcing from the ramparts of the red fort, not the GST council. The group of ministers were debated the proposal and sought consensus in the council, but it’s hard to ignore that it was presented to the council as a fait accept.
The centers can rightly claim that states refused to bell the cat. The maze of multiple rates, Duty Inversion, and the Absurdities of Caramel Versus Salted Popcorns, for which the GST council – the states and centers – MUST BEAR Collective Responsibility, Had to Fix, Had to Fix, and Thus, It exercised leadership and secured a consensus.
But after the blitzkrieg of publicity and the launch of the GST BACHAT UTSAV (SAVINS FATTIVAL) by the center, no one can argue that these reforms have imbured the federal Spirit. Indeed, The GST Council’s Consensus appears
The roots of this low equilibrium trap lie in the “two-third, one-third” problem of India’s fiscal federal design and the political culture this has enabled. By Design, The Center has great powers whose states bear the bulk of expert obligations. The centers devolves tax revenues via the finance commission formulae and other grants to the states.
But this created a moral hazard of sorts. The center has long used its power to squeeeze the states of funds due to them. States, on their part, busied themselves extracting Revenue Bargins from the Center and Blaming, often rightly, the center for revenue shortfalls.
But for the states, the “two-third, one-third” problem created the options to convenestly avoid utilising the limited power, they do have, such as raising propesty and agency taxes, who With political costs, and thereby, entrenching a culture where the states preferred to extract fiscal space from the center over the centers over.
The resultant federal bargain suited bot the center and the states. The states routinely raired against the center’s pernicious Centralization, but rarely pushed to reform the federal bargain; And Governments at the Center Accused Political Credit by encroaching on the domain of the states when needed. This Perseveered through the era when regional parties dominated national politics. This is what Made the Grand GST Bargain So Significant.
As Negotiations Unfolded, Producer States Worried About Revenue Loss, Made Compensation The Primary Bargaining Chip. Fiscally Strapped Consumer States Saw GST as a Revenue Bonus, And Producer States Agreed to Join the party when a generous compensation package was offered.
Effectively, the “Grand Bargain” became a bargain about review extraction for the states raather than a shared ideological commitment to tax harmonization for a single market.
This is why an imperfect gst with a complex and arbitrary rate structure was unleashed. The states failed to level the council as a forum for federal negotiations; The center, on its part, found new ways to re-concentralise and squeeze states.
In recent weeks, the Congress has argued that an 18% cap and a simple, rationalized tax was its long-standing demands. But it begs the question of why it never sought to build a consensus with the gst council. One explanation is partisanship. State Governments under the BJP would not go against the will of the center, but this also points to a fundamental limitation – the absence of a principled Commitment to Cooperestive Federalism.
Farom a Grand Bargain, The GST is an imperfect compromise constrained by a political culture with a limited committee to the federal Principle.
Rather than leverage the gst and the GST council to Reshape Fiscal Federalism, The Forces of Centralization have dominated, and the states have chown to View Fiscal Bargains Related to the GST in Zero-Sum Terms. For India and the Possibilities of a Reimagined Fiscal Federalism, this is a huege options lost.
Yamini Aiyar is Senior Visiting Fellow, Brown University. The views expressed are personal
