On Friday, the Congress party-led United Progressive Alliance (UPA) set the ball rolling for the auction of spectrum, or airwaves, to private-sector phone companies for the launch of third generation (3G) telephone services. By the end of this year, we would know how much the government would have earned from the auction. Present estimates vary. Some conservatively peg it at Rs25,000 crore while the more optimistic maintain that it could top Rs40,000 crore.
Similarly, by allowing the private sector to tap another natural resource, gas, available offshore within the territorial waters of the country, the government is hoping to earn some money, partly as royalty and also a proportion of the profits that will accrue to the entrepreneur. An estimate is not readily available, as it will vary on a host of assumptions, including the quantum of gas that will be discovered and piped. But it can be safely stated that the sums involved are not small. We are talking here of sums in trillion-plus rupees.
Please bear with me and you will figure why this arithmetic is important to understand a major lacuna in the political economy of India.
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Add to this the fact that these income streams have only become available in the last 10 years or so, after the country first embraced liberalization with renewed vigour, and enabling technology and easier access to capital made it possible for private entrepreneurs to participate. Whether it be telephony, gas, crude oil or the like, these are all natural resources that belong to the country and should in all fairness be shared between the Centre and the states.
The principle may be appreciated by policy mandarins, but in practice the fact is the accruals on this account are not shared with the states.
The unfairness is all the more because of the new-found practice of the Union government to increase the effective tax rate through the use of a cess and a surcharge—fuel cess on motor spirit, surcharge on pan masala and tobacco products, education cess, secondary and higher education cess, and so on. Most of us would have felt the impact of the fuel cess when we tanked up our vehicles at the petrol pump every week.
May be small at an individual level, but these cesses add up to a lot of money at the national level. The Union budget for 2008-09 shows that collections under this were nearly Rs1.28 trillion—which is nearly 85% of the transfers in tax revenue from the Centre to the states in that year.
The Centre is not doing anything illegal. These are perfectly valid within the constitutional framework of India. The only catch is that a cess or a surcharge is designed as a temporary measure, inevitably to deal with the fiscal costs arising out of some unforeseen circumstance. But some of these have been in place for five years and more, and are now more permanent in nature. They fundamentally violate the ethics of Centre-state fiscal relations.
Further, when the Constitution was being framed, nobody had envisaged that such huge economic rents would accrue to the government by tapping natural resources. Though they were incredible visionaries, it would have been difficult for even the founders to foresee that natural gas could be tapped from the sea bed, or airwaves could be so spliced that they could be used to transmit data for FM/AM radio, cellphones and now for high-speed video to a range of wireless devices under the umbrella of 3G.
While the states now have a serious bone to pick with the Centre, it also provides leverage to the latter as negotiations for the launch of a goods and services tax (GST) by 1 April reach the final leg.
The GST, once in place, would be the singular piece of tax reform in modern India and will for the first time economically unify the country. As a concept, it is brilliant, but requires the state governments to sign on as they will have to give up a lot of their discretionary fiscal rights. Already, as Mint reported on 11 June, some resistance has begun to emerge from some opposition-ruled states as well as from Tamil Nadu—ruled by the Dravida Munnetra Kazhagam, a key constituent of the UPA. There may be a way out as yet.
The Centre could as a grand bargain come clean on its recent practice of opening up an exclusive revenue stream for itself by way of economic rents from natural resources and propose that it be shared with states. The proportion could be decided by the 13th Finance Commission chaired by former finance secretary Vijay Kelkar. The commission is due to submit its report by October. If indeed the Centre does do so, then in all fairness the accruals from 3G auctions should be shared with state governments too.
It would also be consistent with the electoral mandate served up by the country since 1989. The split political verdict has guaranteed coalitions in the country. If the people have ruled that political power is to be shared, then it is only fair that the same logic be employed in the fiscal arithmetic as well.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at email@example.com