GST spurs reordering of centre-state relations

The passage of the Constitution amendment bill enabling the rollout of the goods and services tax (GST) by the Rajya Sabha last week, after holding out on it for nearly a year, is more than just a seminal piece of tax reforms.

It actually accelerates the reconfiguration of centre-state fiscal relations already underway. Once in place—presumably next year, if not by the deadline of 1 April—it will make states a key stakeholder in the national economy. While the Constitution of India always saw them this way, in practice, the state governments were rarely equal partners.

This is not to undermine the significance of the tax reform, by far the most dramatic since the country attained Independence. Instead, it is to argue that it is considerably more significant than just putting in place an efficient tax regime.

A central feature of the new tax framework—defined by the notion of ‘One Nation, One Tax’—is the creation of the GST Council (once supporting legislation to the Constitutional amendment are passed by Parliament). The way it has been designed, the Union government has only one-third say in decisions taken by the GST Council, while the rest is accounted for by the states; and all decisions have to be carried by a three-fourth majority.

In other words, now onwards, the centre and states are enjoined in a three-legged race—one which they can win only if they coordinate their actions. In short, their future destinies depend on how they cooperate with each other.

Also see: GST council will be one of India’s most powerful federal bodies

We must remember this comes in the backdrop of another game-changing move initiated by the 14th Finance Commission (FFC). Championing the idea that one size cannot fit all—the conventional economic practice wherein uniform central schemes were proffered to states—FFC decided that the spending decision should be in the hands of the states, implicitly accepting that they are mature enough to take such decisions.

Accordingly, it bumped up the share of states from 32% to 42% of net Union tax receipts, did away with tied aid, wherein states had to subscribe to the conditionalities prescribed by the Union government and allowed states conforming to good fiscal records greater leeway to borrow from the markets to fund their budgets. By accepting the FFC’s recommendation, the Union government has assured, for the first time, public expenditure is now decisively in the jurisdiction of states; they get to influence their own fiscal destinies.

This is only fair, given that the states, which oversee law and order, public health, sanitation, agriculture, education and building of roads and bridges, have far more functional responsibilities than the centre.

Purists argue, rightly so, that maybe this transition to greater fiscal autonomy could have been staggered, given that many states do not have the capacities to absorb such large expenditure capability. But then, is there ever a right time; if you have to take the plunge, might as well be at the deep end of the pool as it were.

It is significant that the green signal to the Constitutional amendment by Parliament (Lok Sabha will take up the amended bill on Monday) comes just a fortnight ahead of India’s 70th year of Independence. It is a big milestone for India, which has retained its sovereignty and, more importantly, emerged as a beacon for other aspiring democracies.

The next 70 years will depend on how the federation of India evolves. The term ‘Cooperative Federalism’, coined by the National Democratic Alliance (NDA), sums up the ideology that would successfully define this evolution: Together they stand and divided they will fail.

In this, the recommendations of FFC, GST and other policies on the anvil are only stepping stones. Evolving institutions such as the GST Council and the revived Inter-State Council will be critical in overseeing this transition with minimal recriminations; state chief ministers are already equal partners in the governing council of NITI (National Institution for Transforming India) Aayog, which has replaced the Planning Commission.

In fact, the Prime Minister summed up this new approach to governance in a letter addressed to state chief ministers immediately after the tabling of the FFC report in Parliament in February last year. “This is all towards the fulfilment of my promise of co-operative federalism,” he said. “As you have already seen, we have decided to involve states in discussing and planning national priorities. This is being done so as to maximize the outcome from every rupee spent either at the centre or the state.”

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus

Comments are welcome at capitalcalculus@livemint.com