The political economy of the Srinagar Consensus on GST
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Last Friday Srinagar, normally in the news for all the wrong reasons, etched its place in the economic history of India.
The goods and services tax (GST) Council, which held its 14th meeting in the city, cleared one of the last hurdles—fitment of rates for 1,211 commodities—and in the process all but reaffirmed the 1 July rollout of what is India’s most important piece of indirect tax reform ever.
But the fallout goes much beyond being a showpiece for economic reforms; and it is the political economy of this historic moment which makes it such a game changer.
For one, the consensus managed by the GST Council on such a contentious issue as the fitment of tax rates, ensures Srinagar and the state of Jammu and Kashmir (J&K) are part of the key economic history lexicon of India. It has provided a platform for both J&K and the Union government to attempt to alter the status quo—which at present seems to be nothing but a repetitive narrative of disruption that is, among other things, having devastating consequences for an already fragile economy which is yet to recover from the 2014 floods.
Already, ministers of the 24-odd states who participated in the two-day deliberations have observed that the situation—influenced to a large degree by the footage of clashes between stone-pelters and security forces frequently shown on television—is far less worse than what they had feared.
Taking part in a panel discussion hosted by Mint on the sidelines of the GST Council meeting in Srinagar, Karnataka’s agriculture minister Krishna Byre Gowda candidly admitted that his perception had changed. “The impression you get from outside the (Kashmir) valley is that large incidents of disturbances are prevailing; at least that is the image the media has given us,” he said before adding, “I am not denying that there are no incidents. But for the most part actually life seems normal. Before (coming here) I was questioning the wisdom of holding the GST meet in the middle of so-called disturbances.”
Second, Srinagar retained the consensus that has been the signature takeaway from the previous 13 deliberations, suggesting that a new pattern of federalism is evolving. The fact is that both the Union government and the states and Union Territories have had to surrender some of their sovereignty—their freedom to tax—and obviously some have lost more. Yet, they have differed (sometimes bitterly) but finally stuck to the party line: India First.
It is like Haseeb Drabu, finance minister of Jammu and Kashmir, is often wont to saying: the GST council is India’s first federal institution. For the first time, the states are equal stakeholders with the Union government in economic reforms, unlike say in 1991—at the time, when the Union government went in for a big burst of reforms, Drabu says, most finance ministers read it the next day in the newspapers. This new federal polity, riding on the bonding the finance ministers struck during the GST journey, augurs well for India.
Third, the roll-out of GST will reinforce India’s belated commitment to a rules-based regime. For most of the last 70 years the country has been addicted to an exceptions-based regime, one of the consequences of which is corruption and crony capitalism. Over the last five years or so, the country has begun to take slow and steady steps towards establishing a rules-based regime.
The implementation of GST will be one giant step forward. Not only will the real- time monitoring of transactions discourage tax evasion, it will also accelerate the formalization of the informal economy. Like the demonetization of high value currencies on 8 November, GST too should logically expedite integration of the informal economy into the formal economy.
This is not to say that there won’t be dislocations and disruptions as people are nudged to adopt information technology and set up processes they have never been used to, and all within the next six weeks. But the consensus generated among the finance ministers suggests that there is a collective resolve to see this piece of reforms through. And this will be far more transformative than simply adopting an efficient tax system.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus.
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