A ‘two-third, one-third’ problem of Indian federalism
States get too little tax money for the spending they do and it’ll be a relief if they get their full GST compensation
A tsunami of commentary was unleashed by three words uttered by finance minister Nirmala Sitharaman after the last meeting of the Goods and Services Tax (GST) Council. The amount of ink spilt on her “act of God" comment could fill many doctoral theses, and be the envy of divinity schools. It was a marathon meeting and those words were perhaps just a throwaway remark. Who would have guessed their power? They were evocative and conjured up the notion of force majeure in commercial contracts, which lets parties abandon their commitments. But this was the sovereign trying to renege on a written promise made to its sub-sovereigns: i.e., the states. It was an unconditional promise. Going back on it would have signalled betrayal, a huge crack in the foundation of trust, the very basis for cooperative federalism. There are good reasons why the Centre would have to honour its promise to the states, as it reportedly avowed on Monday, of filling the gap to ensure a 14% growth in GST revenues. The Centre is eminently more capable than the states to raise the requisite funds, having access to the central bank, foreign dollar investors, the instrument of cess, and de facto monetization of debt. States do not have any of these, and could not be left in the lurch. It does not matter that the 14% promise was too generous in hindsight. It did, after all, help secure a historic consensus.