Home >Opinion >Columns >Opinion | Fraying federal polity can derail economic agenda

On 18 December, the 38th meeting of the Goods and Services Tax (GST) Council decided to take a vote on a proposal for imposing a uniform tax rate on lotteries. It was the first time that the federal indirect tax body, since its inception two-and-a-half years ago, had dispensed with consensus.

The point of dispute was the variance in the GST on lotteries —12% for lotteries offered by the state government and 28% for those sold by private entities. Kerala wanted all lotteries to be taxed at 28% and rejected any compromise. Consequently a vote was called on the proposal, which was carried as it was favoured by 21 states and opposed by seven, while three abstained.

Despite the claims proffered by spin doctors after the meeting to not read too much into the vote it is clear that the carefully crafted bi-partisan peace pact, the credit for which must accrue in large part to the then finance minister Arun Jaitley, had been breached. It could be a landmark moment in the country’s federal polity, which had scaled a new high with the introduction of GST.

Indeed it was remarkable that in a country which is so politically diverse, an idea like GST (‘one nation, one tax’) could be evolved with consensus—the states had ceded part of their fiscal sovereignty for a national cause. Though, with the benefit of hindsight, it is apparent that the price this consensus extracted was a flawed GST model with multiple rates.

To the Council’s credit, it has embarked on a project to rework the GST to iron out the glitches. That is exactly why the developments in the 38th Council are a cause for worry. The consensus that was carefully crafted for a record 37 meetings despite (sometimes petty) political pulls and pressures is now history. With politics becoming more fractious, especially after the passage of the Citizenship (Amendment) Act, the odds of a consensus are worse off than before. In other words, the task of the much-needed overhaul of GST has just become that much more difficult.

Tragic, because the GST Council was seen as a forerunner for similar alliances on equally pressing issues like agriculture, education and health, all of which are increasingly posing a drag on India’s ability to realize its potential. All three subjects fall under the purview of the states as well as the Centre. Failure to evolve consensus means states ruled by parties opposed to the Bharatiya Janata Party (BJP)—the dominant partner in the coalition ruling the Centre and the country’s principal political pole—would either reject a Union government initiative or simply put it on the back burner (we are seeing something of this nature play out in Delhi over the implementation of the Ayushman Bharat scheme, which very ambitiously seeks to medically insure nearly half of the country’s population).

It has also long been apparent that the next phase of growth will be determined by the action taken at the state level. The Union government—especially when taken together with what has been done in the last four decades—has already checked most to-do items in the list of macroeconomic reforms. Bereft of consensus, good economic practice could fall prey to political pique or oneupmanship.

The GST experiment had put in place a template. Something similar had been achieved in Gujarat in the mid-1990s when the two arch (and often bitter) rivals, Congress and BJP, inked a document guaranteeing continuity, regardless of regime change, in the reform agenda they agreed to for availing a loan from the Asian Development Bank. It actually laid the basis for the big surge that the state experienced from the turn of the millennium. It was a unique political experiment that would not be repeated till the GST moment on 1 July 2017.

Presumably saner voices will prevail over the new political fault line that has emerged in the last month or so. The new federal polity etched by the GST Council cannot be buried at the altar of politics.

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

Comments are welcome at anil.p@livemint.com

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