The GST, if fully enacted, will not just be one of the most significant economic reforms since 1991. It will also be one of the most significant constitutional innovations since 1950. It radically rewrites the nature of Indian federalism. The enactment of a bill of this magnitude showed glimpses of what Indian democracy can be at its best. India needs more of the nectar of the high-minded constitutional deliberation we saw in parliament and less of low-minded social poison. Like many constitutional innovations, there is some leap of faith. Not all the institutional consequences can be fully known in advance.
Much will depend on how our larger politics develops. And much will depend on the new culture of negotiations that develops around institutions like the GST council. The GST amendment is a radical institutional departure. The GST council, arguably, makes the states significant decision partners in national-level macro-economic management. Indeed, the tough negotiations over the GST rate will reflect exactly the tension the chief ministers will face. Individually, each state would want a rate that gives it higher revenue and more spending; but collectively, they will have to be mindful of the aggregate national-level macro-economic impact on things like inflation. In short, the states will have to think nationally as well.
The equal voting weight given to every state enshrines their power in a new way; it almost accords states a new constitutional status. Most of the coordinating mechanisms involving states like the NDC have been moribund; this creates a genuinely empowered institution for cooperative federalism. How the states form interesting coalitions will keep many a game theorist busy. Finally, the biggest change it introduces is taking away the discretion of individual states on taxing a range of goods and services. Since states are collectively now part of decision-making (even though the Centre can veto), they will have to be careful about creating precedents that could spell trouble for the future. This is one of the attractions. On the one hand, it has the potential of cleaning up the political economy of producer taxes, which will no longer be subject to usual discretionary politics. On the other hand, this is exactly the provision that states like Tamil Nadu worry about. Does the GST cut down the states’ autonomy too much? Will there be a basic structure-based legal challenge to the amendment?
The claim that the GST cuts down the states’ autonomy is considerably overstated if looked at in a dynamic perspective. First, it is true that the states will not be able to use goods and services taxes to finance local practices. But for a while, they have considerable leeway on petroleum taxes that form a bulk of their revenue. Second, we are possibly underestimating the potential of non-goods and services-related revenue the states can deploy. In fact, one of the weaknesses of the current system was that the revenue efforts of most states were pretty meagre; they often took the easy way out. The degree to which states (and local governments) can deploy other kinds of taxes like property taxes is very much an open one. I would not underestimate the states’ creative capacities to find new sources of revenue if a distortionary mechanism is closed off. And in future, there could even be a debate on allowing some degree of state income taxes. Third, if the aggregate revenues go up because of the GST, that arguably creates a new kind of spending autonomy.
It is important not to gloss over our recent history on federalism. The autonomy of states was curtailed, not by restrictions on the revenue side, but by the spending mandates imposed by the Centre. The UPA’s centrally sponsored schemes were arguably far bigger violations of the state’s autonomy. The finance commission has restored some balance by increasing the share of the states. But the impact of this has been blunted a bit by already committed liabilities. And the fact of the matter is the Central government has been pushing unfunded mandates on states in a variety of ways. One of the down sides of the “rights” revolution, which will soon be extended to health, is its impact on states’ autonomy. Even a lot of other central legislation has implicitly imposed costs on the states without consulting them to the degree necessary. So it is a bit of bad faith to present the current story as one in which the states had autonomy to set their own priorities.
The autonomy they exercised was often in not implementing Central mandates. One of the possibilities of looking upon states as partners in national macro-economic management is that they could also acquire some bargaining power on the spending side. So the flip side of the new cooperative federalism may be, if the structures of bargaining work well, a rethink on how the Centre redefines funding priorities in ways that impact the states. If the states are going to be disciplined on the revenue generation side, it is reasonable that they demand the Centre not determine their spending priorities. This story, like the story of most constitutional settlements, will be contingent on lots of things: Which parties are in power in the states, how the economy does and so forth.
There are other implications for federalism. What will happen to the panchayat and city finances is an open question. I suspect the states will do panchayats a disservice.
But politicians could actually get more interested in municipal matters, because there might be untapped revenue sources there. The GST bill may in the long run incentivise new kinds of negotiation.
The road to the GST is still arduous. Self-defeating ideas like having different rates for goods and services are still being bandied about. The tension between the short-term interests of the states, which are pushing for higher rates, and concerns for inflation which call for lower rates, will need to be resolved. The implementation process will generate some short-term dislocations. So politicians may still lose their nerve. In fact, one suggestion to meet this possibility that is floating around is to announce the implementation date as the first month after the next general election in 2019 so that the government does not have to bear a possible implementation price, if there is one.
We have it within our power to make this an exuberant constitutional adventure. India as a deeply unified modern single market with non-distortionary taxes, moving towards cooperative federalism, has more than a touch of romance; it is also practically wise. Like all steps, it will impose some costs. But we have shown that we can adapt and innovate responsibly when we want.