At the peak of the election campaign in Gujarat, Rahul Gandhi told voters that the goods and services tax (GST) stood for a Gabbar Singh tax – a draconian tax which looted people. The Gujarat election results seem to have rejected that Bollywood comparison. The Bharatiya Janata Party (BJP) romped home in more than 80 per cent of all the urban seats – cities which are major economic, industrial, and production centres, and hence would have been most hit by the introduction of the GST. Barring losses in very specialised industrial towns like Surendranagar and Morbi, BJP not just swept the urban seats; it actually owed its slim majority in the state to these very urban voters.
The Congress party appears surprisingly antagonistic to the GST. This is a bill they effectively designed and shepherded for a decade preceding the 2014 election. Even in the Parliament, the bill was passed with bipartisan consensus, a rare feat in Indian politics at any rate. But in the run up to Gujarat election, the opposition party led by Rahul Gandhi was remarkably strong in its criticism of the GST, arguing for a lower rate of tax and a smaller base of goods and services to be included. These measures would effectively reduce India’s tax base itself.
A lower tax rate is a very desirable goal, but it is unlikely that libertarian principles of smaller government, voluntary choice, and putting the private individual before the state collective drove the Congress party towards this unusual position. The answer may lie in the series of fiscal choices which the Narendra Modi government has made since 2014.
Show The States Some Money
Since coming to power, there are three critical fiscal reforms on the revenue front that the government has undertaken. These have significantly enhanced revenue availability for states, particularly in the low income states in India.
1. Greater revenue sharing under the Fourteenth Finance Commission recommendations, which increased the share of states in the revenue pool to 42 per cent, from 32 per cent previously. This was the largest ever increase recommended and accepted by the central government in independent India’s history.
2. Significantly increasing royalties and passing on income from auction of natural resources to states, especially Odisha, Chhattisgarh, Bihar and Jharkhand. While the central government still does not still give these states complete control over pricing over their natural resources, it does take the sting out of the historical injustices done through the freight equalisation policy implemented by Congress.
3. Implementing the GST, where consumer states get more revenue than before based on their economic performance, while ensuring producer states do not lose revenue given the guaranteed five-year compensation promised by the central government.
Stronger state finances will lower the dependency on Delhi.
Historically, through a myriad of rules and institutions, the government in Delhi (presided over largely by Congress) has adopted the mai-baapapproach to doling out favours and money depending on what political incentives it had to support a particular region over another.
While the current government has also indulged in granting similar political favours – packages in Jammu and Kashmir, Andhra Pradesh and Bihar are examples – they are fewer and had very specific political reasoning. More importantly, the discretionary element of political patronage controlling states’ revenues has been largely dismantled with greater revenue sharing and the abolishment of the Planning Commission. NITI Aayog as the replacement institution has little say in revenue sharing and project implementation.
Indeed, post the Fourteenth Finance Commission, it was estimated that more than 60 per cent of total government expenditure would take place at the state level. With the GST now being in place, that numbers would likely climb higher in coming years, possibly even pushing close to 75 per cent in next decade. This is a very important development, because increasingly, the central government would directly spend on basic services (defence, public administration, financing, and foreign affairs), while most of the governance related spending would be pushed out to the states. Over time, this may even lead to rationalisation of the concurrent list of subjects, improving the collective Indian state capacity.
This expenditure control is already underway, with the central government consolidating its special schemes, and pushing the expenditure towards the states as an optional spending programme in most cases. While the large state-owned enterprises such as Railways, National Highways Authority of India, and REC will continue to boost public spending on the basis of own balance sheet and market borrowing, the discretionary element of government in these entities also continues to reduce, with more state specific joint ventures being formed.
Why Congress Should Worry More Over The GST
Congress needs to be significantly worried over the impact of these federal reforms, including the GST on its old political model, which survives and thrives within the party even though the government is functioning differently. Congress faces three fundamental issues when it comes to these reforms, which it may or may not be able to resolve.
1. A rapidly shrinking electoral footprint in states will mean Congress does not benefit from greater revenue sharing – and conversely the Bharatiya Janata Party (BJP) led states get more leeway to spend on infrastructure and public programmes.
2. Congress needs to develop more dynamic governance models within the party, providing more autonomy to its state units. With the elevation of Rahul Gandhi as the president, the party may be willing to experiment with regional leaders such as Hardik Patel, but it will get even more difficult for the younger state leaders to shine – for they will not be allowed to outdo the Gandhi scion.
3. State leaders have even more incentive to break away from the party, especially if they feel they can win elections without the party support. These possibilities exist in several states like Haryana, Punjab, and Madhya Pradesh.
A general abhorrence to decentralised power bases will make it difficult for Congress to wake up and smell the coffee. And worse still – the potential regional allies of Congress like Trinamool, Left parties, and Dravida Munnetra Kazhagam may actually end up with more spending power than the Congress itself, if it performs poorly in the 2018 state election cycle.
Thus, a functional GST and the possibility of increasing tax collection numbers via better compliance and taxpayer base expansion is anathema to Congress. Unless the party does spectacularly well in the key state elections of 2018, it is looking at a dismal, resource constrained future.
Apart from being the single most important reform since 1991, GST may end up being another ingredient of the Congress Mukt Bharat khichdi, which the BJP has been cooking for a while.