Faltering federalism: GST Council meeting failure is not a good sign

States don't issue their own currency, and are by definition a more fragile borrowing construct than the Union. The final solution must reflect this asymmetry

It is unfortunate that the meeting of the goods and services tax (GST) Council, which serves to bring together the stakeholders in the indirect tax regime from both the Union and the states, has ended without a consensus. The Council will meet again on October 12, but it is far from clear how a consensus will be obtained if both sides remain determined on their course. The bitterness was evident from Union Finance Minister Nirmala Sitharaman’s statement after the meeting that some of the participants at the meeting “gently reminded” her that she should not take anybody for granted — a view she contested. The question remains as to how much the ongoing Covid-19 pandemic will affect the states’ revenue, and whether the Union is willing to, or even able to, live up to its commitments under the original grand bargain that led to GST. A division has emerged between some of the states as well, with a considerable number of National Democratic Alliance-ruled states willing to go ahead with one of the options preferred by the finance ministry as to an additional borrowing burden for states. The finance minister herself has insisted that no compensation is being “denied”, merely that the pandemic has affected the Union’s ability to pay. Part of the solution is that the GST compensation cess will continue longer than previously envisaged, and the additional funds collected will go in repaying the additional borrowing. The finance minister insisted that nobody will be denied “the compensation that arises from the implementation of GST”. She also added that the Rs 20,000 crore of compensation cess collected this year will be disbursed on Monday night.

However, that eludes the central question as to whether the Covid-19 burden is being shared equitably, which is the locus of the dissenting states’ objections. The Union is of the opinion that the pandemic means it does not have to pay Rs 1.38 trillion of what was promised; states disagree. Some states also disagree that they should have to take on the debt burden caused by any decrease in expectations. It is up to the Union to ensure that these issues are resolved in a manner that is reasonable and satisfies the dissenters. Fortunately, this has not yet become fodder for mass politics by regional parties, so the possibility of compromise still exists. The Union’s duty must surely be to ensure that these issues do not become further politicised. The costs of such politicisation in terms of the pressure on federalism in India would be great.

This dispute comes at a time when multiple other pressures have begun to operate on fiscal federalism, including through the terms of reference of the Finance Commission, which have threatened to punish “populist” policies in states while promoting the preferred policies at Union level. The pandemic has expanded the scope of already existing disagreements. While the state governments were on the front line of dealing with the pandemic, they had very little input on the scale of the original intervention and the lockdown; and their resources were clearly inadequate for the task. There is no denying that the Union government faces a formidable fiscal hole, and it can seriously question why the states should not have to pay part of this. But the fact is that states do not issue their own currency, and are by definition a more fragile borrowing construct than the Union. There is a built-in asymmetry, and the final solution must reflect that.