Dr Bharat Jhunjhunwala
Prime Minister Narendra Modi is trying to push through the Goods and Services Tax (GST) Bill in the current session of the Parliament. Rates of sales tax applicable on various goods will become uniform across the country if the Bill is passed. This will help push growth. Barriers to interstate trade in goods will be reduced. Trade will increase and push up the growth rate. At the same time States will be deprived of their autonomy. Presently every State is free to impose tax as per its own discretion. One State may tax the television at 12 percent while another may tax it at 10 percent. All States will be required to charge the same rate that is determined by the Centre after GST is implemented.
The issue of autonomy is equally applicable to transfers from the Union to the State Governments. The responsibilities of providing law and order, health, education, rural roads, irrigation, and many others public services rests with the state Governments under our Constitution. The revenues of the states, however, are mainly restricted to sales- and property taxes. The lucrative taxes of excise- and customs duties, income tax and corporate tax are wholly collected by the Central Government. In the result, the states account for 55 percent of the total expenditures of Centre and states combined while they collect only 37 percent of the revenues. The deficit of the states is met by devolution of part of the taxes collected by the Centre.
This devolution takes place in two ways. A specific percentage of the taxes collected by the Centre are automatically devolved to the states. At last reckoning 32 percent was being transferred to the states on this account. Further, the Centre gives grants to the states out of its share of the revenues. These grants are at the discretion of the Centre. Some grants are tied to specific schemes like MNREGA while others are untied. The total transfers to states was about 40 percent of the revenues of the Centre at the last reckoning.
Chief Ministers have always wanted the share of states in the revenues of the Centre to be increased. Moreover, instead of giving “tied” grants that were earmarked for utilization in specific schemes as per norms set by the Centre; the money should be transferred to the states without any conditionalities, he had pleaded. However, the Central Government is of the view that automatic devolution of revenues should not be increased and kept at the present 32 percent. Implicit is the desire to exercise control over the funds devolved to the states.
The underlying issue is that of efficiency versus autonomy. More devolution would give autonomy to the states. That autonomy can be misused. We know how corruption had led to decay of Bihar under Laloo. The Centre loses control over such “inefficient” states if the State share is increased. It is the Centre’s shared responsibility to ensure welfare of the people. Therefore, the Central Government needs to have instruments to cajole the states to implement good policies. That requires the Centre to give out substantial monies to the states as tied grants.
On the other hand, more control by the Centre causes suffocation. It prevents experimentation. The mid-day meal scheme was innovated by Tamil Nadu and employment guarantee scheme was innovated by Maharashtra. More autonomy enables the states to experiment with alternative models of governance. Another danger is that of authoritarianism. Imagine a situation when the Central Government becomes oppressive towards the people as happened during the Emergency. In that case the people would be at the receiving end and the states would remain hapless spectators. That would kill the very essence of democracy and federalism. The choice is difficult. GST and automatic devolution of revenues leads to gain from experimentation and autonomy but loss from inefficiency.
I would vote against GST and for more automatic devolution. Reason is that people of a state will learn from their experiences and ultimately install an efficient Government as happened with the BJP-JDU combine coming to power in Bihar. An individual in the family; a family in the village; a village in the state; and a state in the country should be given maximum possible freedom so that they can make experiments, make mistakes, learn and evolve. A father who does not give freedom to his children makes slaves; not human beings. The same principle applies to the states. Every state must be given maximum freedom to run itself in way it wants. Bihar is a case in point. After much hardship the people learnt that Laloo was using the monies for social welfare and corruption but not investing in infrastructure. That led to lower growth rates. They threw Laloo out. It took 15 years to learn the lesson but it was learnt nevertheless. This cost of learning must be borne. The mother leaves the child to make mistakes so that he will learn. So also the Centre must leave the states to learn from their doings.
It is much more difficult to deal with the tyranny of the Central Government. Take the example of the Pay Commissions. The Centre, in order to keep its hold on the government servants, has continued to increase their salaries. The states have to follow suit and are utterly helpless. They are forced to spend their monies to pay hefty salaries to their employees even though they do not have money to do so. Or consider the WTO Treaty. The Centre signed the Treaty and sacrificed the welfare of the farmers of the country. Markets of the developed countries were not opened for our agricultural exports while our markets have been opened for imports of edible oils and poultry. The states have no tools to resist such anti-people measures implemented by the Centre.
The inefficiency of a state will be rectified after some time; but tyranny of the Centre leaves no anchor by which rectification can take place. It is better to take the route of autonomy since it can bring us out of bad governance even if it is tortuous at present. The route of Centralization leaves no escape route from bad governance even though it may be pleasant today. The United States follows the model of autonomy. The results are before us in plain view. Pray! Why not learn federalism from that country? In consequence, the Government must reconsider its resolve to push GST and seek other ways of promoting interstate trade.
(The author was formerly Professor of Economics at IIM Bengaluru)
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