Notwithstanding the recent Modi-Kumar controversy about inter-state transfers of the charitable kind, Modi did make an important statement two years back. Why should Gujarat disproportionately support the Central government, especially when all top-down aid to states is bound to be politicized, as it has been by the Congress.
I agree with Narendra Modi’s view that we need to have more fiscal autonomy for states. Rajeev Mantri and I had written an article in Pragati during the Telengana controversy – “More states, not satrapies”
The more the number of states, and the freer they are to set their own taxation and spending policies, the more policy innovation and efficiency we will have. This would in turn force the laggard states to shape up, as the revenue base erodes due to the migration of taxpayers and industries. According to M Govinda Rao, director of the National Institute of Public Finance and Policy, a thorough review of fiscal federalism for today’s market economy is urgently needed. He notes that the “fiscal arrangements in India have evolved in a quasi-federal system to meet the requirements of centralised planning in a mixed economy framework.” And, while fiscal centralisation—that is, redistribution from richer to poorer states through the Union government—has had an “equalising impact, it has [created] disincentives for fiscal management.”….One look at the budgets of state governments, and one can see New Delhi’s imprint all over. On the revenue side for states, we have consumption taxes, whose rates are significantly affected through New Delhi’s fiscal carrots and political sticks. Even the remaining independence to set rates will completely go if and when the uniform-rate-throughout-India version of the Goods and Services Tax (GST) comes into force...
In another article, I had written
The debate over the goods and services tax (GST) conflates two objectives. Firstly, rationalizing and merging various indirect taxes to have internal borderless travel of goods and services so that better economies of scale can be realized. And secondly, to then have a uniform tax rate in all the states—which is ostensibly crucial to integrate the market. But an integrated market—with no border delays and octroi—can be fully achieved with better use of information technology and better state-Centre coordination, and does not require a uniform tax rate in all the states. For example, the European Union has achieved a single, efficient market while still having different value-added tax (VAT) rates for its member states using the VAT Information Exchange System. India’s Tax Information Exchange System can be used similarly… We need to learn from the European, American and Canadian models to figure out how to have an integrated market while still having separate tax rates within. A few countries such as Australia have gone for uniform rates—but a huge economy and heterogeneous polity like India’s needs to be aware of the dangers of fiscal centralization.
If Narendra Modi instinctually understands competition and accountability, and even partially meant what he had said two years ago, he should oppose the GST – while arguing for smarter welfare (like his own policies e.g. Chiranjeevi scheme’s maternity vouchers) and block grants for states. Of course, competition between states only works if there is an inter-migratory clause along with a commerce clause. That is, Narendra Modi needs to attack the likes of Raj Thackereys so that people from one part of India can go to another part for an economic regime which has more opportunities for them without any fear. But it seems that Modi will neither support federalism with any conviction, nor will he denounce parochialism with any force. That disappoints me – this somewhat reserved admirer of his.
Pages:
Recent Comments