Grand bargain reduced to imperfect compromise

Now that the hoopla surrounding the Goods and Services Tax (GST) rate cuts is behind us, it is time to take a hard look at India's eight-year-old grand bargain.

- Yamini Aiyar

Billed as a shining example of cooperative federalism, the grand bargain underlying the GST was premised on the willingness of both the Centre and the states to pool their tax sovereignty and jointly exercise the powers to tax. The Centre agreed to share its tax sovereignty, and the states gave up fiscal autonomy to arrive at this grand bargain.

The GST Council was set up as the site for collective decision-making on indirect taxes. Unlike other federal institutions, like the Planning Commission of yore, this was a product of the states coming together rather than the Centre controlling the purse strings and "inviting" states to the bargaining table. In theory, this grand bargain was a template for deepening cooperative federalism beyond tax bargains.

In practice, however, the grand bargain has been constrained by short-termism and a weak commitment to the federal principle. Both the Centre and states are to blame. The blatantly obvious truth that eight years of the GST has laid bare is that Indian federalism is caught in a low-equilibrium trap. Despite celebrating cooperative federalism, the Centre has done all it can to undermine that spirit, seeking to use its powers to impose cess and surcharges to shore up revenues for itself, while routinely delaying revenue transfers and compensation cess.

This has pushed the states to view federal bargains in zero-sum terms: States chose to deploy their political capital bargaining for compensation, rather than working toward the goal of a single market.