The central government has agreed to compensate states fully for the GST shortfall this year. This brings the curtain down on two months of cantankerous conflict between the central and state governments over how and how much the states will be compensated for the GST shortfall. A conflict that would have gone to the apex court, but for the Centre suffering a complete change of heart and giving in to all demands of the states.
Here's an analysis of what the Centre has agreed to and why the co-operative federalism that the former finance minister Arun Jaitley encouraged would have better served the Centre from the start.
Here's what the Centre has agreed to:
1. It will not only compensate states in full, but also borrow the shortfall amount of Rs 1.1 lakh crore in its name, and turn it over to the states in the form of a loan. The benefit of this arrangement is a loan taken by the Centre comes at a lower interest cost. The Centre is at pains to point out this is a back-to-back loan. It will simply borrow from the market and give it to states as a loan, so the deficit shows in the states' books, not in the central budget. But since the principal, and the interest will be reimbursed from future cess collections, neither governments lose.
2. The second and equally important decision taken on Thursday is that an additional 0.5 percent of their SGDP ( state gross domestic product) that states were allowed to borrow to bridge COVID related shortfalls, will now come without any conditions. Earlier, the same permission was granted with conditions such as implementing power sector reforms and the one-nation-one-ration card scheme.
The Centre could have and should have agreed to both these points from the start. By early August, it became clear that the GST shortfall would be over Rs 2 lakh crore. On August 28, the Centre came with the argument that COVID-19 is an "Act of God" and the Centre is not bound to make good the entire GST shortfall. It then pulled out an assumption of a 10 percent nominal GDP growth, on which the 14 percent GST CAGR was based, and proceeded to argue that part of the shortfall which was due to the GDP contraction will not be liable to be compensated and only that part of the shortfall which was due to the implementation of GST, will be compensated. The Centre pressed this argument for nearly two months. The most important statement in the finance minister's letter to the state governments yesterday was the complete about-turn in this position.
It admitted that as per the Attorney General, the entire shortfall will have to be paid to states. The letter said the government has accepted this legal position. It would have been way more efficient, graceful and statesmanlike to have accepted this on August 15, instead of on October 15. Right now, it appears to be statesmanship by force. The threat of the state of Kerala to drag the central government to court, and possible defeat in the apex court, appears to have scared the central government into accepting the legal position that states have to be paid the full compensation of 14 percent CAGR of sales taxes, as agreed in section 7 of the GST Act.
Section 7 of the GST Act is key. Under the GST Amendment Act, states agreed to hand over their most lucrative tax source - sales tax - to the GST Council, provided they are compensated for the first five years at a compounded annual rate of 14 percent. To introduce, in the face of COVID-19, a caveat out of thin air, that the 14 percent was contingent upon the economy growing at a nominal GDP of 10 percent was unfair on the part of the Centre and legally untenable.
The other decision announced in this letter that states can borrow an incremental 0.5 percent of their SGDP without conditions is equally important. In August, the Centre quoted section 292 of the constitution to say that any extra borrowing by states can come only with the Centre's permission and the Centre has the right to impose conditions. This was clearly a high-handed interpretation of the constitution. The constitution requires a state to seek Centre's permission to borrow from the market, only if it has taken loans from the Centre. This is more in the nature of a borrower taking a NOC (No Objection Certificate) from his bank before he takes another loan from another bank. It was unethical for the Centre to impose conditions like power reforms and ration cards. Now wiser counsel appears to have prevailed and the conditions have been set aside.
So what caused this change of heart. Besides the threat of legal defeat in the court, maybe it was a growing realisation that being on a warpath with the states defeats the Centre's own reform agenda. The three farm reform bills, can't really be implemented without states' cooperation. The sight of India's most productive farmers, marching daily against bills that are supposed to benefit them, shows that the Centre is distrusted not only by states, but also by farmers. The farmers’ anger is now turning against big business houses, whom they see as the beneficiaries of the so-called farm reforms. It is one thing for the Centre to be called suit-bookt-ki sarkar by Rahul Gandhi, Arvind Kejriwal, and Mamata Bannerjee and quite another to be so ridiculed by a mass farmer movement. Maybe all these factors together caused the climb down on the part of the Centre.
While it certainly looks like co-operative federalism by force, than by choice, one still hopes this spirit of cooperation continues. The current COVID-driven adversity essentially requires delivering services at the grassroots, be it collecting land records for the PM Kisan Yojana, or implementing the Rural Employment Guarantee Scheme or the proposed Urban Works Program. Even more, co-operation will be needed if when the vaccine arrived. The Centre would be well advised to soften its big brotherliness with a little more friendly neighbour attitude.
(Edited by : Jomy)
First Published: Oct 16, 2020 6:46 PM IST
