GST, farm Bills and 4 other events that widened Centre-state trust deficit

The Centre’s inability to compensate the states for the loss of goods and services tax (GST) revenue, as mutually agreed, has raised questions about a trust deficit between the two levels of government. A trust deficit widens when national parties are in sole power at the Centre, as these parties see ruling from Delhi as their overarching political goal. This was the case under prime minister Jawaharlal Nehru, Indira Gandhi, and Rajiv Gandhi. 

With coalition governments, the situation is a bit better. Since India has seen continuous coalitions since 1989, negotiations between the Centre and states required political investment in trust building so that the central coalition was not jeopardised. However, since 2014 we again have a party wielding sole power at the Centre and, the past chief ministerial experience of Prime Minister Narendra Modi notwithstanding, the trust deficit has begun to grow once again. Complementary changes that seek to condense power in Delhi, last seen in the 1980s, have begun to resurface — the highest offices held by people without a grassroots political base, without any connect with the states, a gigantic Prime Minister’s office, and the subordination of other branches of the State to the will of the Centre. I identify five major events that have contributed to this:

1. The14th Finance Commission increased the share of the states in centrally collected taxes from 32 per cent to 42 per cent but it awarded almost no grants. But in the very first year of the award, the share was just 34.7 per cent, declining to 30.3 per cent in FY20, the final year of the award. This is because the Centre resorted to the imposition of a series of cesses and surcharges on taxes which are not shareable with the states. Previous governments have also done this but not to the same extent. In addition, with the buffer of grants gone, the impact of this was exacerbated. 

2. When the Planning Commission was abolished and the NITI Aayog set up, the political element that was embedded in the planning and plan of financial process was lost. All relationships between the Centre and states became purely administrative. The NITI Aayog began to do things like defining aspirational districts, promoting central government  initiatives and unilaterally undertaking the exercise to rank states on various counts. On centrally-sponsored schemes, line departments communicate directly with state administrations without any political input. No state government, irrespective of political party in power, perceives any ownership over NITI Aayog, which is viewed purely as an instrument of the central government. Another institutional mechanism for political negotiation has ceased to exist. 

3. The terms of reference provided to the 15th Finance Commission by the central government introduced a series of superfluous considerations to judge the vertical and horizontal devolutions to the states. These included “achievements and implementations of flagship schemes of Government of India”, “promoting digital economy”, “promoting labour-intensive growth” and, most egregiously “control or the lack of it in incurring expenditure on populist measures”. These are not inter-governmental fiscal considerations but normative judgements imposed on a neutral Constitutional body on how states should behave. 

4. The national lockdown imposed in March was done by invoking the National Disaster Management Act, which gave the central government sweeping powers. The home ministry used the Act to issue guidelines and instructions to states and as coercive ministries do, sent teams to monitor and chastise what they perceived to be errors in state’s behaviour. Any consultations that the public were privy to consisted largely of the centre lecturing the states on what to do and how to do it. There were no compensatory enabling measures like scaled up grant finance and the bolstering of state-level capacity through placing central administrative resources at their disposal. This further enhanced the trust deficit.

5. The GST compensation controversy and the recent nonconsultative initiative to introduce agriculture reform Bills are just the latest nails in the coffin of cooperative federalism. 

In each of the above cases there were options that would have avoided enlarging the trust deficits. The Centre’s resort to cesses was an obvious attempt to bolster its weak and deteriorating fiscal position at the expense of the states. The NITI Aayog could have been set up with more inputs from state governments, and if cooperative federalism was indeed to be taken seriously, could have benefited from more political capital in its initiatives. The terms of reference of the 15th Finance Commission were marked by weak political input and avoidable central bureaucratic arrogance. The lockdown could obviously have been managed more consultatively and sensitively as was done in many other federations by involving less coercive arms of government in its administration and rollout. With the GST compensation cess, as I have argued, there were plenty of options that did not involve increasing the states’ borrowing liabilities but these were wilfully ignored. 

It is clear that the roots of the trust deficit lie in the unwillingness of the political authorities to invest in cooperative federalism since their priority is to secure and wield power at the central level. But India is a Union of states for good reason, and its diversity and plurality cannot be managed on the economic front through hierarchical fiat — India suffers. I can only hope that the forthcoming award of the 15th Finance Commission will not exacerbate this. 


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