Faltering Federalism

Context: Recently, the meeting of the goods and services tax (GST) Council, which serves to bring together the stakeholders in the indirect tax regime from both the Union and the states, has ended without a consensus. 

Reasons for supporting the Centre

• Compensation is not denied: GST compensation cess will continue repay the additional borrowing made by the states

• Some amount to be disbursed soon:  Finance minister said that , Rs 20,000 crore of compensation cess collected this year will be disbursed soon 

• Union government is facing a formidable fiscal hole: The states should have to pay part of this. 

Reasons for supporting the states

• Covid-19 burden is not being shared equitably: Union is of the opinion that the pandemic means it does not have to pay Rs 1.38 trillion of what was promised

• Did not get adequate support for dealing with pandemic: State governments were on the front line of dealing with the pandemic with inadequate resources for the task.

•  States have more fragile borrowing construct than the Union

Conclusion: States don't issue their own currency, and are by definition a more fragile borrowing construct than the Union. The final solution must reflect this asymmetry.