GST and income divergence

I thought long and hard about this piece written by friends Praveen and Vivek. Initially, I felt that I disagreed with it quite significantly. On further reflection, I am not as ready and willing to dismiss it as misplaced or exaggerated fears as I originally was.

When new opportunities arise, it is those who are endowed that tend to benefit. That reinforces the vicious and the virtuous circles.

But, the solutions lie elsewhere. The problems are not with the 1991 liberalisation or with GST. They are not the causes of income divergence. The underlying factors are different.

There is one area where I disagree.

So, GST at best will not have an impact on the current disturbing trend of income divergence of states or at worst will exacerbate it by removing a powerful fiscal tool of states.

I have a quibble or two with that statement. The States had powerful fiscal tools all these years. Did that stop divergence or foster convergence? This is peripheral. In some sense, that statement sets up a straw-man to knock it down.

GST can be criticised because it goes against the spirit of devolution and autonomy of States. In general, a complex, heterogenous, large and geographically highly dispersed nation cannot be managed centrally. Devolution, decentralisation, trust and co-ordination are essential. They are not easy to achieve. They take time. But, they take practice and commitment.

Managing a nation such as India demands far too much out of humans than is possible, perhaps.

But, all that being said, GST cannot be made responsible for income divergence. At best, it can make an incremental ‘contribution’ to it because the ground has been prepared for that to happen, by the States themselves and their (lack of) governance.

What is indisputable is that the withdrawal of fiscal levers demands a higher sense of urgency and awareness on the part of lagging States just as economic liberalisation  brought into sharp relief the diffrences between better governed States and others.

Given the stakes involved, the warning is appropriate, however.

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