The Unfulfilled Promise, How India’s Grand GST Bargain Descended into an Imperfect Compromise
Eight years after its landmark implementation, the Goods and Services Tax (GST) stands at a critical juncture. Hailed as the most significant economic reform since India’s liberalization in 1991, it was conceived as a “grand bargain”—a shining testament to cooperative federalism that would transform a fragmented economy into a unified single market. The vision was ambitious: to dismantle the complex web of state and central indirect taxes, thereby eliminating cascading taxation, reducing compliance costs, and fostering seamless trade across state borders. However, the recent fanfare surrounding rate rationalization, dubbed “GST 2.0,” has laid bare a more sobering reality. Far from realizing its initial promise, the GST regime finds itself trapped in a “low-equilibrium trap,” constrained by short-term political calculations, a weak commitment to federal principles, and a systemic design that encourages centralization over collaboration. The grand bargain has been reduced to an imperfect compromise, representing a colossal lost opportunity for reimagining Indian fiscal federalism.
The Grand Bargain: A Vision of Pooled Sovereignty
To understand the current predicament, one must first appreciate the revolutionary nature of the original GST framework. India’s constitutional design had historically granted both the central and state governments the power to levy distinct indirect taxes. This created a tangled “tax-on-tax” system, with check-posts at state borders causing immense delays and inefficiencies, effectively balkanizing the Indian market.
The GST was a radical solution. It required both the Centre and the states to voluntarily pool their tax sovereignty. The states gave up their fiscal autonomy over key revenue sources like Value Added Tax (VAT), entertainment tax, and octroi. In return, the Centre agreed to share its power to tax goods and services, creating a dual GST structure (CGST and SGST) administered collectively. The linchpin of this grand bargain was the GST Council, a federal body with representation from the Centre and all states. Unlike previous top-down institutions like the Planning Commission, the GST Council was designed as a genuine forum for collective decision-making, where the Union Finance Minister and the finance ministers of the states would deliberate as equals, with decisions taken by a three-fourths majority. In theory, this was the purest form of cooperative federalism in action.
The Unraveling: Cracks in the Federal Facade
In practice, the grand bargain began to fray almost immediately, revealing a fundamental lack of trust and a divergence of priorities between the Centre and the states.
1. The Compensation Conundrum: To entice states to join the new regime, the Centre guaranteed compensation for any revenue shortfall below a 14% annual growth for the first five years (until 2022). This was the key bargaining chip that secured state buy-in. However, this very mechanism transformed the GST from a shared ideological project into a transactional revenue-extraction exercise for the states. Their political capital was spent on bargaining for compensation rather than on building an efficient, rational tax structure. When the compensation period ended, and especially during the COVID-19 pandemic when the Centre delayed payouts, it exposed the fragility of the bargain and entrenched a zero-sum mindset.
2. The Centre’s Centralizing Tendencies: The text highlights a “blatantly obvious truth”: the Centre has consistently undermined the federal spirit. It has done this by increasingly relying on cesses and surcharges—levies that are not part of the divisible tax pool and thus not shared with states. This allows the Centre to “shore up revenues for itself” while states face fiscal constraints. Furthermore, the recent “GST 2.0” rate rationalization, while necessary, was announced by the Prime Minister from the Red Fort, not through the GST Council. This top-down approach made the Council’s subsequent consensus appear “stage-managed,” reducing the federal body to a rubber stamp for a fait accompli.
3. The Structural Flaw: The “Two-Third, One-Third” Problem: The roots of this friction lie in a pre-existing flaw in India’s fiscal federal design. The Centre controls roughly two-thirds of the total tax revenue but is responsible for only one-third of the public expenditure. The states, with one-third of the revenue, bear two-thirds of the spending burden on critical sectors like health, education, and infrastructure. This creates a structural dependency.
This design enables a “moral hazard.” The Centre, as the text argues, has often squeezed funds due to the states. Simultaneously, states have found it politically convenient to blame the Centre for revenue shortfalls rather than undertake the politically difficult task of mobilizing their own resources, such as reforming property and agricultural taxes. The GST, instead of solving this, became a new theater for this old conflict.
The Low-Equilibrium Trap and Its Consequences
The interplay of these factors has created a “low-equilibrium trap” in Indian federalism. Both the Centre and the states are locked in a sub-optimal arrangement where neither party is incentivized to elevate the system to its highest potential.
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For the States: The focus remains on securing revenue protection rather than optimizing the GST structure for economic growth. They view federal bargains in zero-sum terms—what the Centre gains, they perceive as their loss, and vice-versa.
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For the Centre: It seeks to maintain control and fiscal leverage, using its dominant position in the Council and extra-budgetary tools like cesses to steer the agenda.
The consequences of this trap are evident in the GST structure itself:
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A Complex Multi-Rate Structure: Instead of the ideal single or dual rate, India ended up with a complex slab system (0%, 5%, 12%, 18%, and 28%), along with compensation cess on sin and luxury goods. This led to absurd classificatory battles, such as the text’s mention of “caramel versus salted popcorns,” creating litigation and compliance nightmares.
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Duty Inversion: Where the tax on inputs is higher than on the finished product, leading to blocked input tax credits and inefficiencies for manufacturers.
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Stifled Federal Spirit: The GST Council, intended as a dynamic federal institution, has often become a forum for airing grievances rather than forging a shared vision for the Indian economy.
The Road Ahead: Reclaiming the Grand Bargain
The “GST 2.0” rate rationalization is a welcome step towards simplification, but it does not address the underlying federal deficit. For India to reclaim the promise of its grand bargain, a fundamental reset is required.
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Strengthening the GST Council: The Council must be revitalized as a genuine forum for deliberation. Major announcements concerning GST should emanate from the Council itself, reinforcing its primacy. The agenda-setting process must be more collaborative, giving states a greater sense of ownership.
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Addressing the Trust Deficit: The Centre must move away from reliance on cesses and surcharges and ensure timely revenue transfers. A more transparent and predictable revenue-sharing mechanism is crucial to rebuild trust.
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Empowering States to Mobilize Resources: Concurrently, states must be encouraged and supported to enhance their own tax efforts. The focus should shift from perpetual compensation debates to building a more robust and self-reliant state finances.
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A Principled Commitment to Federalism: Ultimately, the success of the GST depends on a political culture that values cooperative federalism as a principle, not just a slogan. This requires political parties, both at the Centre and in the states, to rise above partisan politics and short-term electoral gains to nurture this unique institution.
Conclusion: A Lost Opportunity or a Wake-Up Call?
The journey of the GST over the past eight years is a cautionary tale of how a transformative vision can be diluted by the inertia of existing political and fiscal structures. It was meant to be a grand bargain that would not only unify the market but also redefine the relationship between the Centre and the states. Instead, it has become an imperfect compromise, reflecting and reinforcing the very centralizing tendencies and zero-sum politics it was designed to transcend.
The initial vision of the GST was not merely an economic one; it was a constitutional moment of profound federal partnership. The current reality, however, is that the forces of centralization have dominated, and the grand bargain has been reduced to a series of transactional negotiations. For India and the possibilities of a reimagined fiscal federalism, this is indeed a huge opportunity lost. However, the story is not over. The “GST 2.0” moment can serve as a wake-up call—a reminder of the original promise and a catalyst for the political will needed to finally escape the low-equilibrium trap and fulfill the destiny of India’s grand tax bargain.
Q&A: Unpacking the GST’s Federal Challenge
1. What was the “grand bargain” at the heart of India’s GST?
The “grand bargain” was the foundational agreement between the Central government and state governments where both parties agreed to pool their tax sovereignty. States gave up their fiscal autonomy to levy their own indirect taxes (like VAT, octroi), and the Centre agreed to share its power to tax goods and services. This was institutionalized through the GST Council, a federal body designed for collective decision-making, heralding a new era of cooperative federalism.
2. What is the “low-equilibrium trap” in the context of Indian federalism and the GST?
A “low-equilibrium trap” describes a sub-optimal but stable state where neither the Centre nor the states are incentivized to improve the system. States focus narrowly on extracting revenue compensation from the Centre, while the Centre uses its power to impose non-shareable cesses and control the agenda. This results in a stagnant system where both parties engage in short-term, zero-sum bargaining rather than collaborating to create a more efficient, rational tax system for long-term national benefit.
3. How has the Centre undermined the federal spirit of the GST, according to the analysis?
The Centre has undermined the federal spirit in several key ways:
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Using Cesses and Surcharges: These levies are not shared with states, allowing the Centre to raise revenue for itself outside the divisible pool, thereby reducing the funds available for states.
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Top-Down Announcements: Critical reforms, like the recent “GST 2.0” rate rationalization, were announced by the Prime Minister before being debated in the GST Council, reducing the Council’s role to that of a rubber stamp.
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Delaying Compensation: Routine delays in transferring guaranteed compensation to states, especially during the pandemic, eroded trust and reinforced a zero-sum dynamic.
4. What is the “two-third, one-third” problem in India’s fiscal design?
This refers to a structural imbalance where the Central government collects about two-thirds of the country’s total tax revenue but is responsible for only one-third of the public expenditure. Conversely, state governments collect only one-third of the revenue but are responsible for two-thirds of the spending on essential services like health, education, and infrastructure. This creates a fundamental dependency of states on the Centre for funds.
5. Why is the current GST regime considered an “imperfect compromise” rather than a success?
It is considered an imperfect compromise because, while it achieved the basic goal of creating a unified market, it failed in its higher ambitions due to political and structural failures. The tax structure remains complex with multiple slabs and classificatory issues, the GST Council’s federal potential has been stifled by centralization, and the entire system is mired in a transactional relationship focused on revenue protection rather than a shared commitment to an ideal single market. It compromised on simplicity, efficiency, and genuine federal cooperation to secure a political agreement.
