Demonetization – Building Allies vs Forcing into Action

Ever since the demonetization decision was made public by the Union Government of India, on the 8th of November 2016, lot has been discussed about the pros and cons of the measure. However, not much has been discussed about the measure from the federalism angle. In this article, we try to look at the whole demonetization exercise from the federalism point of view.

Taxation Powers in a Federal Polity
In many mature democracies, the taxation powers are distributed between the states and the union (also called as ‘federal’) governments. Not just the indirect taxes, even the direct taxes like Income tax and Corporate tax powers are with the state governments too. In federal polities like USA, Canada or Australia, this is the norm.

In India however, the powers to levy direct taxes rest solely with the Union Government. This in itself is, over-centralization of powers. When nations like Canada and Australia with population of 20-30 million take fiscal federalism seriously, what stops the highly diverse nation with a population of 1.25 billion from taking fiscal federalism seriously?

The Black Money
In the previous paragraphs, we discussed about direct taxation powers. Because by definition, black money is the amount for which direct tax has not been paid. By retaining the power to levy direct taxes, the union government has kept to itself all the incentives to fight tax evasion. Had the state governments been provided with direct taxation powers, as is the case in mature democracies, the union would have found natural allies in all the state governments in the fight against tax evasion.

Building Allies vs Forcing into Action
The current approach, taken by the Union Government to catch tax evaders, is more like ‘Forcing’ the state governments into action. Quite naturally, when something is forced upon someone, the reluctance levels will be high and enthusiasm levels will be low. Needless to add, that in a federal setup, such moves are against the fundamental principles of federalism. The frequently heard term of “co-operative federalism” appears to be lacking any substance, considering the current approach.

For co-operation between any two elected governments, there must be an incentive at play. Had the direct taxation powers been in concurrent list, the resulting bounty from the fight against tax evasion would have been an incentive, for both the union and the state governments. To tackle tax evasion, whether it is the USA working with Switzerland, or Germany working with Panama, the approach one can see is that of ‘carrot & stick’. That is how co-operation is achieved, and is made effective. “Stick alone” approach, doesn’t build a strong and effective co-operation.

The demonetization exercise by the union government is akin to “stick-only” approach, and is evident that there was no effort to build consensus among the state governments and the union. This one exercise has strained the federalism-fabric so much, that we might start hearing the benefits of common currency across the union of India being questioned.

GST: What it Means to Federalism in the Indian Union

The Goods and Services Tax is being sold as the best thing that could happen to the system of indirect taxes in the history of the Indian Union. Simplification and streamlining of taxes, uniform taxation across the union, one integrated market, multitude of opportunities to leverage economies of scale, boost to the GDP and significance to the Make in India initiative - the benefits, we are told, are astounding. But what does it mean to the states and their diverse peoples?

A brief history of GST in the Indian Union
 
To begin with, let us look at the history of GST. The proposal was first made in the Union Budget speech of 2006-07. None of the states had asked for it in the first place. The Union Government, nevertheless, wanted to roll out a national-level GST. Meaning, indirect taxes like excise duty, additional excise duty, service tax etc., that fall under the purview of the Union Government, and sales tax, purchase tax, entry tax, entertainment tax etc., that come under the state governments would be subsumed under one national-level tax structure, and that would have no state component. So, the States would get no revenue from goods and services; instead the Union would own and collect all taxes and redistribute among the States.

It was then handed off to the Empowered Committee of Finance Ministers to lay the road-map for its implementation across the Union. Since there was representation of the states in the committee, the idea of national-level GST was opposed. Which state would want to lose its revenues or even the control over its revenues? Finally, a compromise was reached with the dual-GST model, which included a state component too. But as we will see further, the compromise does not necessarily restore control back to the states.

GST - Thrust upon unwilling states

The idea of GST - whether a national level GST, as it was to start with, or a dual GST, as it is being proposed as a compromise now - has come top down from the Union to the States. The States have only agreed to it as a compromise and never wanted such a structure in place. When the States did not want what gave the Union the legitimacy to impose a new taxation structure on them? Note that by legitimacy I do not mean Constitutional legitimacy; I am rather questioning the invasive and imperious attitude of the Union Government in a federal setup comprising several diverse states, each with its unique history, culture, issues and state of socio-economic development.

The AIADMK rightly pointed out the effect the GST Bill will have on the autonomy of the states. In a dissent note the party observed:

..the GST Council, as a constitutional body, impinged on the legislative sovereignty of both Parliament and the State legislature and would jeopardise the autonomy of the States in fiscal matters.

The GST Council will be setup with the passage of the Goods and Services Tax Bill. It will be headed by the Union Finance Minister with the state Finance Ministers as its members. This council will be responsible for the categorization of goods and services, and will decide the tax rates on the same. In matters pertaining to taxes and revenues, all States in the Union should abide by its orders and decisions. What democratic legitimacy and credibility will an elected body retain, when its own matters are decided by a superseding external council that is nominated? The concerns of sovereignty and autonomy of the States, expressed by the AIADMK are absolutely relevant.

No doubt, there is representation of the states in the council. The council, as already stated, will have state Finance Ministers as members. But the weightage given to the states is something to be noted. The Union Government has decided to hold a weightage of one-third of the total votes for itself, and has given two-thirds' weightage to all the states put together. With this, the Union has ensured it has veto power of sorts for itself in the council. The States, needless to say will be dummies. Barring a few exceptional cases in which a majority of States may come to a common agreement, this setup ensures the Union has total control in all matters of indirect taxation in the country.

The GST Council is anti-Federal
 
States that are ruled by the so called 'national' parties, usually have to toe the line of their party high-command, whose agenda is primarily focused on holding the reins of power at Delhi. The interest of the people of the State comes next to this agenda. While this will tilt the balance of power more in favour of the Union Government, those States with less influence in the Union and those ruled by state-level parties will find it much harder to influence any decisions in their favour.

It is also being said that the States can appeal to the council. But a democratically elected government going to a council for matters such as its own taxes and revenues is fundamentally opposed to the idea of democracy and federalism. A legislature elected by the people should hold these powers, not a council or a committee. It also becomes much tougher for the states to come up with and roll out any new or innovative economic policies. They all will have to operate within the limits imposed by this one framework decided by the council.

Who will really benefit from economies of scale?

I also want to address the argument of integrated market and economies of scale. Who does this benefit? It certainly benefits businesses and enterprises that are well established and have large scale inter-state operations. But what if the states want to take a different approach to nurture local entrepreneurship, for example? What autonomy will they be left with to roll-out an economic policy favouring local entrepreneurship when a uniform framework is already decided by and rolled out from a committee sitting in a far-off Delhi?

 Do we really need an integrated market? Do we really need economies of scale? Can our people leverage the so-called economies of scale effectively? These are questions that each state and its people should discuss, debate and take decisions on. Rolling out from Delhi, a single policy for diverse peoples, makes little sense. In fact, it comes with the attitude of 'I know what you need better than you do' - violating the fundamentals of free choice, liberty and democracy.

By this I do not want to sound like a conservative opposed to economic progress. In fact, in today's world, free and democratic countries have attained much stable and viable economic progress in comparison to autocratic, dictatorial or less democratic ones. The USA, termed as the epitome of free- market economy does not have a unified, integrated market. The sales taxes vary across states. In states like Alabama, Oregon, New Hampshire etc., there is no sales tax at all. In contrast, California has the highest rate of sales tax. These rates are decided by the States themselves, the Federal Government has little say in it. To add to it, the cities, the counties and other local bodies may levy additional taxes.  It is not just sales taxes, the States have their share of income tax as well, which is totally a Union subject in India. The USA has shown that a free market does not necessarily have to compromise on liberty of its people or the autonomy of its states.

Another argument in favour of GST is the ease of doing business in India, as businesses do not have to deal with different tax structures in different states. This argument too does not hold any water, when you look at countries like the United States. Despite different laws and taxation structure across different states, USA is way ahead of the Indian Union in this parameter.

Lot is being said about federalism, particularly co-operative federalism, of late. But the GST in its current form will be disastrous to the autonomy of states and the overall federal setup of the Indian Union. Here is a video recording of a talk on the same subject that I gave at Total Kannada, Jayanagar, Bengaluru, on the 13th of March. In this talk, which is in Kannada, I make the same arguments of democracy, federalism and liberty in purview of the GST bill. Comments / feedback/ discussion welcome.

Governors' Post in the States of India, a Colonial Legacy

Warren Hastings, the first Governor General of Bengal.
Pic source: www.artgallery.nsw.gov.au

Ever since the BJP led NDA government took control at Delhi last year, there were words doing rounds that UPA appointed governors will be asked to go. As things evolved, a few of the governors voluntarily stepped down while a few others locked horns with the union government over their transfers. Looking at these events one can’t resist thinking whether such an anti-federal post as the Governor is really necessary.

History of the post of Governor
A Governor’s post has a colonial history. British used a post called resident to boss over the princely states as well as the presidencies of India. The resident post was not unique to India, but was present across geographies ruled by British (as well as other European colonialists). This wiki excerpt elaborates on the role of residents and how they were chosen in the yesteryears:

Some official representatives of European colonial powers, while in theory diplomats, in practice exercised a degree of indirect rule. Some such Residents were former military officers, rather than career diplomats, who resided in smaller self-governing protectorates and tributary states and acted as political advisors to the rulers. A trusted Resident could even become the de facto prime minister to a native ruler. In other respects they acted as an ambassador of their own government, but at a lower level, since even large and rich native states were usually seen as inferior to Western nations. Instead of being a representative to a single ruler, a Resident could be posted to more than one native state, or to a grouping of states which the European power decided for its convenience. This could create an artificial geographical unit, as in Residency X in some parts of the British Indian Empire.

Power held by the Governors in the Indian Union

Pic source: wikipedia.org

Let us have a look at the recent Governor appointees to the state of Karnataka – Mr. Hansraj Bharadwaj, a former congress party member, appointed during the UPA regime; Mr. Vajubhai Vala, a former member of the BJP, appointed as the governor within 100 days of the NDA government taking over at Delhi. Looking at this pattern, it becomes clear that the methods of choosing governors hasn’t changed much since the British time. Originally claimed to be a post that ensures continuance of government at State level, this institution of governor defined in our constitution appears to be mostly used by central governments to meet their political ends.

The political leverage aside, the Constitution of India has given certain arbitrary powers to governor, though a governor is not directly elected by the people of the respective State. Article 163(2) from the Constitution :

If any question arises whether any matter is or is not a matter as respects which the Governor is by or under this Constitution required to act in his discretion, the decision of the Governor in his discretion shall be final, and the validity of anything done by the Governor shall not be called in question on the ground that he ought or ought not to have acted in his discretion.

The key takeaway from this article is, a Governor’s action shall not be questioned. This exposes a fundamental flaw, for there must be no person in a democracy who is immune to judicial scrutiny.

In Karnataka as well as other states of India, no matter who the people vote to power, the top most decision making powers reside with the one loyal to the establishment at Delhi. Positions occupied by appointment having greater powers than the elected representatives is something that doesn't gel well with the democracy.

The Governors, sometimes so disconnected from ground level realities, tend to look at all States uniformly. This approach stands out especially in linguistic matters, given the linguistic grounds for State formation in India. Within days of his appointment as governor of the state of Karnataka, Mr. Vajubhai Vala made a statement that he could manage his work in Karnataka through Hindi. This statement of his is a display of his disconnect from the people of Karnataka.

(This piece had originally appeared in thefederalist.in)

Larger Linguistic States Are Important for Democracy in India

source: blogs.lse.ac.uk

Over the past few months, there has been increased talk of dividing the state of Karnataka into two separate states. The division being talked about might result in two entities, the northern part of Karnataka and the southern part of Karnataka. Interestingly, all this talk is emanating from the sitting MLAs belonging to the two political parties that call themselves as 'national parties', the 'Indian national Congress' and the 'Bharatiya Janata Party'. Mr. Umesh Katti, sitting MLA from the BJP, and Mr. AS Patil Nadahalli, sitting MLA from the INC, are the two gentlemen who are at the forefront demanding separate statehood for the northern part of Karnataka.

Shift in the balance of power
While there is a lot of noise about smaller states being good for development, one has to be careful and consider the shift in the balance of power such division of the states is going to result in. The citizens of India will inevitably have to grapple with such an imbalance, if the larger states were to be further divided.

Why is balance of power important?
This is a question of democracy itself. One of the main reason why democratic practice has been successful across the world is, because of the development of a system of checks and balances to ensure that the political power is dispersed and decentralized. Democracy is a system built on the deeply held belief that government is best when its power to abuse is curbed and when it is held as close to the people as possible.

Let us now understand the current distribution of political power in the Indian Union, and the problems that are inherent under such a distribution.

Degree of centralization in the Indian Union
The power of the states and the Centre are defined by the constitution and the legislative powers are divided into three lists

• The union list - consists of 100 items on which the Union Government can legislate. 
• The concurrent list - consists of 47 items on which the state governments can legislate but the Union Government vests the power to override the state laws.
• The state list - consists of 61 items, on which the state governments can legislate. 

While the distribution of power is heavily tilted towards the Union Government in the ratio of 147 to 61, the articles 352 to 360 of the constitution contain provisions that tilt the balance of power all the more towards the Union Government. According to the Article 356 of the constitution of India, states must exercise their executive power in compliance with the laws made by the Union Government. Article 357 calls upon every state not to impede on the executive power of the Union within the states.

What problem can over-centralisation create for India?
With political power centralised at Delhi, the linguistic groups that carry clout at Delhi always have a larger say in policy matters. As was evident in the recent decision by the Union Government to reduce the import duty on raw-silk, the silk weavers from the state of Uttar Pradesh were benefited, while the silk farmers from the state of Karnataka were negatively impacted. The Union Government of India had to give in to the lobby from Uttar Pradesh, at the expense of well-being of the farmers from Karnataka.
Such policy-making inevitably brews resentment among the negatively impacted groups of people. Resentment among the citizens is a problem that no state can ignore.

With states reduced in size, the capability of the states to resist (or even reverse) the policies that impact their people will also reduce. By moving to split the larger states into smaller ones, and by continuing to run the administration in a centralized fashion, India does not seem to acknowledge the importance of balance of power. Larger linguistic states provide the much needed counter-weight to create the balance of power, and for the democracy to thrive. If you take out the counter-weight, all you have is imbalance, which can only lead to instability.

Let Us Talk about a Forgotten Private Member Bill – the Official Languages Bill 2012

- by Vasant Shetty

For the first time in 45 years, the Indian Parliament witnessed the approval of a Private Member Bill. The bill protecting and providing rights of transgenders was moved by Mr Tiruchi Siva, a DMK Rajyasabha MP and was passed by the Rajya Sabha on the 24^th of April, 2015. It is that photo-op moment for Indian democracy that Indian polity cared so much for and passed a private member bill after 45 long years. The Hindu reports: 

Mr Siva’s Bill has 58 clauses in 10 chapters dealing with different aspects ranging from social inclusion, rights and entitlements, financial and legal aid, education, skill development to prevention of abuse, violence and exploitation.  

Congratulations to Mr Tiruchi Siva for standing up for the rights of a thin margin of people, who otherwise did not exist in the imagination of India’s politics. The media was equally jubilant. After all, who doesn’t want to be seen standing on the side of justice, especially on an issue dealing with transgenders!   

Now, let us turn to another Private Member Bill moved by the same Tiruchi Siva. Unlike the one on transgenders, this bill was about an issue that affects the lives of millions and millions of Indians on a daily basis. So, what is that issue? – It is the issue of language inequality. It is the issue of unabated Hindi Imposition that is rapidly leading to Hindification of India. It is the issue concerning crores of Indians who are denied government services in their own languages and are rather treated as second class citizens for not knowing a language of a higher god - Hindi.  Yes, I am talking about the Official Language Act, which gives absolute primacy to Hindi in all aspects of governance delivered by the Union government of India. This undemocratic, anti-diversity act has forcefully imposed Hindi on all non-Hindi states leading to a steady decline of all non-Hindi languages in their respective states. 

Troubled by the dismal state of non-Hindi languages in India, Mr Siva had moved a private member bill called ”The Official Languages Bill 2012” on the 7^th of December 2012, demanding official language status to all languages included in the eighth schedule of the Indian Constitution. In a fair and just democracy, an issue bothering a majority of the people would have become a policy issue instantly, but in the world’s largest democracy, it is not the case. Mr Siva’s bill came up for a discussion on 23^rd February 2013 and after an inconclusive debate in which several non-Hindi speaking MPs came in support of Siva’s bill, nothing much happened and the bill died a natural death with the end of tenure of the 15^th Lokasabha. 

Some questions arise in my mind after seeing the successful approval of private member bill related to transgenders.

      

• If for 45 years, not a single Private Member bill was accepted, then is there a point in having a provision to move a Private Member bill at all?
• When the rights of a few transgenders are taken seriously (rightly so), why is that language rights of non-Hindi speakers, who form the majority of India, are considered fit to be ignored?
• Can India call itself a democracy, when the Union government so openly and brazenly discriminates between Hindi and non-Hindi languages?
• Success of any democracy lies in bridging the gap between the system and the people, and the biggest tool to achieve this goal is to use people’s languages in administration. Can India’s democracy succeed by simply ignoring the presence of all non-Hindi languages?

These questions concern the entire country, especially the different linguistic groups that are part of India. So, all the different linguistic groups of India must join hands and demand for linguistic equality. In a time when technology can solve all sorts of communication challenges, India cannot harp behind “One Nation – One Language” theory and subjugate the rights of non-Hindi speakers. 

Of late, there is a noticeable awakening among the various linguistic groups of India. As this awakening spreads, it is only a matter of time before linguistic equality becomes a reality in India, and thereby India transforming into a true multilingual federal democracy.  All non-Hindi speakers have their task cut out clearly - join hands, work together and achieve linguistic equality.