A political scion with engineering and management degrees from top institutes at home and in the US, including an MBA in Finance from the Sloan School of Management at MIT, Thiaga Rajan was picked as Finance Minister in the MK Stalin-led DMK government in Tamil Nadu.
Thiaga Rajan calls the GST Council “poorly designed”, explains how lack of data hinders governance, touches upon his run-in with Jaggi Vasudev and
lays out DMK’s federalism principle. The session was moderated by Executive Editor (National Affairs) P Vaidyanathan Iyer.
P VAIDYANATHAN IYER: In your speech at the GST Council in May, you described it as a rubber-stamp council. You also spoke about extreme concentration of powers with the Centre. Do you think a worsening of government finances due to the prolonged slowdown also led to a situation where states are feeling the brunt?
There are three-four different aspects. The first is the Union-state relationship, and like any relationship, it gets frayed over time, and the cracks are more prominent in times of stress. So, the combination of a deteriorating economy and the Covid crisis has made it inarguable that the relationship is not where it should be. And the irony of it is, I don’t have to go far for justification of my quotations — I just have to look at the reign of Narendra Modi as Chief Minister of Gujarat. You will find every action taken by the Union government in terms of fiscal relationship with states is directly in contradiction to the statements made (by him) when he was the CM.
The question of the GST Council is more nuanced. The construct is not well-thought-out, the rush to execute it for the sake of the usual showmanship and dramatic effect that we have now seen with the four-hour notice for the lockdown and the overnight demonetisation… There have been hundreds of changes since the introduction of the GST Bill, we are still playing catch-up. The fact that we are doing so four-and-a-half years later…
In my limited understanding of four months, I understand that the GST Council only has an advisory role. It may go ahead and decide a new rate, but for it to take effect, the state has to pass an ordinance or make changes in its own commercial tax rules.
In my opinion, there has been a deterioration in Centre-state relations. A lot of it is avoidable. The thing that really hurts the country is that concentration of power is happening in the hands of people who either don’t want to use it or don’t know how to use it. They take the power away from other people and then do a very, very poor job of using that power. The fact that the GST Council is so poorly designed adds to this.
P VAIDYANATHAN IYER: You have spoken of the breakdown of trust between the Centre and states. Is it only related to fiscal federalism or would you like to be more specific?
I will give you two very concrete examples. The first bad faith is the whole pretence of moving devolution to states from 32% to 42% (of divisible tax pool). If you look at any analysis by any independent body, the so-called devolution has not resulted in any real devolution. They have moved so much of the money into the indivisible cess bucket that we don’t get any of the money. The outcome of it is that the amount of money we get from the Union in grants and subsidies is higher than what we get as share of the taxes. If we get it as our share of the taxes, we get to legislate on how we want to spend it. That is clearly against any principle of federalism.
Then there is the absurd logic of why the Union government should not have the 14% minimum compensation scheme written into the law. It said we can’t pay 14% because there is not enough money, that the system is designed such that only the cess collected on GST is the basis of paying compensation. About the same time, the CAG report comes out saying that the first two years, you collected around Rs 40,000 crore more in cess than you had to pay to the states, and instead of letting it lie in the account, you took it back into the Union government’s tax pool without sharing it. So you used the cess logic to collect it, not share it, and you did not use it for the purpose for which it was to be used…
P VAIDYANATHAN IYER: The DMK was part of the NDA-I government. What has changed in the NDA, BJP or the DMK’s own philosophy that has pulled the two parties apart?
Right now, the gap between the DMK’s position and the Union government, rather than the BJP — I don’t think it is only the BJP we have an issue with… Let me say, the DMK’s position has remained unchanged. We have always been federalists, for devolution of powers not just from Union to states but also from states to lower rungs of power. But the BJP’s position has changed dramatically. The same PM and Home Minister when in Gujarat were the greatest federalists. Now, they have become the greatest centralists, at least since the days of Prime Minister Indira Gandhi. They want to control everything, from food policy to education to taxes to toilets. So, it’s more this government rather than the BJP at some level.
At another level, of course, the notion of secular, social justice parties is quite different from parties driven by Hindutva philosophy. But even there, that philosophy has not remained constant. Most people would feel that the administration of Vajpayee was different from the administration we see today.
LIZ MATHEW: In the recent Parliament session, the DMK was a silent partner to the Opposition protests. Do you think that like Mamata Banerjee, who has taken an initiative, the DMK could take the lead in bringing all parties together, at least on issues you have raised today?
I am very, very junior in the party and at some level, I am not in a position to comment on the DMK’s position at the national level. Still, I will say that the future of this country lies in regional parties and state governments. Anyone who has any understanding of the complexities, diversity of this country, notions such as ‘One Nation, One Taxation’… all these are not executable. And if they are not executable, they will fail, no matter what you do, no matter how many people you get into this cult-like belief.
We are seeing it fail every day. You can’t use the Swachh Bharat funds because you can’t go and build the toilets yourself. This notion of one national policy is inherently self-defeating. It is a question of how long and after how much pain.
Even the concept of national parties, to me, is contradictory. The BJP is pro-beef in the Northeast and Goa, but you can get killed in some BJP-ruled states on the suspicion of even carrying beef… The Congress is in opposition to some parties elsewhere, we are all in a coalition here. So the BJP may be strong in 10-12 states, in the rest, they either buy power, because they control the Union, or the people… I have told my party leader too that we can show what good governance looks like, what data-driven governance looks like, actions driven by your philosophy… With limited powers we can achieve great outcomes compared to those with unlimited power who are not able to achieve anything. Our honourable CM (M K Stalin) is very clear about his values…
AANCHAL MAGAZINE: You talked about GST compensation dues. For this year, the amount has been estimated based on projections of growth. Is this fair, given that dues of last year have also not been cleared? My second question is regarding your very public spat with the Finance Minister of Goa and other BJP-ruled states. Other finance ministers have also said their views are not heard at the GST Council.
The system is designed for idiosyncratic risk, that is to take care of it if a state faces a problem. But when you have systemic risk, when states and the Union go down, then the entire compensation mechanism is designed to fail. We are in this situation because the entire economy has failed… Like other aspects of the GST, this is not well thought out.
On the issue with the Goa FM, I had only one issue. At the GST Council meet, we spent an hour-and-a-half discussing what is for ratification, what is for approval, and what is for information. Ministers like Mr Badal (Manpreet Badal, Punjab Finance Minister) raised the point that if it is not to be approved by us, but just informed to us, does it have the weight of law? Because the rule is that we as elected representatives have to approve this… That is all he said, that change the wording of ‘for information’ to ‘for approval’, so that we can approve it and you have the luxury of a legal kind of support. But this (Goa) minister went off on a tirade, about ‘anti-national’, ‘this being a war-like situation’. It was nonsense, atrocious because he was casting aspersions on the integrity, competence, patriotism of people who were raising really valid questions. I got in and said it is atrocious that you have these council meetings where one minister, that too from a tiny state, gets to cast aspersions on the validity of other people who represent millions of people. At this point, Ms Nirmala Sitharaman castigated me, saying that in this Council, there are no small states or big states. Only, 15 minutes later, over ease of doing business, the BJP’s satellite states made the argument of being small states. I told Ms Sitharaman, ‘Ma’am you just reprimanded me saying there are no big states and small states’… The Goa minister came out and held a press conference and accused me of all kind of things.
P VAIDYANATHAN IYER: Going forward, how do you see differences of the kind you talk about being resolved?
I am not saying whether it can be resolved or not. But the lack of applying data is surely a shortcoming that can be fixed. Because the very next meeting we had the same discussion again, on tax rate slabs. And again, there was no data… I can sense that even BJP states are starting to chafe under either the actual diktat to say yes to whatever the Union says, or the implication to be more loyal than the king. Because surely no CM wants to lose their ability to act, their constitutional powers that they need to deliver to the people, which is what they got elected for…
So this notion of centralisation is not about the BJP or DMK, it is antithetical to every state government, of every political party. The difference is that today’s BJP is able to keep its state chief ministers and ministers under such an oppressive thumb… But I don’t think that is a permanent feature.
ARUN JANARDHANAN: Public debt has been increasing over the years. What is your plan for tackling it — stabilising and reducing it or exploring new revenue models?
The decay of the last 10 years has been horrendous… We came to office with an alleged debt of Rs 5,70,000 crore hanging over our heads. But we are looking at about Rs 9 lakh crore of debt. And yet, we kept our word. The Chief Minister said we will give Rs 4,000 per ration card… Here is where the problem sets in…. Even the Rs 4,000 that we gave to card holders, it was very clear that there were people who didn’t deserve to get that money who still have the card. We don’t know how our data systems are that bad.
In some cases, our data systems are bad because of the lack of federalism. For example, the Co-WIN portal records all the vaccinations but when we go to do a serosurvey overlaid with the vaccination penetration to start preparing for that third wave, we don’t have that data… If I want to target subsidies and I want to know who all should not get the equivalent of Rs 4,000, the first thing I would say is, ‘Whichever family has income tax payers, should not get it’. But I don’t have that data. We are completely constrained by this centralisation of everything and we are not able to administer properly because of lack of data. Some of that is our own fault, some of that is the nature of design of the government.
So that’s the only concern I have. I am not worried about where the money will come from, but about the rotten, rotten system… the government’s capacity to administer has been seriously eroded. It’s very hard to turn this around.
ANANT GOENKA: You come from a private sector background. How often do you find that at odds with politics, where you have to do things that are politically correct versus things that are economically correct.
There are probably two level of differences. One level is that as an investment banker or a global banker, you are a capitalist to the core. As a politician, as a Dravidian, as an Indian, we are all socialists to some degree or other and rightfully so. So that was not a difficult transformation, because it was a different context. The much harder transition is that we are trying to fight a system that’s broken…
In a commercial enterprise, once you have figured out what is the right thing to do, you did it, there was no resistance. Here you can find out what is the right thing to do and then find out there are all kinds of barriers. That’s the real challenge I face on a daily basis.
P VAIDYANATHAN IYER: The late TDP leader N T Rama Rao had described the Centre as a ‘conceptual myth’. What has changed over the last 10-15 years between the Centre and states causing the relationship to tilt so much on one side?
I see very clear roles for the Union. The Union should be in charge of foreign policy, defence, inter-state commerce, international commerce, trade policy, vaccine procurement. I am not one of those abolitionists who would say there should be no Union. There is a very clear need for a competent, functional and powerful Union government. I am just saying you can’t decide which school needs a toilet sitting in Delhi; we can barely do it sitting in Chennai. We need to devolve that power down to the panchayats and the local bodies.
But if you look at the kind of centralising tendencies… the problem started towards the second term of the UPA and has greatly accelerated in the seven years of the NDA govt…. During the initial lockdown easing, the Union Home Ministry was trying to tell us when we could or couldn’t open barber shops. How does it make sense to have a national policy on barber shop opening?
(This centralisation) is a trend that’s doomed to fail. The question is, how much damage does it do before it fails because the more you try to centralise, the more you are going to have bad outcomes.
P VAIDYANATHAN IYER: Your public run-in with Isha Foundation’s Jaggi Vasudev showed you are a strong votary of the State being the custodian of temples.
I don’t worry about whether my views are in opposition or concurrence with someone like Jaggi Vasudev… But there are fundamental problems with the notion that you can somehow remove the hand of the government from historically and culturally important artefacts.
PRASANTA SAHU: Many states have complained that tax revenues have not grown under the GST regime. The compensation mechanism is coming to an end in June next year, which is set to drag down revenues further.
Yes, especially because the Union government is going to collect cess and especially because a lot of things have been reset because of two years of unexpected macro risk or failure. I join with other states in the notion that the period of compensation should extend… To be fair to the Honorable Union Finance Minister, she has promised a special GST Council session on the compensation.
If a state like Tamil Nadu were to run its finances properly, I am not sure we would be eligible for any compensation because if the bar is 14% year-on-year growth, we were probably doing that in the sales tax/VAT regime.
We all agree that the GST moved from a production-based tax to a consumption-based tax so the GST inherently disadvantaged large production states. But Tamil Nadu is a bit unique because we are high producers as well as have high personal consumption because we have a much less stratified society than, say, Gujarat or Maharashtra. So our iGST in and out is expected to be roughly flat.
But we find our enforcement system is much better than in other states. So we are continuously finding large gaps between incoming iGST and outgoing iGST — we are paying out a couple of more crores a year than what is coming in. These are all the variables that worry us more. Of course, we are philosophically for the extension of the compensation.
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