#260 Hum Dekhenge*

Political Rumblings, 'Special Category Status', and Sin Taxes Committing Sins

India Policy Watch #1: Sangh Sings The Blues

Policy issues relevant to India

— RSJ

A lot of commentary over the past couple of weeks has been on how Modi 3.0 will work in light of the mandate that has strengthened the voice of the opposition and given the NDA coalition partners seats at the high table, quite literally, if you were to go by the pictures. The PM sent out a message that it was business as usual by retaining the same team for key ministerial portfolios and announcing the release of ₹20,000 crores for farmer welfare and housing schemes for the poor on the first day at the office. 

"Ours is a government fully committed to kisan kalyan (farmers' welfare). It is therefore fitting that the first file signed on taking charge is related to farmer welfare. We want to keep working even more for farmers and the agriculture sector in the times to come," the PM said in the official statement.

The multiple stories on the pre-budget consultations that the finance ministry is having with the industry also indicate we will have a greater focus on PLI schemes, MSME subsidies, and minor relief to taxpayers. From big announcements and talks of reforms with an undercurrent of welfarism, which was how Modi 1.0 and 2.0 began, we will likely see significant stress on welfarism with an undercurrent of reforms in this budget. That’s the way the wind seems to be blowing at this moment.

The question of how Modi 3.0 will work depends on what lessons the party has drawn from the 2024 mandate. This will take a few more months to crystallise and we will then see it play out on the economic, social and political agenda of this government. And what lessons a party draws from any election results depends on how comfortable it is to discuss all the issues while not leaving out the proverbial elephant in the room. The early signs from the party on what went wrong have been on the predictable spectrum - refusal to acknowledge failure, ticket allocation, blaming the opposition for spreading misinformation (heh!) and some conspiratorial whispers on internal sabotage in key states. This is the kind of postmortem we have come to expect from Congress over the years, where the core questions, like why did the central message not resonate or did the leadership fail to connect with people, are routinely ignored. So, it will be interesting to see if they are brought up in a party which has, in the past few years, turned into a two-man show. After all, but for the positive surprises in Odisha and Karnataka, the BJP could have been about fifty seats short of a simple majority. Things would have looked very different then.

As if in anticipation of this reluctance to discuss the core issues that went wrong in these elections and continue with business as usual, the RSS fired a pre-emptive salvo last week with its chief Mohan Bhagwat’s speech to the cadre in Nagpur. The speech has been analysed quite extensively in the past week, given the role of the RSS in the Hindutva project and its tone in relaying its concerns. I have picked a few soundbites that I thought were particularly pointed with the intention of ensuring they are picked up in any atmachintan that the BJP does.

“An individual who adheres to the principles of propriety while performing their duties, who takes pride in their work yet remains detached, and who is free from arrogance, truly embodies the spirit of a Sevak.”

“Do the work, but do not be proud of the work you did."

“Elections naturally bring about competition, where individuals strive to surpass others. However, this should be conducted with dignity. Lies should not be employed. People are elected to the Parliament to govern our country.”

“Even for the religions and thoughts that entered Bharat, some people became their followers for different reasons. But our culture does not have any problems because of that. The only thing is that we should get rid of the mindset that we are only right, others are not.”

“By addressing the distortions that have emerged over time through thoughtful understanding, acknowledging that opinions and methods can differ, we must consider this country our own, establish a devotional relationship with it, and treat all its sons as our brothers.” 

“Elections are a process of building consensus. There is a system in place to ensure that both sides of any issue are represented in a like-minded Parliament. Naturally, achieving such a consensus is challenging among individuals who have arrived there through intense competition. Hence, we rely on the majority. The entire competition is for this purpose. However, it is a competition, not war.”

When I read the above, I did a double check. I went back to make sure that the link hadn’t mistakenly taken me to some site on Gandhian (the Mahatma, not Rahul) thoughts. The liberal media seems to have lapped the speech up in the spirit of my enemy’s enemy is my friend. I have my reservations, though.

Firstly, these are wonderful sentiments to express after the verdict is out, and you get a sense of how people have responded to a campaign. Would this speech have been made if chaar sau paar (400+ seats) had materialised? You may argue that a speech of this kind couldn’t have been made in public during the campaign. Fair enough. Maybe it could have been made when the exit polls were showing a clear majority to the BJP. It would have rang truer in its intention then. To come out with these pious intentions after the verdict and place oneself above the political shenanigans of the party is largely an opportunistic play. The speech is a wonderful positioning exercise for the RSS to show how it places the nation above everything else. But only the gullible won’t see through its convenient timing. 

Secondly, as I mentioned before, the most likely proximate reason for the speech is to set the agenda for any introspection that happens within the party. Anyone who wanted to bring up uncomfortable topics for discussion but didn’t know how to now has the convenient shoulders of the RSS chief to raise any of the topics covered in the speech. In that sense, having an external ‘hegemon’ like RSS is a good bulwark against the hijacking of inner party democracy by strong leadership that routinely happens in India. The BJP might actually do a much better job of analysing the reasons for its relative failure than the Congress might do in figuring out the reasons for its relative success.

Lastly, the most important reason for the speech was to diversify the risk of the larger Hindutva agenda from brand Modi. And this is important. The RSS has ridden on the popularity of the PM over the past ten years without putting any real constraint on the cult of personality that was being built. That popularity has helped strengthen the RSS organisation and helped it to spread faster than at any time in its history. Now that it senses that possibly peak brand Modi has been reached, it is astute enough to distance itself, however gradually, from it. Any kind of tight coupling there will impact its image and, therefore, its ability to grow. More than anything else, this strategic distancing of the RSS from the PM’s image and its reiteration of being above the mundane electoral politics is the clearest sign that we have possibly reached peak brand Modi.

It will be interesting to see how things play out from here. Is the PM capable of a reinvention that preserves his strong man cult while simultaneously satisfying the expectations laid out in Mr Bhagwat’s speech? Will the party, too, like RSS, look to diversify its risk for 2029 and begin to ask questions on the agenda for Modi 3.0 and its positioning? If these things were to come to pass, would the jostling begin for the leadership of the party in a post-Modi scenario? Or, like other dominant parties in India in the past, will there be no change and it will be business as usual till the electorate decides one way or the other in 2029? 

Hum dekhenge. 

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India Policy Watch #2: We Shall Never Learn

Policy issues relevant to India

— RSJ

Three news reports for you.

First, from ET on June 22, 2024: India’s ‘sin’ is govt’s bounty: GST cess may deliver Rs 70,000 cr bonanza

The Centre is anticipating a significant surplus of approximately Rs 70,000 crore from GST compensation cess collections, even after repaying loans taken during the Covid-19 period on behalf of states. This unexpected windfall is due to robust collections from sin goods like pan masala, cigarettes, and automobiles. The GST compensation cess is levied on so-called sin goods over and above the peak 28% tax they attract.

Second, this sad news from The New Indian Express on June 22, 2024: TN hooch tragedy death toll climbs to 37; 'illicit liquor sale was rampant in Kallakurichi, police turned a blind eye.'

Kallakurichi in Tamil Nadu, about 240 km from the state capital of Chennai, is enveloped in grief after the death toll in Wednesday's hooch tragedy rose to 37. The numbers are likely to go up with 14 more said to be in a critical condition.

The tragedy was waiting to happen. Locals say Illicit liquor sale was rampant in Kallakurichi. Police failed to take action against the illicit liquor sellers, they said.

Most of the victims are daily-wage workers. They cannot afford Indian Made Foreign Liquor sold in Tasmac (The Tamil Nadu State Marketing Corporation) outlets. Hence, they depend on spurious liquor, which comes at a cheaper price. The victims had consumed illicit liquor sold in two huts and fell ill.

The Union and the state governments can keep raising taxes on ‘sin’ goods or banning them. Such taxes or bans won’t change social behaviour. They will either send the market for such goods underground and make criminals of ordinary citizens or create a market for cheap, unsafe knock-offs for the poor to consume. This never ends in India because we don’t learn. 

And to the third news report.

From the Hindu Businessline, June 21, 2024:

The Telangana Cabinet has decided to waive farm loans (up to ₹2 lakh each) to the tune of ₹31,000 crore before the August 15 deadline set by Chief Minister A Revanth Reddy. Announcing this here on Friday after the Cabinet meeting, the Chief Minister has said that the Government would clear the loans in one go before the August 15 deadline. The decision is likely to benefit 47 lakh farmers in the State. The Chief Minister modalities for the loan waiver will be notified soon.

Well, who is going to pay for these waivers? What’s the point of having banks and financial institutions go into Bharat and build a ‘credit culture’ if borrowers know they won’t have to pay back a loan because the government will offer a farm loan waiver soon? But who cares about moral hazard and the long term consequences?

Hum dekehenge, again. 

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India Policy Watch #3: All States Are Special

Policy issues relevant to India

— Pranay Kotasthane

Over the last two weeks, quite a few articles and explainers have been written on the ‘special category status’ demands of Bihar and Andhra Pradesh. While these articles focused on whether these states deserve this status or not, they missed the bigger picture that all states are special, and none of them deserve a special category status. Here’s how.

First, let’s get to the bone of contention. In simple terms, states with a ‘Special category status (SCS)’ get higher fiscal support from the Union government. This term is of the high-planning-era vintage when the Union government ran plans (in addition to centrally sponsored schemes) to direct states.

The National Development Council accorded this status on the recommendation of the Planning Commission. The five criteria for making this decision were broad and quite vague: hilly and difficult terrain, low population density and/or sizeable share of tribal population, strategic location along borders with neighbouring countries, economic and infrastructural backwardness, and non-viable nature of state finances.

Fiscal support can come in three different ways. First, the erstwhile Planning Commission would give such states more grants and fewer loans to execute their plans. Second, SCS states received higher percentage allocations of plans specifically meant for hill area development, tribal sub-plans, and border area development. Finally, these states again receive higher fiscal support for executing centrally sponsored schemes such as the National Health Mission (NHM).

The crucial point here is that there is no constitutional basis for this status. Many articles over the last two weeks mistakenly mention that the SCS was a creation of the Fifth Finance Commission, which accorded it to three states—Jammu and Kashmir, Nagaland, and Assam—in 1969. This interpretation is incorrect and clearly shows that none of the people writing these articles read that report.

Since the Finance Commission is a constitutional body, coming up with such a status would have had greater significance. But all that the Fifth Finance Commission said was that some states have special features which ‘tend to increase the level of their revenue expenditure’. In such cases, some allowance was made for these cases while coming up with a common formula for sharing tax revenues among all states. There was no ‘special category status’ accorded to any state.

This approach of treating every state as special has been carried over by subsequent Finance Commissions, as illustrated in this paragraph from the 14th Finance Commission report:

“We did not make a distinction between special and general category states in determining our norms and recommendations. We believe that while there are certain common factors that impact cost disability and fiscal capacity of States, there exist circumstances that are unique to individual States. Our endeavour has been to take a comprehensive view of these commonalities and special characteristics of individual States while making our assessment and recommendations. In our assessment of State resources, we have taken into account the disabilities arising from constraints unique to each State to arrive at expenditure requirements. In this regard, we have observed that the North-eastern and hill States have several unique features that have a bearing on their fiscal resources and expenditure needs, such as low level of economic activity, remoteness and international borders. Our objective has been to fill the resource gaps of each State to the extent possible through tax devolution. However, we have provided post-devolution revenue deficit grants for States where devolution alone could not cover the assessed gap.”

Thus, instead of falling into the trap of putting a state in a semi-permanent category that distorts long-term incentives, finance commissions sought to include their special characteristics in the formula used for distributing resources between states. And where this approach still couldn’t meet the state’s expenditure requirements, an additional provision of revenue deficit grants was made in such cases.

Thus, the special category status is an anachronism. Given that the unconstitutional entity that recommended it no longer exists (i.e. the Planning Commission), this status must also be discarded. The counter-response to SCS is that all states are special, and the correct way to help states is to increase the quantum of vertical devolution sustainably so that they can determine their own priorities and plans. This requires the Union government to ramp down its many centrally sponsored schemes simultaneously so that the money saved can be passed on to the states via the Finance Commission. States that continue to clamour for a tag that guarantees largesse from the Union government are only encouraging centralisation.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] Anne Krueger and Shruti Rajagopalan on Ideas of India. Do. Not. Miss.

2. [Journal] The latest edition of the Indian Public Policy Review is worth a read.

3. [Article] Read Dr M Govinda Rao on why Finance Commissions aren’t swayed by the Special Category Status demands.

4. [Article] Read this fantastic story on Tigerfeathers of how ice made its way to Bombay.

5. [Podcast] We have a new Puliyabaazi on why India is not 28 States but 85 Regions, featuring Poornima Dore’s work on regional economic diversity.

   भारत, क्षेत्रीय विविधता के नज़रिये से। India is not 28 States, but 85 Regions ft. Poornima Dore

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* From the iconic song sung by Iqbal Bano and penned by Faiz Ahmad Faiz