India, Oct. 8 -- Now that the hoopla surrounding the Goods and Services Tax (GST) rate cuts is behind us, it is time to take a hard look at India's eight-year-old grand bargain. Billed as a shining example of cooperative federalism, the grand bargain underlying the GST was premised on the willingness of both the Centre and the states to pool their tax sovereignty and jointly exercise the powers to tax. The Centre agreed to share its tax sovereignty, and the states gave up fiscal autonomy to arrive at this grand bargain. The GST Council was set up as the site for collective decision-making on indirect taxes. Unlike other federal institutions, like the Planning Commission of yore, this was a product of the states coming together rather than the Centre controlling the purse strings and "inviting" states to the bargaining table. In theory, this grand bargain was a template for deepening co-operative federalism beyond tax bargains. In practice, however, the grand bargain has been constrained by short-termism and a weak commitment to the federal principle. Both the Centre and states are to blame. The blatantly obvious truth that eight years of the GST has laid bare is that Indian federalism is caught in a low-equilibrium trap. Despite celebrating cooperative federalism, the Centre has done all it can to undermine that spirit, seeking to use its powers to impose cess and surcharges to shore up revenues for itself, while routinely delaying revenue transfers and compensation cess. This has pushed the states to view federal bargains in zero-sum terms: States chose to deploy their political capital bargaining for compensation, rather than working toward the goal of a single market. There is no better illustration of this than the GST 2.0 rate rationalisation. The decision didn't emerge through collective decision-making. It was the Prime Minister who made the announcement from the ramparts of the Red Fort, not the GST Council. The group of ministers debated the proposal and sought consensus in the council, but it's hard to ignore that it was presented to the council as a fait accompli. The Centre can rightly claim that states refused to bell the cat. The maze of multiple rates, duty inversion, and the absurdities of caramel versus salted popcorns, for which the GST Council - the states and Centre - must bear collective responsibility, had to be fixed, and thus, it exercised leadership and secured a consensus. But after the blitzkrieg of publicity and the launch of the GST Bachat Utsav (savings festival) by the Centre, no one can argue that these reforms have imbued the federal spirit. Indeed, the GST Council's consensus appears stage-managed, and the concerns of the states, including over compensation, are being summarily dismissed. The roots of this low equilibrium trap lie in the "two-third, one-third" problem of India's fiscal federal design and the political culture this has enabled. By design, the Centre has greater revenue powers while the states bear the bulk of expenditure obligations. The Centre devolves tax revenues via the Finance Commission formulae and other grants to the states. But this created a moral hazard of sorts. The Centre has long used its powers to squeeze the states of funds due to them. States, on their part, busied themselves extracting revenue bargains from the Centre and blaming, often rightly, the Centre for revenue shortfalls. But for the states, the "two-third, one-third" problem created the opportunity to conveniently avoid utilising the limited powers they do have, such as raising property and agriculture taxes, which would come with political costs, and thereby, entrenching a culture where the states preferred to extract fiscal space from the Centre over improving their own tax effort. The resultant federal bargain suited both the Centre and the states. The states routinely railed against the Centre's pernicious centralisation, but rarely pushed to reform the federal bargain; and governments at the Centre accrued political credit by encroaching on the domain of the states when needed. This persevered through the era when regional parties dominated national politics. This is what made the grand GST bargain so significant. As negotiations unfolded, producer states worried about revenue loss, made compensation the primary bargaining chip. Fiscally strapped consumer states saw GST as a revenue bonus, and producer states agreed to join the party when a generous compensation package was offered. Effectively, the "grand bargain" became a bargain about revenue extraction for the states rather than a shared ideological commitment to tax harmonisation for a single market. This is why an imperfect GST with a complex and arbitrary rate structure was unleashed. The states failed to leverage the council as a forum for federal negotiations; the Centre, on its part, found new ways to re-centralise and squeeze states. In recent weeks, the Congress has argued that an 18% cap and a simple, rationalised tax were its long-standing demands. But it begs the question of why it never sought to build a consensus within the GST Council. One explanation is partisanship. State governments under the BJP would not go against the will of the Centre, but this also points to a fundamental limitation - the absence of a principled commitment to cooperative federalism. Far from a grand bargain, the GST is an imperfect compromise constrained by a political culture with a limited commitment to the federal principle. Rather than leverage the GST and the GST Council to reshape fiscal federalism, the forces of centralisation have dominated, pushing the states to view fiscal bargains related to the GST in zero-sum terms. For India and the possibilities of a reimagined fiscal federalism, this is a huge opportunity lost....