The Future of India's Fiscal Federalism

Grand Tamasha

Indian federalism is encountering some of its biggest challenges since the early years of the republic. Relations between the union government in Delhi and the states are rocky, to put it mildly.

India’s better-off states are growing increasingly agitated about a system of fiscal federalism in which richer states end up subsidizing poorer, more backward ones.

The new Goods and Services Tax (GST) has attracted fresh criticism because its benefits have not been shared equally by all states.

And the coming fight over how parliamentary seats will be allocated across states has only added fuel to the fire.

To discuss the brewing crisis in Indian federalism, Milan is joined today on the show this week by the economist Arvind Subramanian. Arvind is a senior fellow at the Peterson Institute for International Economics. He also served as the chief economic advisor to the government of India between 2014 and 2018. He recently co-authored a new essay in Economic and Political Weekly, “GST Revenue Performance: Gainers and Losers after Seven Years.”

Milan and Arvind discuss the foundations of the GST, its implications for India’s federal design, and its revenue implications. Plus, the two discuss growing resentment among India’s prosperous states over fiscal transfers, questions about political representation, and the prospects of a new grand federal bargain.

Episode notes:

1. Varun Agarwal et al., “GST Revenue Performance: Gainers and Losers after Seven Years,” Economic and Political Weekly 59, no. 37 (September 14, 2024): 35-49.

2. Varun Agarwal et al., “GST revenues: The fate of the compensation cess amid Centre-state row,” Business Standard, July 3, 2024.

3. Varun Agarwal et al., “GST's revenue performance: Centre's sacrifice for cooperative federalism,” Business Standard, July 3, 2024.

4. Josh Felman and Arvind Subramanian, “Is India Really the Next China?” Foreign Policy, April 8, 2024.

5. Arvind Subramanian et al., “Understanding GST revenue performance,” Business Standard, January 1, 2024.

6. Arvind Subramanian and Josh Felman, “Why India Can’t Replace China,” Foreign Affairs, December 9, 2022.