The central government’s “profoundly bad fiscal policies”, including high taxes on auto fuel, and delayed monetary policy action by the Reserve Bank of India (RBI) have fanned inflation, making it hard for states to cut taxes on petrol and diesel, according to Tamil Nadu finance minister Palanivel Thiagarajan. Individual states cutting fuel taxes may create a mismatch between neighboring states and affect tax revenues, he said in an interview.
Tamil Nadu wants a two-year extension of goods and services tax (GST) compensation beyond June 2022, even as it strives to improve state revenue receipts, Thiagarajan said. Edited excerpts:
With inflation on the rise, how can states and the Center offer relief?
Inflation is managed largely through monetary policy and to a lesser extent by fiscal policy at the Union level. At the fiscal level you are kind of manipulating variables that are only likely to have medium to long term consequences, and relatively few variables that can have immediate consequences, whereas, monetary policy by design has immediate consequences, whether it is liquidity ratios or money supply . If you do something wrong for a long time, may be you escape the consequences because the market and (economic) cycles are going your way for a while, but eventually you have to pay the piper. What we’re seeing now is bad fiscal policy by the Union government for many years, exacerbated by the RBI being too slow to move on monetary policy. While there are external factors beyond our control, including disruption in the supply chain, uncertainty and uneven recovery from the pandemic, I would point to deeply bad policies by the government of India over the last eight years and the lack of timely action that we are doing now, which in my opinion is too late. They should have started reacting earlier, when they first saw the signs of inflation, months ago.
Is there still room for you to cut taxes on petrol and diesel?
The government’s view is that we stand ready to do what we can. However, personally, I say that it is atrocious and is equivalent to an emotional blackmail in the (Centre-state) relationship. The Center raised duties by five-six times in petrol and by 10 times in diesel. Then you cut when there is a 200% rise in petrol and 500% rise in diesel prices compared to 2014 and once you start fighting the consequences of your actions, you ask that all states should cut taxes. I think that it is ludicrous. The Center did all the raising (of taxes) and now it is asking us to do all the reductions. With the Center having 90% powers and 10% with states, it is just a mockery of democracy and logic. Lastly, unless every state around Tamil Nadu cuts taxes, it could lead to arbitrage.
With GST collections touching record levels, would TN still press for a two-year extension of compensation?
If you take out seasonality in GST figures, every month should set a new record. If your economy grows by 8%, your GST revenues should grow by at least 8% or more. So every month is supposed to set a new record. The Tamil Nadu chief minister has already said that the GST compensation for states should continue for at least two years to cover the two years of the pandemic. The Center says that extending the compensation is going to create a free rider problem. The argument is that it takes away the incentive for states to improve their collection. Our view is that the Center has taken away all our powers of taxation in favor of GST Council. It is the Centre’s job to compensate us because you have not left us with enough tools or degree of freedom to do our job (to raise revenue).
What do you mean by flawed fiscal policy?
One, on the taxation side, I think petrol and diesel taxation is just an artefact of a broader move away from progressive direct taxes. Such taxes almost always disproportionately affect the poor and the weak, whereas the income taxes by design can be progressive. Second, the Center has not been as good in execution as they have been in making announcements. That includes the privacy pipeline. The whole approach has been shambolic. It has led to relatively low valuations and thus has not created the kind of execution capability that is the hallmark of good outcomes.