Sushil Kumar Modi wears two hats. Not only is he deputy chief minister and finance minister of Bihar, the fastest growing state in the country, Modi is also chairman of an empowered group of finance ministers that is steering the transition to the single goods and services tax (GST) regime. Consequently, he makes for a key stakeholder. Mint, as part of its special budget offerings focusing on views of such key stakeholders in the economy, spoke to Modi in its television studio. In a candid conversation, Modi spoke about the expectations of the state governments from the forthcoming Union budget and also his concerns as the Indian economy sees unprecedented volatility in growth. Edited excerpts.

What does it mean putting in place a GST for the economy?

For a common man, with GST all the indirect taxes will be subsumed into one tax. This is a practice in more than 150 countries. We implemented VAT (value-added tax) in 2005. After VAT, GST is the next stage. Once GST is implemented, the tax load on consumer items will be lessened because of GST. It will also check tax evasion.

It is a big reform, but it is not easy to implement this tax reform in India, which has so many political parties and different state governments.

But it is already two years behind schedule. So it is certain that it will miss the 1 April deadline,too.

To introduce GST, a constitution amendment is required. The Constitution Amendment Bill is with Parliament for the last 13 months. States are not responsible for the delay. In a country like India, two or three years is not enough to implement such a big reform. State governments have different opinions regarding GST or any tax reforms. But slowly we are inching towards GST.

How significant is the in-principle consent of states to a negative list of service tax for moving towards GST?

This is an important milestone. Those services which are in the negative list will be exempted from service tax levied by the central government. The empowered committee has given its consent to more than 35 services or activities which should be kept in this exempted list. But there is one rider with this list. There are certain activities or items on which the states are empowered to impose taxes under the Seventh Schedule, List 2. But on these particular items, central government also imposes service tax. If you go in an air-conditioned restaurant, you have to pay service tax as well as VAT. We have asked the central government to keep these items under the exempted list. The empowered committee is in favour of a negative list and it should be implemented prior to GST. The Centre can implement it from 1 April or whenever they want to.

Even now, there seems to be concern with the Centre. There are genuine fears of the states about loss of tax revenue. But on the other hand, there is also a fear because you are giving up a lot of your taxation rights. What do you think the Centre should do as a confidence-building measure to create a better environment?

States are concerned about their fiscal autonomy. Two-thirds of the taxation powers are with the central government and only one-third with the state government. So states are scared that the central government will encroach on their fiscal autonomy. So states are asking that if GST is being implemented, the central government should compensate whatever revenue loss is there.

If you stand back and look, the National Counterterrorism Centre (NCTC) has run into a problem. States drew a different line on multi-brand retail, too. The Centre and state relationships have always been a point of tension because of the federal structure that we have. But has it ever been so bad as it is now?

Degrees of disruption: Modi says the poorer states will always be affected more compared with prosperous states in a slowdown. Hindustan Times
There could be tensions and problems between the Centre and the states. But in these two casesNCTC and multi-brand retailstates were not taken into confidence and they were opposed by the UPA (United Progressive Alliance) partners themselves. What was the requirement of announcing multi-brand retail when Parliament was going on? They did not call for an all-party meeting. NCTC was also unilaterally announced. In the last two years, UPA has failed in its floor management. If you are not able to take into confidence your partners and your party itself, then how do you expect the opposition to support your each and every move? There is a paralysis within the government and it is unable to make major policy decisions. This is unfortunate.
This deterioration you are suggesting is coalition mismanagement?

Yes it is. Even during Ataljis (Atal Bihari Vajpayee) regime, he used to hold all-party meetings. Even then, tension can happen in a federal structure like India. But here, they have not made any effort.

The Congress governments in states are not speaking against the Centre due to political compulsions, but they are also not happy. Take the case of the central governments refusal to pay CST (central sales tax) compensation. Congress-ruled states such as Andhra Pradesh, Haryana, Maharashtra are also not happy. Haryana says it will lose Rs. 3,000 crore. How can a small state, irrespective of whichever party is ruling, afford to lose Rs. 3,000 crore?

States such as Bihar, which are coming out fast, can take advantage of a rapidly growing national economy and the huge demographic dividend in increasing tax revenue, bringing more growth and creating employment opportunities. Isnt this conflict between the Centre and the states messing up a gigantic opportunity?

Yes, it is a missed opportunity. When there is indecisiveness and paralysis in the decision-making at the Centre, naturally it affects the state governments. Our revenues also; the central transfer that we get as devolution as per the finance commission, all this gets affected.

This year, they have sanctioned a budget of Rs. 37,000 crore for Sarva Shiksha Abhiyan (the governments flagship programme to universalize primary education and increase literacy rates). But at the end of the year, they have only Rs. 21,000 crore. So there is a shortfall of Rs. 16,000 crore. All this is happening because of the mismanagement of the government and hampering the development of states.

Modern India has never seen such a steep drop in growth from 9% to less than 7%. India is a $1.8 trillion economy, so its a huge number. How vulnerable is an emerging state such as Bihar to this volatility in economic growth?

We have started feeling the pinch of a slowdown. We are more vulnerable. States like Maharashtra and Gujarat can absorb the shock also because they have resources. But we are totally dependent on central transfers. We are making efforts, but the options are limited. So the poorer states will always be affected more compared to prosperous states.

So the political economy of this years budget is far more significant than previous years because of the growth slowdown. An issue that has been raised constantly by the states with the Centre is the centrally sponsored schemes. The states have been demanding flexibility to run these schemes. Have the states managed to convince the Centre for these 100-odd schemes?

Last month, there was a pre-budget meeting of the finance minister with all the state finance ministers wherein every state finance minister has raised the issue of pruning the number of centrally sponsored schemes. But I do not think the Centre is going to take any drastic steps.

We have all demanded that the central government should implement the B.K. Chaturvedi committee report, a committee which was set up by the central government itself.
An approach of one size fits all doesnt work. The same MGNREGS programme (the rural jobs guarantee scheme) doesnt work for all states. Bihar is a flood-prone state. Some other states have a drought. So there is a need for flexibility.

There should be flagship programmes for each and every sector with six-seven schemes. The central government should provide the money with guidelines and monitor the schemes. States should be allowed to formulate their own programmes.

Traditionally, India has always been a case where sum of the parts is always greater than the wholethat is, the states put together are far more than the Union government in terms of growth and contribution. But in the new economy, where we are a near $2 trillion economy, this is more apparent with states surging forward. Going forward, is this a signal that this is a new India and you need new rules of governance?

Naturally. Now, the southern and western states like Gujarat and Maharashtra dont require much help from the central government and are competing with China. But it is not the case for the eastern parts of India like Bihar, Orissa, West Bengal, Assam, eastern UP (Uttar Pradesh) and other north-eastern states and some of the Hindi-speaking states like Rajasthan and Madhya Pradesh.

Backward states could not take advantage of the green revolution and then of the liberalization of the economy in 1991. These were two missed opportunities. The third opportunity has now come to India where the states are growing faster than the central government. Be it Naveen Patnaik in Orissa, Nitish Kumar in Bihar, Raman Singh in Chhattisgarh or Shivraj Singh Chouhan in Madhya Pradesh, because of good governance, management of economy and effective administration, these states are doing well as compared to the reign of the earlier chief ministers.

If these states miss the bus, it will be very unfortunate for the country. I feel the central government should treat all states equally and not discriminate on the ground of which political party is ruling it. If a state like Bihar, having a population of more than 100 million, remains backward, then how can India grow?

The Union government imposes cesses and also raises funds through the exploitation of natural resources such as spectrum and offshore oil. This is never shared with the states. Have the states not brought this up with the Centre?

When Vijay Kelkar was the chairman of the 13th Finance Commission, all the states raised this issue that all this should also become a part of the central devolution. Till now, the central government has not acceded to our demands. In future, we will continue to pressurize the central government that cess and surcharge and such other things should also be shared with the state governments.

What is the one thing you will look for in this Union budget as the finance minister of Bihar and also as the head of the empowered group?

I would like that taxes like excise duty and service tax should not be increased. Also, the direct taxes code should be implemented keeping in mind the recommendations of the parliamentary standing committee of finance and not what the cabinet decides.

We want more money for agriculture because a second green revolution can only happen in the eastern part of India. In last years budget, they provided only RS 400 crore to eastern India to bring about a green revolution.