India’s Centre-State Fiscal Schisms
It’s been a good week for the book! I completed the chapter on humour and started one on figures of rhetoric (Expect to see some cool ones like diacope, anaphora and epizeuxis!).
I must tell this though. In my career, have been working since 1998 (give or take a few years for MBA and breaks) – so about 23+ years. In all these years, I haven’t enjoyed doing any work project as much as this book I am writing. It’s been an exhilarating ride.
I hope readers will also find it fun and useful!
And now, on to the newsletter.
Welcome to the eighty-ninth edition of ‘3-2-1 by Story Rules‘.
A newsletter recommending good examples of storytelling across:
- 3 tweets
- 2 articles, and
- 1 long-form content piece
Let’s dive in.
𝕏 3 Tweets of the week
Source: X |
This data point may be exhibiting hindsight bias? (Before the election results, I remember seeing stats saying that inflation had toned down in the US and the economy was doing great while unemployment was low!).
Source: X |
Paul does a great job of live-tweeting a talk by Karthik Muralidharan (author of the seminal ‘Accelerating India’s Development’).
This is a mind-blowing stat. It is understandable why India tilted towards over-centralisation during independence, given the need to unite a diverse set of regions and princely states. But we have to decentralise more now.
(Also check out today’s podcast recommendation, on a related topic).
Source: X |
Poignant play on words.
📄 2 Articles of the week
a. Two videos on the American election results
In a week in which you might have been inundated with US election coverage, I could not ignore the topic altogether.
But instead of deep, thoughtful articles (almost all of which would suffer from hindsight bias; see this post I wrote on causality), I bring to you two videos – funny, irreverent, yet meaningful.
The first one features Jon Stewart (my favourite late-night comic) and is titled ‘Jon Stewart’s Election Night Takeaway‘. This three-minute gem makes a simple point: No one knows anything.
Jon takes several examples of expert comments that were analysing previous election results – and shows how wrong they were in their assessments.
For instance in 2008, when Barack Obama won, here’s what one expert said:
There’s no question that this is the beginning– the first election of the future really. And I think we are moving towards a post-racial America.
Jon’s response:
Yeah, that lasted a day
The second video was posted on LinkedIn (hat-tip – Ashish Gala) and is a hilarious take on the kind of deep-dive analytics that happens in US elections. You have to see it to marvel at the biting satire and the brilliant use of graphics. And the much needed final message.
b. ‘Writing as a Way of Thinking’ by Dan Shipper
Last week, we profiled a provocative piece by Paul Graham in which he stated that in the GenAI era, we will just have a world of writes and write-nots. This week is a thought-provoking counter by Dan Shipper (CEO of Every).
Paul had said that writing is the only way to think. Dan counters that writing is not the way to think, it is a way to think:
Writing is a way of thinking – one that is particularly valuable to me. But even in a world where writing goes away, many types of thinking will remain, and they’ll be augmented – rather than eliminated – by AI if we so choose.
Now here’s the cool part. Dan doesn’t do a superficial take on Paul’s writing. He does a ‘steelman‘ version, in this thoughtful para:
But there’s a subtler idea in PG’s argument – that a certain kind of thinking is only possible through writing. He doesn’t say specifically what kind of thinking that is, but I can take an educated guess: When you turn the vast, interconnected network of thoughts, feelings, and ideas in your mind into a line of words, you find sequence, order, and story. You expose fallacy and fuzziness. Externalizing your thoughts pins them down, and once they are pinned you can bring your whole mind to bear on them, over and over, to clarify and improve them.
And writing doesn’t just tell you what you already think somewhere in the cobwebbed attic of your brain. It actively helps you to generate new – and better – thoughts and ideas as you do it.
In his post, Paul muses that the hard thinking that goes with writing may not be done anymore. Dan believes that it might be replaced by a different kind of hard thinking – using an analogy of managers.
Managing is a thinking process – it’s a working-through. I see no reason to think that it will go away, even if AGI is achieved in the near term. In a world where more work is done by AI, the line of words that a person produces may more frequently look like a prompt than prose, but those who write more effective, creative, and interesting prompts will do better thinking than those who don’t.
Dan is an AI-optimist and has a different take on the issue of writing and AI:
My hope is that, on balance, AI will free people from the parts of writing that are otherwise drudgery. It will, in turn, allow us to spend more time writing—and thinking—about more interesting things in more interesting ways.
🎧 1 long-form listen of the week
In a week in which the US election dominates the news cycle, I would urge you to listen to this episode which has a much bigger bearing on our lives in India. I had a lot of TIL moments in the episode about the performance of GST and the nature of Centre-State finances and relations in India, based on research done by Arvind Subramanian (ex-Chief Economic Advisor) and others.
Subramanian starts with some interesting contrast – the timing of the unified GST launch in India was interesting, given how it opposed global trends which were towards fiscal decentralisation:
“…the states were giving up quote unquote 50% of their fiscal sovereignty and the center about 1/3 and it’s quite radical, Milan, if you think about this because when this happened, in 2016, Brexit had just happened and people said ‘oh my God the whole tendency is towards deglobalization, you know getting away from cooperation’, and this was a fantastic counter-example where states and the center were saying, ‘no in the common interest of creating a common market and a simpler tax (and) we will give up our sovereignty'”
You might have seen breathless headlines on record GST numbers in the last couple of years or so giving the impression of massive increase in collections since 2016. The truth is more complicated.
If we consider tax collections as a share of GDP, India was below the pre-GST levels for a long time and is only now catching up. So we aren’t doing as well in GST collections as the news headlines would have us believe. The reason? Significant tax cuts by the government. The good news? Tax collection efficiency has gone up:
…the reason these taxes were well below the pre-GST levels and have now only slowly converged to pre-GST levels is for one very very important reason. Essentially after the tax was implemented in 2017, in the GST council with the connivance of the center and the states, India went on a rate-cutting rampage. Essentially GST tax rates which were roughly 14% when the tax went in, today are about 10 and a half maybe 11% so there’s been a massive cut in rates which actually reduced revenue collection. So the fact that now revenues have come back despite the rate cutting that’s happened shows there have been some improvements in efficiency so that’s the good news.
Why were the states willing to make these cuts? Because they were looking at elections… and their absolute revenue growth was guaranteed by the Centre under the GST law. So we had a classic case of moral hazard:
…heading into the 2019 election you know every politician wants to cut rates but there was another very important reason that facilitated this. Which is that states were given a guarantee that no matter what happened they would see a steady 14% increase in revenues. So that was a feature built into the system. States basically said you know let me get the political benefit of cutting rates and going to the taxpayer and saying rates are being cut without facing the revenue consequences because, and this is what we call moral hazard and this kicked in spades during the transition period of the GST
Not that the Centre has been a beacon of fiscally responsible behaviour. It had to share 42% of all taxes with the states as per law. So it brought about some new taxes which were outside the sharing bracket:
…the center has kind of flouted the spirit of the recommendations of the Finance Commission because remember the Finance Commission said many years ago that 42% of the kitty should be given to the state. The center followed that but over time has started levying what are called cesses. You just call something a cess and then you don’t have to share it. And so uh it has de facto violated the spirit and started imposing these taxes mainly on petroleum and things which it keeps for itself and doesn’t distribute to the states. And the states have chafed under this quite considerably.
Things get even more messy (or interesting) further into the conversation – around topics of conflicts between high-tax paying states (such as those in the South and Maharashtra) and the centre in terms of the low share of their own taxes that they get back.
Expect these schisms to grow over the years. Hopefully, we will have some statesmen like leaders who can navigate this crucial period in India’s development.
That’s all from this week’s edition.
Photo by Diana Polekhina on Unsplash