Dear reader,
Back in 1832, the United States government put a high tax (called a tariff) on goods coming from other countries. This was meant to help American businesses, but it made things more expensive for people in the southern States, especially South Carolina.
Calling unfair, South Carolina said they should not have to follow a law that hurt them. They came up with an idea called “nullification”. This meant they believed they could ignore a federal law (like that tariff) if they thought it was unconstitutional or unfair. They passed a special rule saying the tariffs would not apply in their State.
Andrew Jackson, who was the US President then, was furious. He believed that States could not just pick and choose which laws they followed, and said that nullification could lead to the country breaking apart.
South Carolina threatened to leave the United States if the federal government tried to force them to collect those tariffs. Things got really tense, and it almost looked like there could be a war.
Luckily, cooler heads won out. A politician named Henry Clay helped work out a deal where the tariffs would be lowered gradually. This calmed things down enough to avoid a war, but the idea of the rights of States versus the power of the federal government kept simmering, and later contributed to the American Civil War.
Although the primary cause of the war was the institution of slavery, historians have pointed out that economic differences, particularly disagreements over tariffs, industrialisation, and the sharing of revenues further fuelled the tensions, leading to secession. Karl Marx, for one, famously called the war between the North and South “a tariff war”.
History has many examples of disputes over revenue sharing, taxes, and tariffs between Central or Union governments and member States leading to unrest and even secession.
Take the Nigerian Civil War of 1967-1970. The unrest arose partly from disputes over revenue sharing and resource control. The oil-rich southeastern region, predominantly populated by the Igbo ethnic group, felt they were not receiving a fair share of the oil revenue generated from their land. This, combined with ethnic and political tensions, led the southeastern region to declare an independent state called Biafra, triggering a brutal civil war.
In relatively peaceful Canada, the predominantly French-speaking province of Quebec has a long history of advocating for greater autonomy and questioning the fairness of the federal revenue-sharing system. In 1990, the failure of the Meech Lake Accord, which aimed to address Quebec’s concerns (which included financial elements), led to a rise in pro-sovereignty sentiments and the subsequent 1995 Quebec sovereignty referendum, where the vote to remain in Canada won narrowly.
In 2017, the Catalan government in Spain held an independence referendum, deemed illegal by the Spanish Central government. This move followed years of tensions over the distribution of tax revenue and the perceived lack of autonomy granted to Catalonia. While the referendum was declared invalid, it underlined the discontent that simmers around revenue sharing in federalised systems.
These are just a few historical examples showcasing how disputes over revenue sharing can escalate to social unrest. While these examples are complex and multiple factors are involved, they highlight the importance of addressing concerns of fair and transparent resource allocation within federal or union structures.
Why are we talking about these extreme examples in India now?
Because seven States, including Kerala, Tamil Nadu, Karnataka, and Punjab, have spearheaded protests against the Centre’s tax policies and the alleged non-sharing of GST (Goods and Services Tax) revenues. The States make the following key arguments:
Unfair distribution: The States say the current tax distribution system unfairly favours the Centre. They argue that their contributions to the national tax pool are not adequately reflected in the share of taxes they receive in return.
GST compensation loss: The cessation of GST compensation in June 2022 has put further financial strain on States. The initial GST implementation promised compensation for a fixed period of time to offset potential revenue losses.
Blocking scheme funds: The States allege that by not releasing funds, the Centre is stifling their ability to fund essential services and development projects.
These concerns are not trivial. They challenge the very basis of fiscal federalism in the country. The rising urgency of the protests highlights the growing tensions between Centre and States over fiscal autonomy and resource allocation. It underscores the need to revisit the relationship to ensure a more equitable and truly cooperative federal structure. It is important for the Centre to understand the need and relevance of the protests and take steps to come to a compromise/solution so that it does not escalate into a larger crisis.
The latest issue of Frontline examines this critical problem, with the opening essay by eminent economist C.P. Chandrasekhar asking the crucial question that is at the heart of it: Is India’s fiscal federalism breaking apart?
Read it here and write back with your comments.
Wishing you a productive week ahead,
For Team Frontline,
Jinoy Jose P.
