Concessionary federalism in a dominant party system? Indirect tax reforms and subnational acquiescence in India

Abstract

ABSTRACT What accounts for subnational assent to policies that seek to reduce their fiscal autonomy and increase fiscal centralization? Since subnational actors with access to veto capabilities can block such reforms, the key to this theoretical puzzle lies in the identification of those conditions that create weak veto possibilities. This article seeks to solve this puzzle by analysing the case of India which has amended the constitution to introduce a ‘dual GST’ system. The combined logic of a market economy paradigm – within which the realization of a common economic market was an important policy goal – and the logic of a ‘dominant party equilibrium’ – which reduced the number and impact of veto players – created the right conditions for intergovernmental coordination. However, even under these conditions, the coordination dilemma, which had plagued the indirect tax reform process since 1991, could not have been resolved without making compromises as midpoints of competing claims. Thus, even under a dominant party system, the institutional condition of federalism cannot be ignored entirely. Overall, India’s transition to a goods and services tax (GST) regime is a classic case of the centre and the states pooling sovereignty over the taxes assigned to them. This has strengthened the ‘shared rule’ dimension of Indian fiscal federalism.