FM opens up on North vs South, Congress,GST, IncomeTax & India’s Economy| IBP Episode 8

The discussion highlights India's economic challenges, including a small tax base with only 1.5% of the population paying taxes compared to higher percentages in China and the US. Concerns about unemployment are raised, citing that over 35% of engineering graduates and significant portions of MBA, IT, and polytechnic students are unemployable. The disparity between northern states like Bihar receiving more funds from central collections versus southern states like Kerala sparks debate on resource allocation fairness. Efforts by Prime Ministers to reduce corruption through technology ensure direct benefit transfers without leakage.

The Need for Seamless Coordination Across Governance Layers India's governance structure is divided among the central government, state governments, and local bodies (panchayats or urban local authorities), each with distinct responsibilities. Effective coordination between these layers is crucial to facilitate investments and economic growth. Local governments often lack readiness to streamline processes for businesses, leading to delays or deterrence of potential investors. A collaborative approach across all levels can ensure smoother clearances and a more business-friendly environment.

Examples Highlighting Successful Collaboration in Investment Facilitation Instances like Tata’s Nano project relocating from Bengal to Gujarat illustrate how proactive collaboration between state governments and local bodies can attract major investments swiftly. Similarly, Assam demonstrated its capability by enabling semiconductor manufacturing despite being less industrially developed than other states—showcasing that efficient cooperation at all levels makes even challenging projects feasible.

Gujarat's Consistent Land Banking Success Gujarat has excelled in implementing a consistent land banking system, making it easier for industries to set up operations. Unlike other states where political changes disrupt projects, Gujarat maintains continuity and readiness of industrial zones. This approach attracts investors by ensuring stability and reducing delays or cost escalations.

The Importance of Government Continuity in Economic Development Economic development requires governments to maintain policy consistency across administrations. Disruptions caused by changing government priorities can delay major infrastructure projects like the bullet train between Maharashtra and Gujarat, leading to increased costs and investor uncertainty. Stability fosters trust among international stakeholders while enabling long-term economic growth.

Privatization as a Catalyst for Economic Growth The government redefined its role in business by limiting its presence to strategic sectors like communication, ensuring services reach underserved areas. Privatization was emphasized under Prime Minister Modi's leadership, fostering efficiency and innovation across industries such as the space sector. This shift allowed private investment and talent to thrive, making India more competitive globally with advancements like cost-effective satellite launches.

Governance Over Politics for Sustainable Progress Effective governance prioritizes economic stability over political disruptions that hinder growth. Retrospective taxation policies from previous governments disrupted businesses by imposing unexpected financial burdens on past transactions. A balanced approach where governance leads ensures continuity and benefits both enterprises and citizens without undermining progress through politically motivated decisions.

In India, only 1.5% of its population pays taxes compared to 10% in China and 43% in the US. Expanding this base is challenging as taxation cannot be forcibly imposed; it requires identifying untapped revenue sources and gradually integrating them into the system. Cultural attitudes also play a role—many view being taxed as regressive despite personal financial growth, creating resistance rooted in moral perceptions. The solution lies in fostering civic consciousness through nudges rather than coercion while addressing taxpayers' concerns respectfully.

For decades, taxpayers have questioned the value they receive from their contributions, citing issues like poor infrastructure, inadequate utilities, and subpar public healthcare. Despite paying taxes diligently—even small amounts—citizens often feel underserved by government services. Prime Minister Modi has emphasized safeguarding taxpayer money through technology to prevent leakages and ensure funds reach intended beneficiaries directly. This approach aims to build trust by demonstrating tangible returns on tax payments.

A significant disparity exists between the rich and poor in India, highlighted by tax contributions where 0.3% of the population pays 80% of taxes. The wealthiest 1% dominate consumption patterns, accounting for nearly half of all flights and a substantial share of income and digital transactions. This gap is exacerbated by mismatches between education qualifications, job readiness, industry requirements, and limited resources among smaller companies to train employees effectively.

Efforts are being made to align engineering education with industry needs by collaborating on curriculum design, particularly in the final years of study. This approach aims to equip students with specific skills required for sectors like metal forging or automobile manufacturing. Additionally, the PM Vishwakarma Yojana focuses on upskilling individuals working with basic tools by providing training, stipends during courses, and a toolkit worth 15,000 rupees upon certification. These initiatives aim to enhance employability in high-demand industries through targeted skill development.

Unemployability Crisis Among Engineering and Management Graduates A significant portion of engineering, management, ITI, and Polytechnic graduates in India are deemed unemployable due to outdated curricula that fail to meet industry demands. Many students graduate without relevant skills or knowledge for today’s job market. This issue is compounded by a lack of investment from state governments over decades in upgrading educational tools and infrastructure.

Solutions Through Individual Effort, Peer Learning, Government-Industry Collaboration Addressing this crisis requires individuals taking initiative through online/offline courses while engaging with peers for contextual learning. Governments must invest in modernizing training facilities alongside private sector collaboration to bridge skill gaps across industries like renewable energy. Post-COVID labor shifts highlight the need for localized workforce development as companies adapt by training local talent closer to their communities.

Engineering colleges in India are proliferating, often prioritizing profit over quality education. Many institutions lack competent faculty and infrastructure but excel at marketing false promises to students from rural areas, luring them with dreams of lucrative job packages. This results in graduates burdened by loans yet unable to secure employment due to inadequate skills, tarnishing the country's reputation globally. The oversupply of poorly trained engineers misleads foreign investors about India's workforce potential while leaving many families financially devastated.

GST Compensation and Manufacturing States' Concerns Under GST, tax revenue is split between the central government and consumer states, leaving manufacturing states like Tamil Nadu feeling disadvantaged. These producer states argue that despite investing heavily in infrastructure to attract industries, they don't benefit proportionally from the taxes generated by their production. To address this concern when GST was introduced in 2017, a compensation mechanism ensured these manufacturing-heavy regions received financial support for potential losses.

Post-2022 Cess Collection: Paying Back Borrowed Funds From 2017 to 2022, state governments were guaranteed a growth rate of 14% through compensation funded by cess on luxury goods. During COVID-19 lockdowns when revenues plummeted but obligations remained unchanged, funds were borrowed to maintain payments promised under this system. Post-2022 until 2026 however; collected cess now exclusively services repayment of those borrowings rather than compensating individual state deficits directly as before.

Controversy Over Tax Distribution Among States The controversy arises from the perceived unfairness in tax distribution among states, where industrialized states feel penalized for their investments as revenue flows to consumer-heavy regions. Kerala's claim of receiving only 21 rupees per 100 collected compared to Bihar’s 70 highlights this disparity and fuels a north-south divide narrative. However, central government investments like ports, airports, railways, and defense facilities significantly contribute to state economies but are often overlooked when calculating returns.

Finance Commission's Role in Allocating Taxes Tax allocation is determined by the Finance Commission based on constitutional guidelines rather than decisions made by any political entity or leader. Factors such as population size play a significant role alongside other evolving parameters during each commission cycle. Misinterpretations arise when these allocations are viewed without considering broader national contributions that benefit individual states' infrastructure and economy.

Kerala's Economic Crisis and Declining Revenue Share Kerala is grappling with an economic crisis, marked by a significant decline in its share of the divisible pool from 3.8% during the 10th Finance Commission to just 1.9% under the 15th Finance Commission. Despite having representation in past UPA-led governments, Kerala failed to address this issue effectively over successive commissions. The state's inefficiency in revenue collection has compounded these challenges, raising questions about its ability to manage resources independently.

Strategies for State-Level Revenue Optimization States must adopt innovative approaches for improving their own revenue generation rather than relying solely on central allocations or increasing taxes directly. Examples like Maharashtra’s adjustment of stamp duty rates during COVID-19 demonstrate how strategic policy changes can boost revenues while stimulating local economies. Efficient tax collection through technology and plugging loopholes are essential steps toward financial sustainability at the state level.

Leveraging Technology to Combat GST Fraud and Enhance Revenue Collection The integration of technology, particularly artificial intelligence, has revolutionized revenue collection in the Goods and Services Tax (GST) system. By tracing money trails and identifying fraudulent claims like false export refunds or fake transactions, authorities have dismantled complex fraud networks. For instance, AI detected trucks falsely claiming multiple trips without transporting goods by analyzing improbable travel patterns within short timeframes. This technological approach eliminates guesswork while exposing systemic loopholes efficiently.

Vision for India's Economic Growth: Balancing Sectors Towards 2047 Goals India aims to become the third-largest economy within two years through a balanced focus on agriculture, manufacturing, and services sectors under initiatives like Make in India. Exporting agricultural products ensures better returns for farmers but requires careful regulation to maintain affordability for domestic consumers. The vision extends towards achieving economic self-reliance by 2047 with streamlined business processes fostering growth across all key industries.