Q.1) The Centre acknowledged that States are likely to face huge GST revenue shortfall as the economy may contract due to COVID-19, which it termed as an unforeseen “act of God”. The issue strengthens the necessity for a new system between sovereign and sub-sovereign entities. Critically analyze. (15M, 250 Words)

Why this question?

  • As per the Centre’s estimates, the States’ GST revenue gap in 2020-21 will amount to about ₹3 lakh crore, while cess collections are only projected to reach ₹65,000 crore, leaving a shortfall of ₹2.35 lakh crore. Thus the question. 


Mention in brief about the background of the compensation issue. Also mention the need to uphold cooperative federalism.

Body: Discuss the following


  • Falling states’ economy
  • Abdication of responsibility by the center
  • Fiscal federalism: 
  • The high rate of 14%
  • Failed to learn from Value Added Tax (VAT)

Way forward: Need for bargaining between center and states 

  • Widening the tax base
  • Single rate of 12%
  • Ditching “revenue neutral rate” (RNR)
  • Overhaul of the interstate GST and the administration of the e-way bill

Conclusion: GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.


Q.2) As per the GDP data released by the Ministry of Statistics and Programme Implementation (MoSPI)for the first quarter (April, May, June) of the current financial year, the GDP contracted by 24% per cent in Q1. Analyse the associated concerns and suggest a way forward. 

Why this question?

  • India’s GDP has contracted by 24% per cent in Q1.Thus the question.


  • Mention in brief the latest GDP data and the sectors mostly hit.

Body: Discuss the following

Concerns: The vicious cycle of falling incomes and poor demand: When incomes fall sharply, private individuals cut back consumption. 

  • When private consumption falls sharply, businesses stop investing. Since both of these are voluntary decisions, there is no way to force people to spend more and/or coerce businesses to invest more in the current scenario.
  • It is true for exports and imports as well.
  • Increasing fiscal deficit: Even before the Covid crisis, government finances were overextended. 
    • For April-July, the Centre’s fiscal deficit stood at Rs 8.21 trillion, or 103 per cent of 2020-21 budget estimates of 7.96 trillion.

Way forward: 

  • Efficient subsidy and social spend: The government can 1% of GDP by higher subsidy efficiency and savings in admin expenses.
  • Disinvestment: Monetisation of capital owned by state owned enterprises can mobilise 0.7% of GDP.
  • Asset monetisation: 0.7% of GDP can be mobilised by recycling of PSU infrastructure.
  • Higher tax buoyancy: A simplified GST structure can garner 0.65% of GDP.
  • Power sector reforms: Cost reflective tariffs with targeted subsidies to agriculture and household can provide 0.3% of GDP.

Conclusion: Only when the government spends more by building roads and bridges and paying salaries or by directly handing out money — can the economy revive in the short to medium term.