While most state finance ministers make general positive noises about the proposed Goods and Service Tax regime, one person who has been constantly opposing it is the Madhya Pradesh Finance Minister Raghavji. Despite most other state finance ministers from his party (BJP) accepting the regime in principle, he has constantly held out that he and the government of Madhya Pradesh are opposed to the scheme, while never giving any credible reasons for his stance.

I term this as a case of sub-national geopolitics. Raghavji is simply exploiting the geographically strategic position that his state Madhya Pradesh occupies (in the geographical center of the country, as the name suggests), and has recognised the fact that without MP being party to it, the GST is dead on arrival.

The basic principle of the GST is to have uniform indirect tax rates across states, and the premise is that when tax rate across states are equalised, it will be easier for goods to flow across inter-state borders and it will bring India closer to being “one market”. Currently, with each state having its own indirect tax structure, there is a restriction in movement of goods between states. Consequently, much time, money and resource is spent getting goods to cross inter-state borders. This leads to inordinate delays and to a higher transaction cost on movement of goods between states, leading to large-scale inefficiencies in the market. The GST seeks to remove this.

Madhya Pradesh, by sheer geography, has a large number of nationally important roads passing through it. Now, even if the state is not a signatory to the GST, goods criss-crossing the country would be forced to take a rather circuitous route in order to avoid this non-GST state. In other words, any advantage that could have been gained by the incidence of GST would be lost thanks to the loss of critical parts of the network infrastructure.

With Madhya Pradesh having recognised this, it is unlikely that they will come around to joining the GST network in the absence of other carrots. While it may not be politically possible (and also incorrect) to give a special package to the state only because they are blocking the GST, other means of compensation for the state can be explored. One idea would be to give states a higher share of the tolls collected on the national highway network, which could influence states that are critical from a network standpoint to embrace the GST.