Page 318 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy
Pavitar Parkash Singh, Lovely Professional University

Notes
Unit 25: Government Finance: Union and States

CONTENTS
Objective
Introduction
25.1 Government Finance: Union and States
25.2 Summary
25.3 Key-Words
25.4 Review Questions
25.5 Further Readings

Objectives

After reading this Unit students will be able to:
• Describe the Government Finance: Union and States.

Introduction

It has been observed that since the mid-1980s, the fiscal position of the both Centre and States
Government in India has been under pressure. The stress originates from the inadequacy of receipts
in meeting the growing expenditure requirements. We find that the State finances have not been
properly managed not only by the States but also by the Planning Commission and the Central
Government, which include economists. They do not see States as autonomous, responsible
organisations which have to take care of the debt by themselves. Today, one of the major obstacles in
the way of reviving growth is the sorry state of State finances since they could not do the minimum
that they should do. They have no money to invest. Apart from the persistent problem of unacceptable
revenue deficits and high fiscal deficits, many State Governments are now faced with the problem of
mounting debt, particularly the burden of contingent liabilities in the form of outstanding guarantees.
At present, the estimated total debt of the Central and State Governments are above 80% of GDP. It
may be noted that recent years have seen a very sharp upsurge in the indebtedness of both the Centre
and the States.
25.1 Government Finance: Union and States

India has a federal structure, in which a clear distinction is made between the Union and State functions
and sources revenue, but the residual powers belong to the Centre. Although the States have been
assigned certain taxes which are levied and collected by them, they also share in the revenue of
certain Union taxes, and there are certain other taxes which are levied and collected by the Union but
the proceeds of which wholly go to the States. In addition, the States receive grants-in-aid of their
revenue from the Union which further increase the amount of transfers between the two levels of
governments. The transfer of resources from the Central Government to the States is an essential
feature of the present financial system of India.
Division of Resources
The Constitution of India makes a clear division of fiscal powers between the Union (on the centre)
and, the State Governments. The principle adopted for this classification is that taxes which have an
interstate base are levied by the Union, while those with a local base are levied by the States. The
residuary powers belong to the Union.

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