Page 325 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 25: Government Finance: Union and States

The framers of the Indian Constitution provided for grants and loans so that the Centre might come Notes
to the help of those States which were in difficulty and also to bring about balanced development of
the different regions. The use of grants and loans in the last 40 years or so, however, has resulted in
the complete domination and control of the States by the Centre and to a certain extent, even financial
irresponsibility and indiscipline on the part of the States. The enormous increase in transferred
resources from the Centre to the States, the phenomenal growth in loan assistance to the states and
the political pressure amounting to blackmail by the Centre through the instrument of grants have
frightened the States. Hence, there has been an insistent demand for a comprehensive review of
Centre-State relations in general and Centre-State financial relations in particular. The J.K. Thavaraj
Committee (Report of the taxation Enquiry Committee, Kerala Government), the Rajamannar
Committee on Centre-State relations appointed by the DMK Government of Tamil Nadu and the
document on Centre-State relations (1978) adopted by the West Bengal cabinet led by the CPI-M
United Front—all these have the same theme viz., political and financial autonomy for the States and
drastic restriction of the power and financial resources of the Centre.
Responsibility and Resources of the Centre and of the States
According to the Constitution, the Centre has to concern itself with the most generalised features of
the Indian economy such as the creation and maintenance of the banking system, railways and ports
as well as facilities for national economic planning with the regulation and development of large-
scale industries, exploitation of mineral resources, regulation of foreign trade, etc., besides, of course,
the defence of the nation from foreign aggression. On the other hand, the States are concerned with
important aspects of the life of the people, such as the maintenance of law and order, the construction
and maintenance of irrigation, power, road transport, etc the development of educational and health
facilities, the promotion of primary sector such as agriculture, fisheries, forests and secondary sector
viz., tiny, small and medium industries.
In order to carry out these responsibilities the Constitution provided for different types of financial
resources. The Union is entrusted with taxes on personal incomes and profits of companies, excise
duties and customs duties. In a rapidly developing economy, these are precisely the most productive
taxes in the country. In the case of the States, land constitutes an important base of taxation. In a
densely populated country like India, the volume of land coming under tax remains almost stationary.
Therefore, land, as a source of revenue has been responsible for the inelastic nature of State revenues
to a considerable extent. On the other hand, the various taxes on commodities and services like sales
tax, State excise duties, duties in electricity rates, motor vehicles tax etc can be quite productive.
Taxation of industrial and commercial properties has been the preserve of the Centre, and tremendous
expansion in the base of industrial and commercial property, income and wealth as a result of economic
development 11 as been responsible for raising the financial resources of the Centre. At the same time
while rapid industrial development boosted Central excise duty collection, expansion of imports
pushed up customs duty collections. This seems to have given a buoyancy to the Central revenues
which is not available to any tax head assigned to the States except sales tax.
The period since 1951 has witnessed an enormous expansion of financial powers of the Central
Government whose dimensions have progressively increased in relation to the combined resources
of all State Governments put together. For instance, the current tax revenues of the Centre have risen
from ` 360 crores in 1950-51 to ` 65,000 crores in 1994-95 and to ` 5,48,120 crores in 2007-08 (budget)
On the other hand, current tax revenues of the States (excluding transfers from the Centre) have risen
from ` 280 crores in 1951-52 to ` 53,400 crores in 1994-95 and ` 2,57,250 crores in 2006-07 (budget).
The rate of growth of revenues of the Centre is much faster as compared to that of the States. But then,
the Centre has only limited functions to perform while the functions of the States are almost unlimited.
In a way, the Indian Constitution itself is responsible for the existence of a financially strong-Centre
and weak-States. Until partition, there was a growing consensus in favour of the corporation tax and
export duties to be included in the divisible pool. This was the case made out before the Sircar
Committee known as the Expert Committee on Financial Provisions. It was partition which alerted
the Constituent Assembly against possible dangers to the unity of India arising from the divisive
forces. Its effect is reflected in the strong-Centre theme which runs through the Constitution. The
financial provisions of the Constitution clearly reflect this strong-Centre bias.

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