White Paper on Indian States (1950)/Part 9/Public Finance Structures of Indian States

by Ministry of States, Government of India

PUBLIC FINANCE STRUCTURES OF INDIAN STATES

183. The States and Unions of States which continued as separate units had retained their own pre-existing public finance structures. These had one common feature, distinguishing them from the Provinces of India, in that except in respect of certain matters covered by the Stand-still Agreements, the States were free to follow their own policies in matters of "federal" finance and taxation, that is to say, in that field of public finance, such as Custom, Income-tax, Central Excises, Railways, Posts and Telegraphs, etc., which in the Provinces of India, was reserved for the Central Government. Moreover, unlike the Provinces, the States and Unions continued to bear expenditure of a federal nature, such as that relating to Defence; and many of them continued to derive substantial revenues from internal customs duties upon trade with the rest of India. The question of extinguishing these special rights and obligations of the States in the field of federal finance and of making good to them the net gap in their revenues, which might arise if their revenues and expenditure of a federal character were taken over by the Central Government as being more appropriate to its functions, was a difficult one; and the situation was further complicated by the variety of conditions prevailing in this respect, and also in the field of "provincial" finance, in the various States.

184. Apart from this central problem of federal finance in relation to the future Constitution of India, in which it was hoped that the States and Unions would occupy precisely the same position as Provinces, there was the further need, on purely economic and fiscal grounds, to bring about uniformity in the structure and administration of federal finance throughout the country, without which the unity of India would be altogether incomplete and any co-ordinated progress in the economic sphere impracticable. The following observations of the Joint Parliamentary Committee on Indian Constitutional Reforms (1933-34) had already indicated the dangers inherent in an unco-ordinated fiscal administration in India, even at that time:—

"The existing arrangements under which economic policies, vitally affecting the interests of India as a whole, have to be formulated and carried out are being daily put to an ever-increasing strain, as the economic life of India develops. For instance, any imposition of internal indirect taxation in British India involves, with few exceptions the conclusion of agreements with a number of States for concurrent taxation within their frontiers, or, in default of such agreement, the establishment of some system of internal customs duties—an impossible alternative, even it it were not precluded by the terms of the Crown's treaties with some States. Worse than this, India may be said even to lack a general customs system uniformly applied throughout the sub-Continent. On the one hand, with certain exceptions, the States are free themselves to impose internal customs policies, which cannot but obstruct the flow of trade. Even at the maritime ports situated in the States, the administration of the tariffs is imperfectly co-ordinated with that of the British-India ports, while the separate rights of the States in these respects are safeguarded by long-standing treaties or usage acknowledged by the Crown. On the other hand, tariff policies, in which every part of India is interested, are laid down by a Government of India and British-India Legislature in which no Indian State has a voice, though the States constitute only slightly less than half the area and one-fourth of the population of India………

Moreover, a common company law for India, a common banking law, a common body of legislation on copy-right and trademarks, a common system of communications are alike impossible. Conditions such as these which have caused trouble and uneasiness n the past, are already becoming and must in the future increasingly become intolerable as industrial and commercial development spreads from British India to the States".

185. Finally, there was the urgent need to accord some measure of immediate financial assistance to some of the States in connection with their increasing burden from having continually to subsidise the sale of food-grains at prices which would be within the reach of the consumer. It was clear both to the Government of India and to the States and Unions themselves, that apart from some ad hoc, temporary assistance in this respect, it was impossible for the Centre to systematize subsidies and other forms of financial assistance to the States on any planned basis, without first considering the central problem of the financial relationship between them and the Centre. It was evident that unless the Centre had the same sources of revenue and the same responsibilities for the discharge of federal functions in States as in Provinces, it would not be possible to deal with the problem of financial assistance in any satisfactory manner, especially if such assistance was to be on the same basis and on the same principles as were applicable to the Provinces.