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August 1, 2000
Our financial federalism is an elaborate mosaic
A significant indicator of India's financial federalism at work is the table below.
CENTRE'S FINANCIAL ASSISTANCE TO STATES & UNION TERRITORIES
(Amounts in billion rupees)
* Represents a one-off aberration consequent to the leap of 200.26 billion rupees brought about by the new system of transferring 75% of net small savings collection to States and UTs w.e.f. 1-4-1999.
** The jump is caused by the acceptance of the interim recommendations of the Eleventh Finance Commission
Source: Government of India, Expenditure Budget, 1999-2000 and 2000-2001, Volume 1, Statements 10 and 17
The first thing the above figures do is, they nail the lie of the reported plaint of Punjab State's Finance Minister that the Centre finances State Plans with only 30 % grants and gives the balance support through loans. The truth that grants by Delhi towards State Plans aggregate well over 40 % typifies the rhetoric and prevarication behind our States' cry for greater autonomy.
The tabulated statistics themselves flow from a very elaborate scheme of Centre-State financial relationship set out in our Constitution. Its two most conspicuous features are (i) a complete separation of Centre-State taxing powers and (ii) massive transfer of funds from the Centre to the States to supplement the latter's own tax revenue. With Delhi's acceptance of the interim recommendations of the Constitutionally established Eleventh Finance Commission (under Article 280), this originally creative mosaic of inter-governmental relationship has been further enlarged and embellished, though there's always scope for further refinement.
Consider the distinct taxing powers. Certain subjects like income other than agricultural income and Customs duties are permitted to be taxed by the Centre alone. Certain other taxes like land revenue or that on agricultural income or lands and buildings are leviable only by the State Government. Only a few items are subject to concurrent taxation; a good example of this is the matter of mechanically propelled vehicles.
A distinct feature of the Indian Constitution is that the Centre is required to compulsorily share some of its revenue with the States. From the point of view of this sharing, the Central taxes fall under five following categories:
1. Taxes levied and collected by the Centre, and used by it wholly, e.g. Customs duties.
New ground will be broken on the above 50-year-old broad structure when the liberal disbursals set out in the Eleventh Finance Commission's recently submitted report are accepted, as is likely.
The other grants stipulated in the Constitution will, of course, continue to the needy States (Article 275) in the form of "fiscal need" grants as well as "specific purpose" grants (Article 282) which, however, are discretionary in the sense they are not binding but conditional to meeting multifarious situations such as floods or for meeting certain preferred national goals in conjunction with the State machinery. For instance, Jammu and Kashmir was assigned a special Central grant of Rs. 7.65 billion in 1998-99.
The point (plaint?) has often been made by the States that their sources of tax revenue are relatively few in the Constitutional mosaic. And a recent paper prepared for Asia Development Bank by economist M.Govinda Rao has estimated that States in India now raise 38 per cent of current revenues but account for 57 per cent of total expenditure.
That kind of statistic conceals the States' own lack of courage along with a surplus of bad governance, corruption and prodigal-cum-populist attitude. For instance, how many States have levied a tax on agriculture? How many have raised the ancient rate on land revenue on agriculture? How many have increased irrigation charges? How many have stopped theft of electricity? How many have collected the entire sales tax dues? How many blocked the sea of wasteful expenditure and raise productivity of government? How many have put a full stop to populist schemes that drain the exchequer? And what is their explanation for the miserable way they have run their autonomous State Electricity Boards for decades right across the country?
The answers to these questions are known, but one statistic from Maharashtra is revealing. In one taluka of its Thane District, the total land revenue on a plot of 4.02 acres of agricultural land next to a tar road has remained static at 82 paise per year for at least the last decade; and because the land is less than the "small" holding norm of 5 acres, those 82 paise are not payable!
While the States do have the moral and Constitutional rights to press for a higher financial share from the Centre, they should remember that (i) such increase cuts into the funds required by the Centre for a whole gamut of purposes from national defence to oil exploration and (ii) the rates at which the Centre levies its shared taxes are so high that it is very doubtful if the States themselves could collect as much from these taxes as they secure now as their share from the Central levy. And why, if they wanted autonomy, have they agreed to a uniform sales tax in all States?
Talk is sometime heard of a plea for a State income tax and certain other aspects of the American federal structure. Advocates of that need to be reminded that--- * In the U.S.A., Canada and Australia, where both the Centre and the States may levy many similar taxes simultaneously, there have been many acute problems of overlapping and multiple taxation. For example, a resident of Connecticut conducting business in New York can have his income taxed by the State of New York because that income originates there, while the State of Connecticut can tax the same income because its recipient resides there!
* In Canada and Australia the position is somewhat akin to India with both conditional and unconditional funds being given by the Centre to the federation's constituent units. But in the U.S.A. there is no Constitutional provision for such transfer of Federal revenue and sharing is resorted to by force of circumstances. That is done through a pervasive system of only conditional grants under which resources are transferred subject to Federal Government stipulations (like speed limit on roads) being complied with.
* In Australia, the States are debarred from levying "excise". By interpreting "excise" broadly as a tax on goods, many State taxes on sale, use, consumption or production have been characterised as "excise" and thus placed beyond the State purview.
Yes, the framers of our Constitution had indeed done their homework on federalism in practice. Today, over 50 years later, it is our State politicians who refuse to do theirs.
This is not to say that Dr Ambedkar and his colleagues had pronounced the last word on the subject. Far from it, because there simply can be no last word on any subject. And room for constructive discussion there always is. But looking at the overall picture in State capitals, the gnawing suspicion is that the current cry for more autonomy is but a big cover-up for non-performance-- as it certainly is for Farooq Abdullah who set up the rationale for this series of articles now being concluded next week.
Next Week: Anatomy of Autonomy
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