CHyi<PM<R V II I CHAPTER-VIII EVALUATION OF THE FINANCIAL RELATIONS BETWEEN THE UNION AND THE STATES IN INDIA, Introduction An attempt is made here to trace the financial relationship between the centre and the states in India, and to throw light on the salient features of the changing pattern of the financial adjustments between them. Also an attempt is made to study the changing impact of the said relationship on the finances of the State of Maharashtra as well as the reactions and arguments of this state to the changing pattern of the relationship between the centre and the states. The second part of this chapter is devoted to the analysis of the issues involved in the transfer of resources from the centre to the states. The role such transfer played in Maharashtra's revenues, has been analysed in the chapter on Revenue Structure. 8.1 Early Beoinnino of Financial Relations in Indias The problem of financial relationship between the centre and the states is a practical complicated issue. This problem can be backdated to the year 1833, when there was a 288 ]ight}y centralized system uf Government established by th« Charter Act of 1833 which vested complete power of legislation, administration and finance of the entire territories in India, in the governor general of India. Therefore, even the presidencies collected the taxes and spent the proceeds in the name of the Governor General of India; such states soon proved to have led to "irresponsible extravagance" on the part of the provincial government. Thus, the year 1870 was the year when financial decentralization in India began. It is not necessary here to continue along the way back into the developments from 1870 to 1975-76, since this study deals with the period from 1975-76 to 199S-93. But as a very brief background, it may be mentioned that, "Mayo's Reforms of 1870 marks the beginning of continuous process of functional and financial devolution from t^ie central to the provincial Governments. Mayo's scheme which came into effect in 1871, provided that, certain administrative departments such as, Education, Medical Services, Ja ils , Police etc. should be under the control of provincial Governments, while the receipts from these departments, plus some "assignments" from the Cential revenues, were to form the provincial resources. This ar ranigements were termed as "Budget by assignments". The provinces therefore, were assigned the following revenue heads; Excise, Stamps, and t)->e License Tax. This system of 289 assigned revenues was modified in 1888, it was made quasi­ permanent in 190^ and permanent in 1912. In 1909 the Secretary General of State appointed thie Royal Commission on decentral i 2ation to go into the whole question of financial relations between the centre and the provincial Governments and to make recommendations. The commission however favoured relaxation of central control in a large number of minor matters, so as to avoid vexatious interference with the financial administration in the provi nces. Naturally the old financial structure, based on the principle of detailed control over provincial finance by the central Government, seemed grossly unsuited to the new constitutional arrangement s contemp1 ated - The Joint Report recommended the principle of "Seperation of Revenues*'. This scheme of reallocation of revenues, involved the seperation of central and provincial budgets and a general relaxation of central control over p ro v in c ia l finance. The Jo in t Report recommended th a t, provinces should be given independent powers^ in the field of taxation, expenditure and borrowing, consistent with the general responsibi1ity of the Government of India for the stability of Indian finance. 290 Moreover, before* the reforms, the provincial Governments) had no independent borrowing powers, loans were given to them by the Central Government out of the provincial loans account. "This relationship between the central Government and the provinces was found unsatisfactory to both and step by step the financial status of the provinces was raised u n til, the 1919 Act had recognised the sep^ation of revenues of the provinces from those of the Central Government" ^ . Thus with the inauguration of provincial Autonomy in 1937, India entered on a new career. This brought to a successful termination the development which had been going on since 1860. It is also known that the adoption of Montagu-Chemsford Reforms marked the firs t stage towards introducing the federal system of finance in India. The Government of India Act of 1935, should also be regarded as an important land mark in the evolution of the Indian federal system. 8-2 Problems of Financial Relations bet»»een the Centre and the States The setting up of a Finance Commission once in five years is a constitutiona1 obligation under Article 280 and the commission is required to make recommendations to the President as to j- 291 (a) The distribu tion between the Union and the States, of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the states of the respective shares of such proceeds; (b) The principle which should govern the grants-in-aid of the revenues of the states out of the consolidated Fund of India. (c) Any other matter re fe rre d to the Commission by the President in the interest of sound finance. It is difficult to erase the impression that the terms of reference favours the Union Government. But our analysis or the resource-rea11ocation between the centre and the states might be a clear answer to this. 8.3 Sharino of Taxes Union Excis»e Duties Under the Six Finance Commission, the coverage of items for state's share has been sim ilar but the state's share was limited to 20 percent. The Seventh Finance Commission doubled the state's share to ^0 percent on the ground that if the states had sufficient resources with them, their dependence on the centr'e would be reduced. It included in the divisible pool all commodities excluding Excise on elect ric ity . 29P The? Eighth Finance* Commission, raised this share to 45 percent, but the increment of 5 per cent Mas used for meeting the assessed post-devolution de ficits of the states. The Ninth Finance Commission, let the overall share remain at 45 percent, but used for index of infrastructure 5 percent and 7.4S5 percent was to be distributed among the deficits states in its First and Second Reports respectively. Thus,the portion of the net proceeds of the union Excise Duties from which all states receive a share was 40 percent for the Eighth Finance Commission. It remained so in the one year (1989-90) report of the Ninth Finance Commission, but it was reduced to 37.575 percent in its second report pertaining to the period 1990-1995, The Tenth Finance Commission, raised the state's share to 47.5 percent, taking into consideration its other recommendations of a decrease in the state's share of the net proceeds of Income Tax, There has been an increasing trend in the state's share of divisible pool through greater coverage as well as increase in the percentage of Excise Duties transferred to the states except during the period of the Ninth Finance Commission. P93 The recommendditions of the various Finance Co/nmissions relating to the distribution of Union Excise Duties are presented in the following table No.^2 given below;- Table No- 37 Union Excise Duties 6th 7th 8th 9th FCR 10th States FC FC FC 1st 2nd FC Report Report 1 ) Andhra Pradesh 8.16 7.691 8,587 7.858 7.170 8.465 B) Arunachal Pradesh -- - 0.070 0.897 0.170 3) Assam 2.71 2.793 2.977 2.707 3.810 2.784 i*) Bihar 1 1 .47 13.021 13.202 13-573 11.028 12.861 5) Gujrat ^*.57 4. 101 3.506 3.109 3.183 4,046 6> )-)aryana 1 .53 1 . 177 1 .017 1 ,077 1 .099 1 .238 7) Himachal Pradesh 0.63 0.521 0,589 0,549 1-943 0.704 8) Jammu Kashmir 0,90 0.839 0.856 0.713 3,548* 1 .097 9) Karnataka 5.45 4,876 5.077 5.092 4. 104 5.339 10> Kerala 3.86 4.035 3.800 3-707 3.807 3.875 11) Madhaya Pradesh 8.15 8.725 8.852 8.726 7,224 8.290 IS) Maharashtra 8.58 6.63a 6.216 5.635 5.185 6.126 13) Manipur O.Hl 0-218 0.H33 0. 197 1 .174 0.285 1^») Maghalya 0.19 0.200 0.194 0. 199 0.891 0.283 15) Nagaland 0.11 0.097 0.096 0.070 1 .348 0.181 16) Sikkim - 0.028 0.039 0,032 0.260 0.126 17) Goa --- 0.074 0.523 0.180 IB) Mizoram - - 0.065 0.109 0. 149 19) Or i ssa 4,06 4-682 4.592 4,454 5.358 4.495 30) Punjab 1 -87 1 ,226 1 .317 1 .310 1 ,362 1 .461 21 ) Rajasthan 5.00 4,813 4.695 5.097 5.584 5.551 22) Tamil Nadu 7.43 7.637 7.317 7.785 6.379 6.637 83) T r ipura 0.30 0.373 0.292 0.295 1 .556 0.378 Si*) Uttar Pradesh 17.03 18.290 19.097 19.877 15- 638 17.811 H5) West Bengal 7 .79 8.025 7.449 7.729 6.600 7.471 100.00 100.00 100.00 100.00 100.00 100.00 Source These data were compiled from various reports of Finance Commissions * Figures for Jammu and Kashmir are estimated S94 This Table shows c3ear]y that the different Finance Com/nis&ions kept changing the a/nount of share of each state throughout history of Fir>ance Commissions in India.