FEDERAL FINANCE IN INDIA

RICHARD GOODE *

TNDIA, with a population of more

port December 15, 1952.1 The Com-
A than 360 million, is in that respect
mission was responsible for recommen-
the largest country in the world withdations
a to the President as to : ( 1 ) divi-
federal system of government. Al-
sion between the central government
though the problems of federal govern-
and the states of the proceeds of taxes
ment and finance are fundamentally
subject to sharing, principally the in-
the same in India as in other federal- dividual income tax and central excises;
isms, the subject takes on special inter- (2) principles that should govern dis-
est because of the country's ancient civ- tribution of grants-in-aid from the
ilization; colorful history; and culturalcenter to the states; and (3) amounts
diversity as evidenced by differences into be distributed to four jute-produc-
customs, language, and religion. Pov-ing states in lieu of the former assign-
erty and the government's efforts to al- ment to them of a share of the proceeds
leviate it are the most pervasive eco-of export duty on jute.
nomic influences on public finance.
The Commission's report contains
Recognizing the importance and much useful factual material as well as
likely persistence of questions of fed-
eral-state fiscal relations, the authors of a statement of opinions presented to it
the Indian Constitution of 1949 incor- and its own recommendations. These
porated an article requiring the Presi-recommendations were immediately ac-
dent to constitute within two years cepted by the Government of India.2
after the new Constitution became ef- This article consists primarily of a sum-
fective a finance commission to studymary of the Finance Commission's re-
these matters and thereafter to set up a port and a few observations on the roles
new commission at the expiration of of the central government and the
each fifth year or earlier if he considers
1 Report of the Finance Commission, 1952 (New
necessary (Article 280). The first fi- Delhi: Government of India Press, 1953) pp. ii,
nance commission was appointed No- 198. Members of the Commission were Mr. K. C.
vember 21, 1951, and submitted its re- Neogy (Chairman), Mr. V. P. Menon, Justice R.
Kaushalendra Rao, Dr. B. K. Madan, and Mr. M. V.
* The author, an economist on the staff of the Rangachari (Member-Secretary). Mr. Menon re-
International Monetary Fund, recently served as a signed in February, 1952 and was replaced by Mr.
V. L. Mehta.
member of a Fund mission to India. Opinions ex-
pressed in this article are his own and do not neces- 2 Budget of the Central Government, 1953-1954,
sarily reflect the official views of the Fund. Finance Minister's speech, Part A, p. 11.

361
 362 NATIONAL TAX JOURNAL [Vol. VI

years, terminating
states in financing India's first with the Govern-
five-year
ment of India Act of 1919, were
plan for economic development.
marked by a gradual but progressive
History of Central-State Financial
Relations shift of financial authority from the
center to the provinces. At the begin-
In the past century ningIndia has
of this period thepassed
central govern-
through a series of remarkable changes
ment exercised complete control over
in fiscal relations between the central
provincial revenues and expenditures.
government and the provinces or states.3The provinces at first received fixed
This experience includes - for the ter- grants for specific purposes. Later a
ritory that was formerly British India system of ee financial settlements " arose
- periods of almost complete centrali- under which the provinces received a
zation, separation of revenue sources, fixed, but not a uniform, proportion of
provincial contributions to the center, the main revenues collected within their
revenue sharing by the center, and fi-borders. Finally, an arrangement for
nancial leadership by the center with ct divided heads " of revenues was
equalizing grants-in-aid to the states. adopted. Although the central govern- ^
One notable omission from this history ment retained nominal control, the pro-
is the type of tax competition that has vincial governments actually assumed
arisen in many federalisms out of the responsibility for the revenue which
simultaneous levy by central and state they administered.
governments of the same major taxes. Under the Government of India Act
Indian federalism has evolved slowlyof 1919 complete separation of revenue
out of a highly centralized system.
sources between the center and the
One Indian student has observed that
provinces was contemplated. Customs
in the Indian Union federation was the
duties, income tax, and certain stamp
result of a process of disintegration,
taxes were to go to the center; the prov-
whereas in the United States, Australia,inces would have exclusive use of ex-
Canada, and Switzerland federalism was
cises, land taxes, irrigation charges, and
the outcome of a process of integra-certain minor revenues. Inasmuch as
tion.4 Amalgamation of the Indian
it was estimated that this assignment
States with former British India, after
would be insufficient for the central
independence, however, appears to be
government, the provinces were to be
an example of integration in the classic
tradition of federalism. required to make financial contributions

When authority was transferred to the central government. An expert

in
1858 from the East India Company committee appointed to advise on the
to
amounts of the contributions recom-
the British Crown a unitary fiscal sys-
mended that initial contributions be
tem was established. The next sixty
based on the increased revenue enjoyed
3 This brief historical review is based mainly on
the Finance Commission report but also draws on the
by the provinces under separation of
more comprehensive treatment contained in P. J. sources and that this arrangement be
Thomas, The Growth of Federal Finance in India gradually supplanted by a standard
(Madras: Oxford University Press, Indian Branch,
1939). contribution based on taxable capacity.
4 R. N. Bhargava, " The Theory of Federal Fi- The scheme met with objections from
nance," Economic Journal , LXIII (1953), 84. the provinces. The standard contribu-
No. 4] FEDERAL FINANCE IN INDIA 363

tion never came into effect,

which India and the
became ini- although
a republic,
tial contributions were abolished from remaining a member of the British
1928-1929 after having been suspendedCommonwealth, in 1950 opened the
for 1927-1928 and partly remitted for current chapter of central-state fiscal
relations. The Constitution embodies
several earlier years. The idea of com-
plete separation of sources had an evenessentially the same scheme as the Gov-
ernment of India Act, 1935, but does
shorter life: a plan for sharing of in-
come tax revenue was adopted in late not specify the proportion of income
1920. Under this plan each provincetax to be distributed to the states or the
was to receive a small fraction of anyformula for its allocation among states.
A temporary award was made, to be in
increase in assessed income in the prov-
ince above the 1920-1921 level. effect for two years, until the first fi-
The division of revenue sources and nance commission could bring in its re-
the arrangement for sharing of income port. The Constitution also authorized
tax adopted after 1919 were criticized sharing of central excise tax revenue, if
on the grounds that the revenues as- Parliament by law so provides, but at
signed to the provinces were too in- the outset no sharing arrangement was
made.
elastic to meet their needs and in par-
ticular that the industrial provincesT rends in Central and State Revenues
were not allowed to benefit adequately
from business activity in these areas. In the 1920's and 1930's the taxes
administered by the central government
Several proposals for modification were
discussed, but the system remained inproved to be considerably more elastic
effect without fundamental modifica- than the revenue sources assigned ex-
tion until adoption of the Governmentclusively to the provinces. With the
of Jndia Act, 1935. growth of the public budget and the
- under the 193 5 act the provinces increase in the price level in the war and
were assigned the agricultural incomeimmediate postwar years this difference
became even more marked. The devel-
tax. (Agricultural income is not sub-
opment, which is attributable to changes
ject to the general income tax in India.)
in both the tax base and tax rates, is
The provinces were also assigned half of
the net proceeds of tax on nonagricul-traced in the following indexes of total
tural income. This share was distrib- revenue of central and provincial gov-
uted among provinces accordingernments:
to 5

fixed percentages, determined originallyFiscal Year Center Provinces

on the basis of residence of taxpayers 1921-1922 100 100
and population. Provision was also 1929-1930 138 119
1936-1937 119 112
made for sharing of export duties on 1937-1938 126 113
jute with the jute-growing provinces 1944-1945 516 254
1946-1947 534 304
and for grants-in-aid. The provinces
retained exclusive use of land taxes. 5 Central revenues include share of income tax
Excises were divided. During the and
warjute duty assigned to provinces and exclude
provincial contributions (in 1921-1922). Provincial
the center was allowed to retain a part
revenues exclude receipts from the center in the
of the provincial share of income tax.
form of shared taxes and grants-in-aid. See Report
Adoption of the Constitution under
of the Finance Commission, 1952, p. 30.
 364 NATIONAL TAX JOURNAL [Vol. VI

Statistics for more recent

effects of years
prohibition cannot
of alcoholic bever-
be directly compared
ages,with
which hasthe above
been adopted in some
states, several
figures because of partition of states have imposed
India and sales
incorporation of former quasi-inde-
taxes in recent years. The states have
also benefited
pendent states into the Indian from a Union.
substantial in-
But the available evidence shows that crease in the size of their share of indi-
central revenues have continued to ex- vidual income tax collections of the
pand at a considerably more rapid rate central government.
than state revenues from own sources. Changes in the composition of cen-
The inelasticity of state revenues is tral and state revenues are summarized
due largely to heavy reliance on landin Tables 1 and 2. For the central gov-
taxes and stamp taxes and to the in- ernment both income taxes and excises
flexibility of irrigation charges in a pe- TABLE 1
riod of rising prices. India experienced Composition of Central Revenue: India
a considerable inflation during World Selected Years

War II and the immediate postwar pe- (In percentages)

riod. In mid- 19 5 3 the wholesale price
index stood at approximately 3% times source q',lppo 1937- 1944- 1946- 1951-
source 1938 1945 1947 1952J(I
its 1939 level.6 As in most countries
agricultural prices have risen more than
Total

the general average. Land taxes have Customs

Income taxes
not kept pace with prices. (Almost allCorporation . 2.2 24.9 20.1 7.5
state land taxes are on agricultural land;Other** .... 14.6 24.2 18.0 17.0
urban land is subject to local rates for Excises

Railways, posts
the support of local government.) Inand tele-
the seven states for which roughly com-graphs f .... 3.9 12.6 3.1 2.2
Other

parable statistics are readily available,

land tax receipts increased only about * Provisional f
50 per cent from 1938-1939 to 1951- ** Net of state
tax on corporate profits which is credited to
1952, whereas in the later year the all-
stockholders when profits are distributed.
India index of wholesale prices of major f Net contribution to general revenues.
Source: Report of the Finance Commission,
agricultural commodities averaged more 1952, pp. 32-33, 47, 162-163.
than 5l/z times the 1938-1939 level.7
In 1952-1953 agricultural prices re- have increased in relative importance
since 1937-1938. The contribution of
ceded, but the index still averaged 449
customs duties declined sharply during
(1938-1939 = 100) . 8 In order to make
up for declining real revenues from the war owing to interruption of both
land taxes and also to offset the fiscal imports and exports, but has recovered
with the resumption of international
6 International Monetary Fund, Internationaltrade
Fi- and adjustment of duty rates.
nancial Statistics , August, 1953, pp. 96-97.
Distribution
7 Reserve Bank of India, Report on Currency and of Income Tax
finance , 1951-1952, pp. 210-211; Reserve Bank of
India Bulletin, June, 1952, p. 500. When the Finance Commission began
8 Reserve Bank of India Bulletin, May, 1953,itsdeliberations 50 per cent of net pro-
p.
443. ceeds of the individual income tax, ex-
 No. 4] FEDERAL FINANCE IN INDIA 365
TABLE 2
dividends are distributed. The super-
Composition of State Revenue: India
tax or corporation tax on company-
Selected Years *
profits is not subject to division with
(In percentages)
the states. Net proceeds of income tax
are computed by deduction of esti-
öource qftllppe 1937- 1944- 1946- 1951-
öource qftllppe 1938 1945 1947 1952mated
** cost of collection. Distribution

Total
among the states was according to a
Land tax
temporary award based on population
Excises and residence of income-tax-payers.
Sales taxes

Stamp taxes . . 12.5 7.3 7.9 5.5 Most states urged that the state share
Forests and irri- be enlarged. As might be expected,
gation charges 14.2 12.3 9.9 7.3
Other, own
however, the states differed in their
sources $ .... 18.0 24.5 25.0 30.3 recommendations concerning the for-
Devolutions
from center: mula for distribution. One compara-
Income tax tively prosperous state, which includes a
large industrial area, maintained that
share

Jute duty share 3.1 .7 1.2 .5 §

Grants-in-aid . . 3.6 4.1 6.3 5.4 the considerations governing distribu-
tion of grants-in-aid should not be ap-
* Provinces of British India in 1937-1938,
1944-1945, and 1946-1947; Partplied to sharing
A and Part B of income tax. This
states of the Indian Union in 1951-1952. state held that the contribution of each
** Provisional figures. state should be the main factor in the
f Includes tax on motor fuel.
allocation formula and that industrial
% Includes taxes such as those on motor
vehicles, entertainment and betting, electricity,in the states should also be taken
labor
transportation, and professions and nontax
revenue from fees, industries, transport, and
into account in view of the special costs
civil works. For details for 1950-1951 and sub- of government services necessitated by
sequent years, see K. S. Krishnaswamy, " Fi-concentration of population and indus-
nances of Part A and B States," Reserve Bank
trialization. Other states favored dis-
of India Bulletin, May, 1953, pp. 381-382, 390-
391.
tribution on the basis of population and
§ Grants in lieu of share in jute duty. still others asked for distribution on the
Source: Report of the Finance Commission,
1962, pp. 36-37, 49. basis of need. In at least one important
respect, however, income tax sharing is
elusive of proceeds attributable to Part
C states9 and to taxation of central simpler in India than in, say, Australia
and Canada. In India the states have
government emoluments, was assigned
never been authorized to levy general
to the states. The et individual income
income taxes.
tax " includes normal tax on corporate The Commission decided that it was
profits, which, as in the United King- undesirable to concentrate on income
dom, is credited to stockholders when
tax as te a balancing factor in the ad-
justment
9 The Part C states comprise several small states of resources between the
formed from former Indian states. Their finances Centre and the units " but it conceded
are merged with those of the central government.
the propriety of a small increase in the
Unless the context indicates otherwise, the word
states " as used in this article does not include state share. Accordingly, the Commis-
Part C states. sion recommended that the state share
 366 NATIONAL TAX JOURNAL [Vol. VI

be raised from 50 per cent

that the to shares
percentage 55 per
be worked
cent. The report does out
notaccording to this formula
elaborate thé and be
Commission's reasons left
for rejecting
unchanged for a periodthe
of years in-
stead of having
claims for a larger increase in thethe formula
state applied
share. It may have been influenced
anew each year. by
the rather generally accepted
The states' share opinion
of income tax in
that a cyclically sensitive
1951-1952, tax is more
the last year of the old
appropriate for a central government
sharing arrangement, amounted to Rs.
than for state governments.
527 million. UnderFurther-
the new arrange-
more, the central government
ment it is estimated atretains
Rs. 600 million
more independence ofin action and
1952-1953 and is million
Rs. 597 able in
to exercise more effective
1953-195 4.10 leadership
when devolutions take the form of
Division
grants than when they constitute a of Central Excises
fixed percentage of the yield of a major
Although the Constitution explicitly
tax.
allows the sharing of excise tax revenue,
As regards the distribution of theno sharing arrangement was in effect.
state
share the Commission had before it,
The central government was deriving a
broadly speaking, three main types substantial
of amount of revenue from ex-
suggested criteria - contribution, need
cises, and the Commission decided that
as indicated by population alone, and
a portion of the revenue from these
need as indicated by factors suchtaxes should be distributed to the states.
as rel-
ative per capita income and special re-
In selecting the taxes for division, the
sponsibilities. Although the Commis-
Commission recommended that sharing
sion acknowledged the relevance of
be restricted to a few excises on widely
contribution, it recognized that collec-
consumed commodities and that prefer-
tions are not an accurate measure of ence be given to taxes with compara-
contribution in view of the economic tively stable yields and relative immu-
interdependence of all sections of thenity to variations in the customs tariff.
country. The two largest cities, for ex-On this basis it considered most suitable
ample, are ports and financial centersfor division the taxes on tobacco,
which occupy a strategic position butmatches, and vegetable products (oils).
which could not flourish without the As Table 3 shows, these duties account
support of the hinterland. With re- for about one-half of central excise rev-
spect to need, the Commission felt that enues.

population is the most acceptable as The Commission recommended

well as the most readily available meas- 40 per cent of the net proceeds
ure. More refined measures, it believed, shared excises be allbcated to the s
should be left for consideration in rela-
on the basis of population. Wi
tion to grants-in-aid.
expressing itself on the desirabilit
Accordingly, the Commission recom-
mended that the state share of income allocation on the basis of consum
tax be distributed on the basis of a for- 10 Report of the Finance Commission , p. 1
mula giving weights of 20 to collections planatory Memorandum on the Budget of t
tral Government for 1953-1954, p. 8. One
and 80 to population. It recommended 21 cents U. S.
No. 4] FEDERAL FINANCE IN INDIA 367

of the taxed commodities,

export dutythe Commis-
that may have been influ-
sion pointed out thatential
the andstatistical
which became even more
basis
for this distribution was not available. pronounced during the Korean War is
It recommended that estimates of con- the variability of yield owing to fluc-
sumption be developed for the informa-tuations in price and volume of jute ex-
tion of future commissions. ports and to changes in tax rates. The
TABLE 3
ending of sharing of customs revenues
may also have been considered a corol-
Central Government Excises: India,
1951-1952 and 1953-1954 lary of the division of powers under the
(Percentage composition)
Constitution, which allocates control
over foreign commerce to the central
1951-1952 1953-1954 government.
Tax

(Actuals) (Budget)
Principles of Grants-in-Aid
Motor fuel
As shown in Table 2 the states in re-
Kerosene

Sugar cent years have been receiving devolu-

tions from the center amounting to
Matches

Steel ingots
Tires about one-sixth to one-fifth of their
total revenues. The greater part of this
Tobacco

Vegetable products (oils) 2.9 3.1

Coffee sum has consisted of shares of income
tax revenue and jute duty (or grants in
Tea

Cotton cloth

Coal cess lieu of the duty). These shares provide

Miscellaneous
unconditional assistance to the states.
Deduct: refunds

Total
Since independence, roughly half of the
total amount of grants-in-aid from the
Source : Government of India, Explanatory center to the states also appears to have
Memorandum on the Budget of the been in the form of unconditional or
Central Government for 1963-1954,
p. 5. block grants. The other half consists
mainly of grants for development and
Grants in Lieu of Jute Export Duty postwar rehabilitation.
Special grants to the four principal The Commission adopted a pragmatic
jute-growing states are intended to approach to grants, rejecting both the
compensate them for the share that view that all grants should be uncondi-
they formerly received of the central tional and the opposite principle that
the central government should lay down
export duty on jute and jute products.
The Commission recommended a revi- specific requirements as to expenditure
of all funds distributed to the states.
sion of the ad hoc grants in effect for
1950-1951 and 1951-1952. Although The principles that the Commission rec-
ommended to govern grants-in-aid to
this subject is of considerable impor-
the states can be briefly summarized:
tance in India, the only question of spe-
cial interest for the foreign student is 1. Budgetary needs should be the
why the authors of the Constitutionfirst criterion.
decided to discontinue the sharing of2. Consideration should be given to
export duty. One characteristic of the
the tax effort exerted by the state. The
 368 NATIONAL TAX JOURNAL [Vol. VI
Commission, however, suggested amount to be distributed
no at-is to double
tempt at elaborate measurement over the next four years and is to be
of ef-
fort but confined itself to the remark distributed in proportion to the num-
that te only in clear cases of inadequateber of children who were not attending
taxation " should assistance to a state be school in 1952.
reduced. Under the Commission's recommen-
3. In order to give recognition to dations three states will receive no rev-
economy in expenditure, the central enue grants. Five states will receive
government should avoid giving the only the grant-in-aid for primary edu-
impression that it will underwrite statecation; and three, only general assist-
deficits. Aid should not be distributed ance. Two states will receive general
in proportion to financial difficulties of
grants plus grants in lieu of jute export
the states because this would place aduty ; and two states, general grants
premium on extravagance and a penalty plus educational grants. Only one state
on financial prudence. will receive all three types of grants.
4. Grants should help equalize stand- Table 4 summarizes the effects of the
ards of basic social services. Commission's recommendations. Al-
5. Grants should help states meet though only two states will not receive
special obligations arising out of parti- additional funds, there will be wide dif-
tion, famine, and other problems. ferences in the increases realized by the
6. Grants may appropriately be given other states. In general, the Commis-
to further any purpose of national im- sion's recommendations will substan-
portance by encouraging and assisting tially decrease differences in per capita
the less advanced states to go forward transfers to the states, as might be ex-
with the desired services. pected in view of the emphasis placed
on population in the formulas for shar-
Effects of Commission's Recommen-
dations ing income tax and excises. Per capita
receipts of eleven states will be brought
The Commission applied its princi- closer to the national average; six of
ples in a forthright way, recommending these states have in the past received
approximately a one-third increase in more than the national average and five
devolutions to the states and a signifi- less than the average. Three states will
cant reallocation of central assistance.
move farther away from the average;
After taking account of the shares of two of these have been below the aver-
central income tax and excises, the age and one above. Two states will
Commission concluded that seven of the
show no significant departure from
sixteen states should receive general and their previous relation to the average.11
unconditional assistance from the cen-
Data are not available for testing in
tral government. It also recommended a refined way the " equalizing " effects
grants for aid to primary education in of the Commission's recommendations.
the eight states with the smallest pro- It is reasonable to assume, however, that
portion of the children between the ages the poorer states fare better under for-
of 6 and 11 actually attending school.
(These proportions varied in 1951 be- 11 These generalizations are based on estimates de-
tween 99 per cent at one extreme and rived by applying the Commission's recommendations
to the years 1949-1950 to 1951-1952 and comparing
1 1 per cent at the other extreme.) The the results with actual figures for these years.
 No. 4] FEDERAL FINANCE IN INDIA 369
TABLE 4
pected to experience a decrease in re-
Devolutions * to States under Finance
ceipts from the center, had a consider-
Commission Plan Compared with
Average 1949-1950 to 1951-
ably higher per capita income than any
1952: India
other Part A state. The three other
Part A states with per capita incomes
Per Capita above the median will also receive sub-
Amount Amounts
Recom- (Relatives) ** stantially smaller increases in shared
mended
taxes and grants than the four Part A
State as Per Corn-
Cent of 1 states
QiA with per capita incomes below the
mission
1949-1952 Recom- median. Within the groups, however,
Average menda- there is not a close correlation between
tions
need as indicated by estimated per
Assam

Bihar
capita income and expected increase in
Bombay central assistance. It must be empha-
Hyderabad
sized again that the income estimates
Madhya Bharat . . . 2,433 4 74
Madhya Pradesh 125 84 80 are admittedly very crude approxima-
Madras
tions on the basis of meager data.
Mysore

Five Year Development Plan

Orissa

Patiala & East Pun-

jab States Union 406 20 80 In the fiscal year 1951-1952 India
Punjab

Rajasthan embarked on a five year plan for eco-

nomic development. The plan calls for
Saurashtra

Travancore-Cochin 100 181 141

Uttar Pradesh a concerted effort by the central and
West Bengal
state governments and by private busi-
Total ness and individuals to raise the rate of
* Shared saving
taxes and investment
andand output. gr
revenue /The goal is an 11 per cent increase in
(including g
jute export duty).
national income which, after allowance
** Based on 1951 census. A relative of 100
for the expected growth of population,
indicates that the state receives the per capita
average for the whole country; a relativewillof allow an increase in income per
less than 100, less than the per capita average;
head of only a little more than 4 per
a relative of more than 100, more than the per
capita average. cent. Although this objective may ap-
Source: Derived from Report of the Finance pear modest, its achievement would
Commission, 1952, pp. 108-109, 160.
mark a reversal of the trend of constant
mulas giving predominant weight or to declining real income per head.
population and to proportion of chil-
This is not the place to summarize or
dren not attending school - both used
appraise the Five Year Plan, but some
by the Commission - than they would
if distributions were based on the esti-comments on its implications for fed-
eral finance are in order. The states are
mated source of tax collections. Rough
estimates of 1949-1950 per capita in- expected to assume a large share of re-
come have been made for the nine Part sponsibilities for the plan. Some of the
A states.12 According to these esti-largest multi-purpose water projects,
mates Bombay, the only state that is ex-for example, are state undertakings.
The central government, however, will
12 B. Natarajan, An Essay on National Income
and Expenditure in India (Madras: Economic Ad-
assist in the financing of these and other
viser to the Government of Madras, 1949). state projects by means of loans and
 370 NATIONAL TAX JOURNAL [Vol. VI

capital grants. The formulation rent revenues - or of thenondevelop-

reduce
plan has already involved close collabo-
ment expenditures - over the five years
ration between the center and the by an average amount equal to about 8
states, and its execution will require
per cent of their total 1950-1951 rev-
continued cooperation. enues and also to borrow a sizable sum
The proposed distribution of devel-
(Table 6). Inasmuch as nondevelop-
opment expenditures of centralment and expenditures have in fact risen
state governments is summarized in1950-1951, the over-all increase in
since
Table 5 and compared with expendi-state taxation and borrowing will have
tures in the year immediately preceding
to be still larger if state commitments
the plan. The contemplated increase in be met. The center is expected
are to
the rate of expenditures for develop-
to supplement state resources by trans-
fers equal to about one-half of the
ment purposes (including certain social
services) is very large - approximately
planned increase in current revenues of
TABLE 5
Development Expenditures of Central and State Governments:
India, 1950-1951 and under Five Year Plan, 1951-1956
(Billions of rupees) *

1950-1951 Actuals Plan, 1951-1956

Purpose

Center States t Total Center States t Total

Agriculture and community development 0.02 .32 .34 1.86 1.74 3.60
Irrigation and power

Transport and communications

Industry

Social services including rehabilitation . . .23 .32 .55 1.91 2.33 4.23
Miscellaneous

Total

* Rs. 1 billion = U. S. $210 million.

f Including Part C states and Jammu and Kashmir.
Source: Government of India, The First Five Year Plan (New Delhi, 1952), pp. 96-99.

40 per cent above the 1950-1951 level the states. These transfers are in addi-
for the states and 140 per cent for the tion to the shared taxes and current
center. The increase in total (current grants-in-aid recommended by the Fi-
and capital) expenditures is, of course, nance Commission. The central gov-
considerably smaller - about 10 per cent ernment may be hard pressed to pro-
for the states and 25 per cent for the vide funds for these transfers and to
center.13 The Planning Commission cover its own developmental and non-
has pointed out that this allocation of developmental expenditures. The sched-
expenditures between the center and uled reduction of sterling balances held
the states is to some extent arbitrary at in the United Kingdom, amounting to
this stage and that the final division Rs. 2.9 billion over the five years 1951-
cannot be accurately foreseen. 1956, will, however, considerably ease
To finance their share of the plan the this task.
states were called upon to increase cur- During the first two years of the
13 1950-1951 figures from Reserve Bank of India, plan, 1951-1952 and 1952-1953, cen-
Report on Currency and Finance, 1951-1952, p. 72. tral government expenditures under the
No. 4] FEDERAL FINANCE IN INDIA 371

plan have equalled about

expected toone-fourth
be in a position to makeofup
any deficiency
the total planned for the in this item.
five Some rev-
years;
state expenditures, enue
aboutsources that are not fully exploited
one-third. A
are available
sharp acceleration of expenditures to most of the states,
willand
be necessary if thethere
plan is stillis
timetoto reach
bethe planned
com-
objective.
pleted by 1956. As regards financing,
Conclusion
the central government has raised about
two-fifths of the amount it is scheduled The recommendations of the Finance
to get from domestic sources (other Commission have strengthened federal-
than credit creation) over the five years. state fiscal relations in India. The revi-
TABLE 6

Financing of Government Development Expenditures: India, 1950-1951

and under Five Year Plan, 1951-1956
(Billions of rupees) *

1950-1951 Actuals Plan, 1951-1956

Source

Center f States f Total Center f States f Total

Current revenues

Railway profits

Domestic loans, etc

Subtotal

Assured external assistance

Residual I

Total

* Rs. 1 billion = U. S. $210 million.

f Center includes Part C states.
I To be met by further external assistance or additional taxation, borrowing, and credit
creation. Drawing down of sterling balances under the existing agreement with the United
Kingdom is scheduled at Rs 2.9 billion, 1951-1956.
Source: Government of India, The First Five Year Plan (New Delhi, 1952), pp. 55, 62.

The central government has also trans- sion in arrangements for revenue shar-
ferred to the states approximately two-ing and grants-in-aid has significantly
fifths of the contemplated total of as- reduced differences in per capita trans-
sistance under the plan. The states onfers from the center to the states and
the other hand, have raised only about has probably been equalizing in effect.
one-fifth of the funds that they are ex-The important place of income tax
pected to find from their own sources sharing in the scheme may, however,
over the five years.14 pose a problem in the future in view of
The problem of finding additional the variability of revenue from this
noninflationary sources of finance dur-tax. The Five Year Plan for economic
ing the next three years will be crucial development is an important instance
to the success of the Five Year Plan. of central-state fiscal cooperation. The
The lag in state revenues is serious, andjoint effort of the central and state gov-
ernments will be facilitated by the
the central government can hardly be
intergovernment fiscal institutions that
14 Planning Commission, Five Year Plan Progress
Report for 1951-52 and 1952-53 (New Delhi, have been built up in India over a long
1953), pp. 7, 13, 18. period of years.