The Provincial Fund And Federal Finance

The Provincial

Fund and Federal Finance

(Asst. Professor, The Nizam's College, Hyderabad)

I

After years of aimless drifting, it has now been settled that India should be a Federation. The only way in which the Conference in London respected the recommendations of the Simon Commission was by accepting the federal idea initiated and developed, however crudely, in their Report. Incidentally it may be said that it was the only service which the Commission did to a Government ignorant, knowingly or otherwise, of their own political destinies and constitutional colour.

In his financial proposals, Sir W. Layton too had to dance to the federal tune of the Commissioners. He came as an adviser but had-to take dictations. One feels, as one goes through the later portion of his proposals, the throbbing pulse and the mental agony that he must have had in trying to compromise his scientific convictions with foregone conclusions, compromise what may be called financial unitarianism with political federalism. A student of public finance feels genuinely sorry that an economist of the eminence of Layton was not given the opportunity to write on a clean slate. The result, however, is that in the end the glory of the financial adviser to the Simon Commission stands enhanced. The fame that sometimes men win in life, more on account of their capacity to come out of conflicting interests without insulting objective factors than to their bare theoretical originality of conception, falls to the enviable lot of Layton.

To grasp the significance of the above generalisations, it must be understood that the financial expert had to harmonise three conflicting factors–firstly, the unscientific distribution of finances between the centre and the Provinces as it obtains today; secondly, the attempt to evolve a federal financial organisation out of that unscientific distribution, without at the same time going counter to the wishes of the members of the Commission who were anxious to find in federalism an effective brake on further constitutional progress of this country, atleast for the present; and lastly, his own strong prejudice in favour of a healthy centralised finance. It is extremely gratifying and, at the same time, pathetic to note the emphasis he lays on the essential economic unity of this country and the ardent yearning he feels for a highly centralised Constitution in order to effectively and rapidly develop the nation-building services. As if these obstacles were not enough, he has several other factors to contend with, such as the increasing desire on the part of the Provinces to acquire more if not complete autonomy, the utter inadequacy of present provincial financial resources for beneficent productive concerns, the meagre annual surpluses of the Central Government–mainly the result of their own actions,–the bad incidence of the present-day Indian tax system, etc. In view of all these unfavourable data to begin with, the scheme of a Provincial Fund that he has sketched may easily be reckoned as a feat of scientific skill. Without in any way compromising the ambition of the Provinces to secure complete internal freedom, it places at their disposal a fruitful and growing source of income which can be utilised for purposes which hereafter will be conducive to their economic betterment. The scheme has another great advantage in that it tries to help the less prosperous Provinces to a greater extent, so that the promised and prophesied progress may not be an eye-wash, as it actually was before and after the Meston award. Before, however, the plan ripens into fruitful maturity, there are certain very important pre-requisites, namely the willingness of the richer classes to be taxed more than at present, and the purposeful cutting down by the Central Government of certain extravagant items like the expenditure on the military department. To lay a flattering unction to the souls of those conscientious objectors who are up against the least kind of central interference in the Provinces, there is to be an inter-provincial Council of Finance Members which will work in co-operation with the Finance Member of the Central Government, in administering this Fund. The Lower House of the Federal Legislature is not given any great power to interfere with the day-to-day administration of this fund, though it is given the right of voting on vital matters affecting its constitution, even for which a previous absolute majority of the Provincial Government is required.

II

At the first glance, the scheme looks like going to the very early days of financial decentralisation when the Central Government was giving out meagre and restricted doles to the Provincial Governments to be applied to useful works of development. But it should be noted that the money from the Provincial Fund accrues to the Provinces over and above the actual provincial finances, over which the Local Governments have absolute powers of raising and spending. Other things being equal, i.e., giving room for a diminution of revenue from opium, a falling off of income from protective customs tariff, the cutting down of the military expenditure and several other such factors, Layton is not over-sanguine in expecting an increase of hundred crores of rupees of income to the Central Government. In this expectation is also envisaged the idea that more finance will flow on account of tapping new sources of taxation, like the super-tax, taking away the exemption of agricultural incomes from income-tax, imposition of death duties, excise on articles of luxurious consumption like tobacco and common things like matches for which the demand is inelastic either on account of addiction or on account of bare necessity, terminal taxes, etc. The tax on salt too is suggested to be transferred to the Provinces for expenditure, as though centrally collected, its incidence is on provincial consumers.

Thus, in the new order of things, there will be four kinds of taxes: -

1. Those collected and spent by the Central Government.

2. Those collected and spent by the Provincial Governments.

3. Those collected by the Central Government and distributed to the Province of origin.

4. Those collected by the Central Government and distributed to the Provinces on the basis of population.

Under the first come taxes like customs, income-tax pure and simple, i.e., minus half of personal income-tax remitted to the Provinces, commercial stamps, railway income etc. Under the second come all present provincial taxes estimated at 78 crores of rupees. Added to this they will also get a surcharge on personal income-tax and the proceeds of the terminal tax. Under the third category come half of personal income-tax transferred from the centre, the agricultural income-tax and death duties.

Those that come under the last head constitute the Provincial Fund as such. At the end of a decade the total income on account of new sources to the Provinces is estimated to rise to 114 crores of rupees.

Out of this, 14 crores will accrue on account of the Provincial Fund, which gets into it the revenue from excise, tobacco, matches, and salt when the Central Government finds it convenient to transfer it to the Provincial Governments. The Provincial Fund is thus neither a dole given in compassion or for cringing; nor is it a contribution which savours of the centre having sacrificed something. It also in no way interferes with provincial autonomy to any great extent, except that the tax-collecting agency is central.

There is however some real difficulty when the question of distributing the Provincial Fund is to be undertaken. The proceeds of a tax may be claimed by any Local Government on one of two bases: the place of origin or the real needs of a Province. On the face of it the first sounds quite just and proper. In fact some taxes, like the agricultural income-tax, are based on that principle. But in a country where there is economic unity, where the Provinces are not good fiscal units and where the prosperity of a Province may be due to good conditions elsewhere, the principle of origin takes on an unscientific complexion. It cannot therefore be applied to the distribution of the Provincial Fund, which is intended to be used for economic progress. The criterion of need is quite humanitarian and charitable. If the Provinces which yield revenue can be made to part with a portion of their income for the betterment of their ill-fated sisters, it becomes a provincial contribution to another Province, instead of to the centre. The only solution therefore seems to be a distribution of the Provincial Fund on the basis of population. It does not mean that this has no flaws. It is quite possible that a comparatively sparsely populated tract like Sindh stands in greater need of development, than a Province like Madras or Bengal. Again, tracts like the North-West Frontier Province may require more funds on account of their infertility and strategic importance. It is not claimed, therefore, that the basis of population is invulnerable. It is only a case of selecting the principle that has the least number of objections. More than all, it involves the democratic ideal of the greatest good of the greatest number and it must be taken for what it is worth.

III

Some ardent admirers of Federalism may object to this new scheme as interfering too much with the federal nature of the future Constitution of India. It must be however understood that Layton tried to mitigate the unfederal character of his plan as well as he could. Whereas in some cases he cannot satisfy too scrupulous critics, other expedients are sure to cause dissatisfaction bordering on insult. There is no finality or perfection in human affairs and institutions. That which comes best and serves best for the time being must be taken as good enough. Even in full-blown democratic federations, elsewhere in the world, the actual division of functions differs with differing circumstances. Where constitutional and administrative functions are divided, there are bound to be financial divisions too. But in either case the divisions need not stand in the way of progress. So long as the essential conditions of federal finance are satisfied, some kind of overlapping is to be tolerated in the interests of national progress.