Evolution
It
would be useful to dwell for a while on the evolution of Fiscal Federalism in
India. Many of its features are intertwined with the history of East India
Company and the British Crown.
The
East India Company was granted a Charter of incorporation by Queen Elizabeth in
1600 CE, which gave the Company exclusive right of trading with India.
East
India Company set up a number of factories and trading centres at different
places in India. Bombay, Madras, and Calcutta became the main settlements and
were declared as presidencies.
Under
the Act of 1773, the Calcutta Presidency was given full powers over the other
two presidencies of Madras and Bombay, which for the first time resembled
setting up of a Government. However, only in the Charter Act of 1833, did a
central fiscal authority with Presidencies as constituents was formed, which
vested the financial and legislature powers in India solely in the
Governor-General of Bengal, who was designated the Governor-General of India
making the entire administration centralized.
The
current system of the financial year ending on 31st March along with the
principles of the English budget system were adopted with crown taking direct
control in 1858.
Union,
State and Concurrent Lists in the current Indian Constitution has its genesis
from the first budget, which was presented in 1860-61 under the new system.
A
system of diarchy, dividing the administrative subjects into two categories –
Central and Provincial was a result of the Montague-Chelmsford reforms enacted
in the Government of India Act, 1919. Under the Act, provinces got power by way
of delegation and the Central Legislative retained the power to legislate for
the entire country relating to any subject. The sources of revenue were also
divided between the Centre and Provinces.
In
1927, to review the working of the Act of 1919, the Simon Commission was
appointed. The commission favoured the formation of Indian Princely States and
Provinces, which were the administrative divisions of British Government.
The
Government of India Act, 1935 established a federal system with Provinces and
Indian States as two distinct units. Under the act, legislative powers were
distributed under three lists - Federal List, Provincial List, and the
Concurrent List. The Act made the revenues and finances of the Provincial
Government distinct from those of the Federal Government. The act provided for
collection and retention of levies by the Federal Government and spelled out
details of the distribution of financial resources and grants-in-aids to
provinces.
As
per the Act, such sums as prescribed by his majesty in Council were to be
charged on the revenues of the federation. The Government of India Act, 1935
established the basic structure of fiscal federalism in India, one that
survives even today.
Constituent
Assembly was constituted in 1946, which adopted a unitary form of government.
The federal framework evolved, however, indigenously over a period. The final
shape to the federal form of government and federal finance was incorporated in
the Government of India Act, 1935. It also had some features of a parliamentary
system. However, the nature of the relationship between the proposed federal
Government and the Provinces of British India relative to that of the Princely
States was resolved only after independence, but before the Constitution was
adopted.
Post-Independence
At
the time of Independence, India had nine Provinces and over 500 Princely
States. The Princely States accounted for 40 per cent of the territory and 30
per cent of the population, and were diverse in size, character, systems, and
in the nature of their relations with British India. They were integrated with
India after Independence, and the Union of States came into existence on 26th
January 1950.
The
evolution of fiscal federalism in India thus has a long genesis. It primarily
dates back to the government of India Act of 1919 and 1935. While the Act of
1919 provided for a separation of revenue heads between the Centre and the
provinces, the 1935 Act allowed for the sharing of Centre’s revenues and for
the provision of grants-in-aid to provinces.
. Article 1
of our Constitution describes India, that is, “Bharat as a ‘Union of States’
rather than a ‘Federation of States”.
There
was no unanimity in the Constituent Assembly with regard to the name of the
country. Some members suggested the traditional name (Bharat) while other
advocated the modern name (India). Hence, the Constituent Assembly had to adopt
a mix of both (‘India, that is, Bharat’)
Secondly,
the country is described as ‘Union’ although its Constitution is federal in
structure. On November 4, 1948, while moving the Draft Constitution in the
Constituent Assembly, B.R. Ambedkar responded to the question as to why India
is a “Union” and not a “Federation of States”:
“The
Drafting Committee wanted to make it clear that though India was to be a
federation, the federation was not the result of an agreement by the States to
join in a federation and that the federation not being the result of an
agreement no State has the right to secede from it. The Federation is a Union
because it is indestructible.”
