White Paper on Indian States (1950)/Part 9/Need for Caution

by Ministry of States, Government of India

Need for Caution

200. While federal financial integration can, on the whole, be regarded as ultimately having satisfactory results from the purely financial point of view, there is obvious need to proceed with caution, especially in the first three or four years. From the point of view of the States themselves, it is difficult to make any reasonably precise estimates of the results of federal financial integration upon their revenues. Even so, those States which will directly profit from federal financial integration, viz., PEPSU, Madhya Bharat and perhaps Rajasthan, need hare no cause for anxiety, though in the case of the last two, there will be the problem of replacing internal customs duties by sales tax. As regards those States which will incur a loss in consequence of federal financial integration viz., Hyderabad, Mysore, Trevancore-Cochin and Saurashtra, none except perhaps Travancore-Cochin, need have cause for concern in the first five years, since their losses will be fully re-imbursed to them by guaranteed subventions from the Centre already referred to in an earlier paragraph and since internal customs duties (in Hyderabad and Saurashtra) will be abolished only gradually. In the excepted case, the immediate abolition of internal customs duties, necessitated by the formation of the Union of Travancore and Cochin, will involve a loss of the order of rupees ten millions; but it is expected that this will be largely offset by the sales tax recently introduced in Travancore, by increased food subsidies and Grow-More-Food grants and loans from the Centre, and by the special guarantee arrangement devised for this State for the first three years.

201. After the first five years, however, it will be necessary in the case of Mysore, Travancore-Cochin, and Saurashtra, to replace a diminishing Central guarantee by revenue from alternative sources. But there is no cause for undue anxiety on this account, especially as the matter will be the subject of careful review by the Finance Commission to be appointed under Article 280 of the New Constitution. In the meanwhile, however, the finances of these, and indeed of all, States will require careful nursing. In the words of the Committee—

"………We find it necessary, however, to sound a note of warning. Representatives of the Governments of States who met us referred to plans prepared in their States for prohibition, abolition of Jagirs, etc., for implementation in the near future. We hold the view that the Governments concerned should proceed in these matters with caution. We are convinced that for a number of years their finances cannot bear the losses of revenue involved and, as has been pointed out by the Government of India to Provinces, the execution of such policies will defeat the efforts now being made to check inflation".^[1]

1. Paragraph 35 of Part I of the Committee's Report.