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B. R. Ambedkar's contribution to the history of provincial decentralization of imperial finance

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  Munich Personal RePEc Archive B. R. Ambedkar’s contribution to thehistory of provincial decentralization of imperial finance Abdul Azim Islahi Aligarh Muslim University, Aligarh, India1994Online at  http://mpra.ub.uni-muenchen.de/29723/ MPRA Paper No. 29723, posted 24. March 2011 07:12 UTC  B. R. AMBEDKAR'S CONTRIBUTION TO THE HISTORY OF PROVINCIAL DECENTRALIZATION OF IMPERIAL FINANCE  Dr. Abdul Azim Islahi *   Introduction One of the important topics of the economic history of India, the srcin, development and organisation of provincial finance during the British rule, has surprisingly enough, escaped the attention of the most of the writers on the subject. With the  possible exemption of M.G. Ranade, who presented a fragmentary sketch of 'provincial decentralization' in 1887, the subject remained un-trodden till Dr. B. R. Ambedkar (1891—1956)    published his path breaking pioneering work 'The Evolution of Provincial Finance in British India' in 1925. 1  Expressing the difficulties besetting his task, Ambedkar himself mentions that "no spade work has been done in the field of Indian Finance". 2  The book is divided into four parts. The first three parts deal with the srcin, development and organisation of provincial finance, and part four which discusses the constitutional change of 1919. The present paper aims to study and evaluate Dr. Ambedkar's pioneering contribution to the srcin and development of provincial finance during the British period. It will discuss his opinion regarding different stages of decentralization, and compare it with that of M.G. Ranade, one of the earliest writers on the subject. Towards the end, an effort will be made to investigate the main causes in Ambedkar's opinion that led to the enactment of the Reform Act of 1919 which marked the beginning of the modem history of public finance in India. It will also examine Dr. Ambedkar's view on financial relationship between the centre and the provinces. Imperial Finance 3  between 1833 to 1871 A progressive centralization of fiscal power was the striking feature of the East India Company. The three presidencies were completely independent of each other, till 1773 when Bombay and Madras were subordinate to Bengal, under a governor general, but it was not until 1833 that a central government was established separate from the government of Bengal and with complete powers over the three presidencies. Likening the several presidencies with separate clock each with own mainspring in itself, Dr Ambedkar says: "Each possessed the powers of sovereignty, such as the legislative, the penal, and the tax powers. They were independent in their finance. Each was responsible for the maintenance of services essential for peace, order and good government within its jurisdiction and was free to find money by altering or levying taxation or borrowing on credit to meet its obligations. 4  The Act of 1833 put *   Dr. Islahi, a staff member of the Department of Economics, Aligarh Muslim University, presented this paper to the 76th Conference of Indian Economic Association held at Bombay during Feb. 19-21, 1994. Full paper was published in the Conference Volume. Later it was included in Das, D.K. (editor), Great Indian Economists , New Delhi, Deep and Deep Publications, 2004, vol. 3, pp. 321-329.    an end to this situation, and the financial system which was roughly analogous to the system of separation of sources and contribution from the yield was changed into a system of aggregation of sources and distribution of the yields. 5  Thus, with the Imperial system of the government in India in 1833, the system of Imperial Finance started and very soon it became so comprehensive that when in 1858 the Crown took over from the East India Company the government of India, it was found that no  province had any separate power of legislation, any separate financial resources, or  practically any power of creating or modifying any appointments in the service; and the references to the Government of India which this last restriction involved gave that government the opportunity of interference with all the details of provincial administration". 6  From its very start the Imperial system of government suffered from the fatal disease of financial inadequacy, and it was only occasionally that the efforts of the finance ministers were successful in restoring equilibrium and staving off the hours of crisis. 7   Ambedkar's Criticism of Imperial Finance According to Dr. Ambedkar, 'the inadequacy of Imperial finance was mainly due to an unsound fiscal policy'. The land tax was the heaviest impost of the Imperial revenue system in operation, which prevented the prosperity of the agricultural industry. Another source of income was the custom duty which hampered the manufacturers of the country. There were internal customs and external customs and  both were equally injurious to trade and industry. 8  Salt tax and' other oppressive taxes continued to harass the industrious poor. 'Under the injurious revenue system of the Imperial government, the taxing capacity of people decayed so that notwithstanding the numerous resources from which it derived its revenue, the Imperial government was unable to make both ends meet. 9  As far expenditure is concerned, the military invariably consumed more than one half of the total revenue of the country. 10  To this should be added the internal charges on war debts. In short, 'the bulk of the money raised by injurious taxes were spent in unproductive ways'. 11  'Education formed no  part of the expenditure incurred, and useful public works were lamentably few. 12   Move towards Federalism in Finance As a result of grave condition of the Imperial finance, during the 1860s some of the British officials, such as Richard Strachey advocated for a full federal system in Indla.' 13  The federal plan was proposed by its advocates in the interest of economy, responsibility, plenty and equity. The plan for federation was opposed on the ground of practicability and expediency. Dr. Ambedkar notes that although at that stage federalists could not win the majority, they at least succeeded in forcing their opponents to improve the system by removing some of the most radical defects from which it suffered. 14  A new arrangement was made under which the revenues and charges remained Imperial in their status, but their management was to be  provincialized, so that each of the provincial government to administer a part of the Imperial charges incurred in its territory within the limit of a part of the Imperial revenue collected in its territory. Ambedkar refers to the system as "Imperial finance without Imperial management". 15  This was the srcin which led to the formation of the scheme of provincial budgets.  The First Stage in Provincial Finance, Budget by Assignment Lord Mayo, the viceroy of India, played the most important role to break through the hitherto prevailing spirit of hesitation and indecision. The new scheme was announced  by the famous financial resolution of December 14, 1870, as being adopted for execution from the commencement of the financial year 1871-72. In this scheme, since assignment of funds from the Imperial treasury was adopted as a method of supply to balance the provincial budgets, Dr. Ambedkar gives it the name of 'budget  by assignments'. 16  Commenting on the system he says: "The assignments made to the  provincial governments for the year 1871-72 had been declared to be fixed and recurring. Recurring they were, but fixed they were not; for, every year since the start the government of India kept on adding to and withdrawing from provincial budgets items of charges already incorporated in them. In accordance to these modifications in the incorporated charges, the Imperial assignments had to be either reduced or augmented as necessity dictated". 17   The Second Stage, Budget by Assigned Revenue The scheme of provincial budget was introduced with mixed feelings; doubts and hopes were expressed even by its supporters. But the result was overwhelmingly favourable. In Ambedkar's assessment it proved economical and beneficial. 18  Under this system revenue increased, receipts from services expanded and evasion decreased. 19  However, the system appeared to be ill-fitted for the success of the scheme in its enlarged form. The most radical defect in the system of budget by assignment consisted in its rigidity. 20  To Sir John Strachey belonged the credit of carrying the scheme a stage further. In place of fixed assignment, he proposed to give the provinces certain sources the yield of which largely depended upon good management with the aim at achieving better and more elastic provision for the growing needs of the provincial services. This was another stage in the evolution of  provincial finance. Because of its distinct mode of supply adopted, it is called by Ambedkar as stage of budget by assigned revenue.  21  It should be noted the plan was not new. In early 1870s it was presented by the supporters of the provincial decentralization and by John Strachey himself. But at that time that government was afraid to adopt it. But the success of the previous stage  paved the way to take a step forward and implement this scheme. According to Dr. Ambedkar, under new provision 'the deterrent effect of a deficit to bear and the stimulating effect of a gain to reap made the mechanism of provincial finance as  perfect as It could be made from the standpoint of economy in expenditure and  productiveness In resources.  22   The Third Stage, Budget by Shared Revenue Although the measures of 1877 were superior to those of 1871, they were very short of the fullest requirements of elasticity in finance. As a result the government of Madras did not adopt it and it was also not applied to Burma and Assam. Keeping into view the requirement of the province, the government of India conceded that it was entitled to have its real wants supplied more liberally than before. The earlier system grouped the budget under two distinct categories, wholly Imperial and wholly  provincial. The new provision carved out a third category of account to be made of   jointly imperial and provincial. 23  Dr. Ambedkar termed the system as 'budget by shared revenue. 24  The principle of shared revenue was applied to all the provinces with effect from 1882-83.The earlier systems were characterized with constant revision of short duration. In 1882-83 settlement, it was made a definite rule that they shall be quinquennial in duration; that is, they shall not be subject to revision before the end of the fifth year from their commencement. 25  The subsequent revisions took  place In 1887-88, 1892-93 and 1896-97. The budget surplus of 1898-1913 enabled the government to be more generous with the provinces. The settlement was made quasi- permanent in 1904, and permanent settlement in 1912 which worked up to April 1, 1921, when provincial finance in British India entered on an entirely new phase. Here the history of the growth of provincial finance as it developed stage by stage under the old phase comes to an end. Dr. Ambedkar dealt in details with the mechanism which inter-related the finances of the central and provincial governments under the old phase. 26   M.G. Ranade's Description of the Stages of Provincial Finance Before we proceed to study Dr. Ambedkar's reflections on the new phase of  provincial finance introduced in 1921, it seems worthwhile to compare his division of the stages of provincial decentralization of Imperial finance with the one fragmentary writing on the subject by M.G. Ranade entitled "Provincial Decentralization" appeared in 1887. He simply covers the period up to 1882 only. As we have seen above, one of the features of provincial finance after 1871 was that the revenues and charges incorporated into the provincial budgets were revised every fifth year. Dr. Ambedkar criticizes Justice Ranade who, in his opinion, takes this feature as a norm  by which to mark off the different stages in the growth of provincial finance from one to another. Consequently, each quinquennial period to him becomes a stage, and in his hands the history of provincial finance falls into as many stages as the quinquenniums into which it can be divided'. Commenting on this style Dr. Ambedkar says: "It may, however, be submitted that if every revision had changed the fundamentals of  provincial finance, such an arrangement would not have been illogical. But as a matter of fact, the provincial finance did not change at every revision. What the revision did was to temper the wind to the shorn lamb". 27  To Dr. Ambedkar, the title of Ranade's pamphlet as "Provincial Decentralization" is also false to the contents for it implies that its subject matter must be local finance.  28   Financial Relationship under the Old Scheme Between Central and Provincial Governments The question of financial relation between the centre and states has assumed great importance today and we have a lot of works dealing with the subject at present. The issue fully existed during the British period as well, but it had not received that much attention as its importance demanded. Dr. Ambedkar is one of the few writers who discussed the matter. At the very outset he mentions the difficulty to grasp the exact nature of their financial relation for what may appear on the surface may be very different from what it may really be. 29  He presents many incidents that seem to support the view that the Indian system was based on a separation of sources between the provincial and the central governments and contributions from the yield by the former to the latter. 30  But there are a number of objections to the said view. 31  After
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