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Presidential Speech at Calicut in Kerala in December 1967

Centre – States Relations

The Congress continues to rule at Centre while in the States we have several non-Congress Governments. This has invested the issue of Centre-states relations with considerable political importance. Our Constitution is federal in form but most of its provisions reveal a unitary bias. The political situation prevailing during the last 20 years and the existing planning and financial arrangements have made the Centre all the more powerful. In the past, as the Congress held away at all levels, no one ever challenged the Centre's dominance or alleged misuse of authority by the centre. The Congress High Command also exercised its influence to see that Centre-state relations remained smooth. The situation has now changed, however. Several States are now in the hands of non-Congress Governments. They wish to serve the people according to their own concept. They should be given a full opportunity to do so, and provided resources to meet their obligations.
The sovereign authority of the nation vests in the Central Government. In its dealings with the State Governments, let the Central Government show an awareness of this responsibility, and act in a liberal and impartial manner. If, instead, they keep looking at things from the narrow party standpoint and try to explain away pettiness of approach by citing powers conferred on them by the Constitution, they would only be harming the country's interests. Nationalists would feel sore and frustrated while those interested in promoting disintegration and disruption would exploit the situation only to challenge and weaken the Centre's authority. The conduct of Communists in West Bengal and Kerala is a pointer. In order that Centre-States tensions should not imperil the country's unity, it is necessary that while on the one hand the structure of our Constitution is made unitary, on the other, financial and other powers presently concentrated in the Centre should be decentralised in favour of the States to enable them discharge their functions responsibly.

Wanted: Permanent Finance Commission

Financially, the States today are badly dependent, on the Centre. The Constitution so divides resources and obligations between the Centre and the States that the entire burden of Administration, Public Welfare and Development lies on the States while all the elastic and rich resources of revenue are with the Centre. Although States do get a share of Income-tax and Excise-duty on the basis of recommendations made by the Finance Commission, they have to depend very greatly on discretionary grants from the Centre. In 1951-52, 29.4 percent of the States' expenditure came from Central resources. According to the revised figures for 1966-67, this amount has risen to 55.3 per cent. Over the same period the Centre's discretionary grants to the States have risen from 7 percent to 19 percent of the States' expenditure. Obviously, this state of affairs militates against the spirit of responsible government. It has to be changed. A demand is being made that the Constitution should be amended for the purpose. I think that without amending the Constitution, a flexible arrangement can be devised to meet the requirements of the changed situation. The Finance Commission, which is now appointed every five years, can be made a permanent body, and grants and loans under Article 282 given by the Central Government in its own discretion may be brought within the purview of the Commission's recommendations.

Tax-Structure needs Re-Examination

In the same context, it needs to be observed that States also should consider how fully to exploit their own resources. No doubt, there is a need to lessen the tax burden and to simplify the existing machinery for tax realisation. But I must say that the present taxation policies of several State Governments bear the impress more of political slogans than of Governmental responsibility. Many revolutionary ideas are now being propounded in respect of land revenue; income-tax sales tax etc. It would be well if all these proposals are submitted to scientific scrutiny before a final decision is taken in their regard because these taxes have been till now important sources of revenue.
Even otherwise, there is imperative need for a Commission to examine the entire tax structure. It was in 1953-54 that the last Taxation Enquiry Commission had been constituted. The first Plan had only been launched then. Now, three Plans have been completed. In 1951 -52, the total tax revenue of the Centre and the States was Rs. 638 crores whereas the estimated tax- revenue for 1967-68 is Rs. 3599 crores. During this period land- revenue has been doubled, income tax and company tax quadrupled, sales tax increased 9 times and excise duty  18 times. These taxes have off and on been increased on an ad hoc basis and later the increase has been made permanent. Again, there are commodities which have been subjected to excise duty, sales tax as well as octroi duties and terminal taxes. This has naturally increased their price. During the last 15 years there have been vast changes in the distribution of incomes. The value of the Rupee has gone down steeply, States have been reorganised and today the Plan itself is being reconsidered. Because of all these consideration, appointment of Taxation Enquiry Commission is necessary. This commission might consider all problems of economic development, capital formation, public welfare, the need to remove disparities and the requirements of decentralised government, and in that light make recommendations about existing taxes and the tax Structure.

Devaluation has halted Economy

  The country’s economy has been causing anxiety since several years but lately it has deteriorated rapidly. Signs of recession had started showing in the beginning of 1956. With the cessation of foreign aid and imports during the war with Pakistan, industries whose production was dependent on imported raw materials and spare parts from abroad were seriously affected. But at that time the country was psychologically prepared to face such adversity. As a result programmes of import substitution were undertaken on a large scale and a feeling of confidence took roots that the country was all set on the way to self-sufficiency. But even before these efforts could bear fruit, the Government succumbed to foreign pressure and devalued the Rupee. Relying on the Rs. 750 crores untied foreign loans available, it liberalised imports. This policy adversely affected the trade and industry of the country. The quantum of foreign loans increased, so did the prices, but the pace of industrial production did not grow. In some industries, production for 1966 was even less than that for 1965. The object of export promotion also was not realised. The balance of payment position on trade account for 1966-67 shows an adverse balance of Rs. 773.4crores, which is higher than that for the preceding year. In the sphere of foreign trade the same trend still persists. Devaluation thus has done harm to our economy.

It appears, however, that inspite of this; international forces are exerting once again to impose on us yet another dose of devaluation. By threatening to resign if anything of that sort to happens, Deputy Prime Minister Shri Morarji Desi has given an indication of firmness. But unless those basic ills are remedied which account for an adverse balance of payment position, and which compel us to approach foreign governments with a begging bowl, it may not be possible to sustain even the present value of the Rupee.

Ad-hoc-ism will not do

Comprehensive measures are called for to counter the effects of growing recession and to impart dynamism to the economy. It is a matter of regret that the Government does not seem to appreciate the gravity of the situation and has made little effort to analyze it carefully. A casual consideration of problems and adoption of ad-hoc measures only to solve them will not do. The devaluation decision of June 1966 was based on the analysis that the slump in economy had been caused by paucity of imported raw materials. And in this year's budget this aspect has been ignored, and drought and shortfall in agricultural production have been blamed for the economic crisis. Then, some engineering industries are sought to be kept alive with the assistance of executive orders from the Railway Department. There is no realisation of the fact that with a halt in the expansion programme of Railways these orders would only mean needless waste.

Diversionary Tactics

When today the situation demands some revolutionary changes in the country's economic policy, the Congress Government at the Centre is wasting much of its time and energy on issues which may be important by themselves but which are not relevant so far as the basic problems of Indian economy are concerned. Thus, the problem of privy purses, the issues raised by the Hazari Report, the proposal for nationalization of basks and general insurance are animatedly debated, and projected as if the economic development of the country hinges round these questions. Actually, these questions are not even remotely connected with our basic problems of food scarcity, falling production, growing unemployment and risible prices. And when these matters are debated over and over again, with Government giving no indication of a will to clinch these, issues, one is naturally led to suspect that the real object of these discussions is only to divert public attention from the crucial problems and use these debates to exert political pressure on certain sections.

Social Controls of Banks

At the last session or Parliament, Finance Minister Shri Morarji Desai made a statement that an Enquiry Commission would be appointed to go into the problems of banking. This statement also announced a scheme for social control of banks. As the Finance Minister evidently held that the problems of banking merited a thorough examination by a Commission, wish he had waited for the Commission's report before precipitately coming forth with his Social Control Scheme. The real problem today is of capital formation, and social control is not going to help capital formation. Also, it is doubtful that this scheme would ensure optimum utilization of the resources available with banks. There is no doubt that agriculture and to small industries need capital badly. But what about the industries that are benefiting today from these resources? How wi1l they run? Or, are they regarded as unnecessary? The proposal to have representatives of small industry and agriculture on the Board of Directors is welcome. But how are they going to be selected? Are they to be nominated? If so, the nominations are very likely to be vitiated by political consideration. I wonder why depositors have been given no representation on the Board. Besides, foreign backs have been kept outside the purview of this scheme. This would naturally injure the interest of Indian banks. It would be better if instead of launching such political schemes, the Government decided to open new banks to meet the growing demand for capital investment.

No Plan Holiday

We have been disappointed also with the Planning Commission. By suggesting that the Fourth Five Year Plan should commence from April 1, 1969, it has agreed to a Plan Holiday. The situation calls for greater endeavor and not a holiday. When conditions are difficult, well-considered, planned measures become all the more necessary. Programmes should be undertaken to remove the strains and cracks caused in the country's economy as a result of the Plans till now, and in a way so as to avail of our developed potential. The present recession and large-scale educated unemployment owe to a great extent to the manner in which plans have been arbitrarily slashed or changed during the past two years. Productive schemes under the Plan have been cut while unproductive expenditure of the administration has been increasing. Such budgeting is not conducive to economic growth. Recession leads to fall in revenues and increase in administrative expenditures causes inflation. As a consequence, despite all efforts, deficit financing becomes unavoidable. In this matter, however, let us be practical and not doctrinaire. In order to utilise the potential of the unemployed, and to implement quick yielding schemes, a judicious recourse to deficit financing would certainly prove profitable.