THE
EVOLUTION OF PROVINCIAL FINANCE IN BRITISH INDIA
________________________________________________________________
PART
III
PROVINCIAL
FINANCE: ITS MECHANISM
Contents
The Limitations Of
Provincial Finance
The Nature Of Provincial
Finance
The Enlargement
Of The Scope Of Provincial Finance
PART
III
PROVINCIAL
FINANCE: ITS MECHANISM
CHAPTER
VII
THE
LIMITATIONS OF PROVINCIAL FINANCE
To
those who might be expected to have a knowledge of the anomaly—unparalleled in the
annals of administration—involving the existence of provincial Government without
there being the necessary complement of Provincial Finance, the study could not but have
been of profound interest as disclosing the manner in which the anomaly created in 1833
was rectified or seemed to be rectified in 1870 (Footnote#).
(Footnote#)There,
however, prevails the idea that Provincial Finance existed tong before 1870, But this is
undoubtedly an error which may as well be corrected in this place by briefly recalling the
history of financial decentralisation prior to 1870. The year 1855 will always stand
pre-eminent in the history of decentralisation of Indian Finance. It is from that year
that local Finance dated its origin. It must not, however, be supposed that prior to 1855
there were no local revenues. On the contrary, there were very small funds such as Ferry
Funds, Toll Funds, Cesses, etc., in existence and were spent on improvements of local
utility, but the important point to note is that the balances from such funds were not
carried to a separate account but as a rule merged in the general balances of the country,
with the exception probably of Bengal and North-Western Provinces, where it seems that
such balances were carried to separate local Fund Accounts (of. Calcutta Review, 1851, Vol. 16, pp. 464 and 466).
It was by the Financial Resolution of May 11,1855, that local Funds were completely
separated from Imperial Funds and were treated as " Deposits "—a
sub-division of the Account Head " Debt "(cf. Accountant's Manual, by Y. Venkatramaiah, Part I,
Madras, 1866, p. 79) and by the Resolution of September, 1863, local Finance was
established on a separate footing by the institution for each of the different provinces
of a distinct local Fund Budget as separate from the Imperial Budget. It so happened that
in the absence of local authorities the Government of India entrusted the task of the
preparation and execution of the local Funds Budget to the respective Provincial
Governments as being more in touch with local wants. It is this accident that has betrayed
many into the supposition that this was essentially Provincial Finance. But nothing can be
a greater blunder. What existed before 1870 was local Finance, pure and simple, although
under the supervision of the Provincial Government, in whose hands the local Funds were
essentially a kind of trust. The mere bringing together by the Provincial Governments of
the receipts and charges pertaining to the local Funds into a local Fund Account for the
whole Province can hardly be interpreted to mean the amount to be at their
disposal—and that is the only sense in which Provincial Finance can be a
reality—any more than the bringing together of the local Rates levied in the United
Kingdom in the budget of the Chancellor of the Exchequer can give an indication of its
financial position. The local Funds were not at the disposal of the Provincial
Governments, for they could not be disposed of on purposes other than those which attached
to them. In this sense they constituted local Finance and not Provincial Finance. Some
people mistake it for Provincial Finance probably because the term " local Government
" is used as a synonym for Provincial Government. But, while local and Provincial
Governments are often used as interchangeable terms, it must be remembered local and
Provincial Finance cannot be so used. As a matter of fact, there was a period in the
history of Financial organisation in India during which there was local Finance without
local Government to be precise, and there was no Provincial Finance, even though there
were Provincial Governments. It is probable that, as tong as the habit of speaking of
Provincial Government as local Government continues, this confusion of ideas will not
entirely vanish. While some have insisted that Provincial Finance had its being tong
before 1870, the Resolution of December 14, 1870, which instituted the scheme of
Provincial Finance, is called * Resolution on local Finance " as though it gave rise
to local and not Provincial Finance. Such absurdities can be avoided only by insisting
upon precision of terminology.
On
a purely a priori consideration of the matter, nothing could have been more natural than
to suppose that the system of Provincial Finance thus established in British India was
independent in its organisation. Indeed it is difficult to imagine how one could emerge
from the study of its origin and development without such a faith having silently grown
upon him. But if Provincial Finance was independent in its organisation, we should find
the Provinces in possession of financial powers which are commonly associated with the
functioning of independent States. For the immediate purpose of finding out whether or not
Provincial Finance was an independent system of finance, we may take the freedom of
budgeting and everything that is involved in it as an evidence of the existence of these
powers. Independent budget powers would involve the power to determine the services which,
according to the needs of the country, a good government should undertake, and to decide
upon the mode of raising either by taxation or loan sufficient money to meet the
expenditure upon those services. Alongside these powers the budget system entails the
obligation of keeping accounts and submitting them to independent audit.
Applying
these tests to the Provincial Budget, the origin and growth of which have been treated in
the foregoing parts of this study, we cannot predicate a tithe of the independence which
characterises the budgets of sovereign States. On the contrary, the budget system
introduced into India with regard to the different Provinces was accompanied by the most
stringent limitations. They were given a budget without
its powers, and they bore the obligations of accounts
and audit just because they were left free within the limits of their budgets. Why these
limitations were imposed will be explained when we come to scrutinise the ways of
enlarging the scope of Provincial Finance, it must,
however, be emphasised that these limitations formed an integral part of the scheme, and
the stringency of the former had grown pan passu with
the scope and proportions of the latter. In fact they defined the law of the Constitution
of Provincial Budgets. A complete comprehension of the operation of Provincial Finance in
British India is therefore not possible without a thorough knowledge of its rules of
government. Such being the importance of these rules it cannot but be to our advantage to
analyse them at this stage.
These
rules were laid down on various occasions during the interval between 1870, when the
scheme of Provincial Finance came into being, and 1912, when the scheme reached through an
evolutionary process its final and permanent stage, in the form of Resolutions of the
Government of India in the Department of Finance. The rules framed in 1870 [f1]
were few and simple. Nor was there any necessity for a complex code to govern the
operation of the very meagre budgets which were then constituted. Many supplementary rules
were issued afterwards to dispose of unforeseen cases of order and procedure; but it was
not till 1877 [f2]that
we come across a most elaborate set of rules and regulations governing the financial
transactions of the provincial Government. The Rules of 1877 were the basis of all those
that were subsequently issued. With very small addenda or corrigenda they remained in
force for a period of fifteen years, when they were superseded by a new series of Rules
promulgated in 1892.[f3]
But only within a short span of a quinquennium this series was replaced by another issued
in 1897, [f4]
and the latter formed the governing body of Rules till the year 1912, when a new series
was brought out to regulate the working of the permanent settlement made in that year. [f5]
The same was reissued in the Financial Department Resolution
No. 361 -E-A. dated July 24, 1916. But as the alterations
therein were not in any sense consequential, the series of 1912 may be taken as laying
down the final regulations of Provincial Finance.
Recognise
as we must the necessity for analysing the rules, we must determine beforehand the point
or points of view from which to conduct the analysis. It must be premised at the outset
that the object of entering upon the examination of the Rules is twofold : (1) to know what limitations there were and (2) why they
were placed. Our immediate interest, it is true, is to state what limitations there were,
but this is only a preliminary, if not a minor, object. The second is really the more
important of the two. It is only as an aid to the proper understanding of the causes of
the necessity for these limitations that knowledge of them is to be sought. While keeping
in our mind the immediate object of stating the
limitations, it will be unimaginative not to foresee that in the following chapter, in
which we shall be presently engaged, we will learn that the necessity for these
limitations arose from the very peculiar nature of Provincial Finance itself. On the other
hand, it is important to anticipate this conclusion, and instead of producing the Rules seriatim as they occur, arrange them in such a way
that they shall be an external register of the internal conception of Provincial Finance
which particularly pervaded the minds of its promoters. For the consummation of this end,
the labours of the officials in charge of Provincial Finance who have laid down these
rules are of no avail. To them these rules were only instruments of financial control, and
it did not therefore matter in what order they were grouped. On the other hand, to get at
the conception behind these rules it is necessary to classify and group them according to
the purposes they were calculated to subserve. But the cardinal point in the matter of
classification lies in defining the likely purposes which the originators of such an
interrelated scheme of Provincial Finance as obtained in India must have had in view.
Without being at all dogmatic, it may be said that for a successful working of such a
scheme rules would have to be laid down for the purposes of defining (1) the
Administrative and (2) Financial Powers of the Provincial Government. Each of the two
categories may be further subdivided for a clearer understanding of the nature of
Provincial Finance. Thus the Rules relating to Administrative Powers may be further
subdivided into those pertaining to (i) Services and (ii) Staff. Similarly the Rules defining the Financial Powers
may be conveniently grouped under the following subsidiary categories : Those (i) of a general nature and those pertaining to (ii)
Provincial revenues; (iii) Provincial Expenditure, (iv) Budget Sanction and (v)
Audit and Account.
Taking
purpose as the fundamental divisions, the above categories may be supposed to exhaust
the possible purposes that the framers of the scheme may be
said to have had in mind. On the basis of these categories we may therefore proceed to
reduce the amorphous mass of Rules into a digest which, it may be hoped, will be
convenient and instructive at the same time.
I.limitations
on administrative powers
(1) Rules of Inter-Provincial Services
For
regulating the inter-provincial or inter-departmental relations affected by the creation of
separate budgets for the different
Provinces,
it was ordained that—
(i)
No
inter-provincial adjustments were to be allowed.
(ii) No
service previously rendered to other Departments at the charge of the Department made over
to the control of the Provincial Governments was to be abolished, and no service
previously rendered to these departments at the charge of other departments was to be
increased.
(iii) No
line of through communication was to be abandoned or allowed to fall out of repair.
(2)
Rules pertaining to Staff
As
to the staff engaged in the execution of the provincialised services the Provincial
Governments were enjoined not to—
(i)
Create a permanent appointment or augment the pay and allowance of any appointment.
Prior
to 1912 this applied to appointments with a pay of Rs. 250
a month and above. [f6]
But after 1912 it applied only to appointments ordinarily held by a Gazetted Officer or by
an officer of the Imperial Service as defined in Article 29-B of the Civil Service
Regulations. [f7]
(ii)
Create a temporary appointments or deputation for an Officer.
Prior
to 1912 this applied to appointments with a pay of Rs. 250 a month and above.[f8]
But after 1912 it applied to such of the appointments the remuneration of which exceeded
Rs. 2,500 a month, or Rs. 800 a month, if the temporary appointment or deputation was
expected to last for more than two years'[f9]
(iii)
Abolish a permanent appointment or reduce the pay and allowances of such an appointment.
This
rule was in the beginning applied to such appointments the remuneration of which exceeded
Rs. 250 a month. [f10]
After 1912 it was confined to such appointments as were held by Gazetted Civil Officers
recruited in England or as were defined by Article 29-B of the Civil Service Regulations.[f11]
(iv) Grant
to a Civil officer in Government employ or in receipt of a service pension.
(a) Land, except
where the grant was made under the ordinary revenue rules of the Province concerned
without involving any special concession in money or its equivalent beyond the fact that
the grantee received the grant in preference to others[f12]
or
(b) An assignment
of Land Revenue when the amount exceeded Rs. 600 a year, or
the assignment, though within that amount was not limited to three lives and reduced by
one-half on each succession. All grants as assignments of Land Revenue made by Provincial
Governments to civil officers were to be confined to cases in which the services were of a
very distinguished and exceptional character.[f13]
(v)
Revise (a)
permanent establishments which involved additional expenditure exceeding Rs. 50,000 a year
; or (b) rates of substantive pay of any one branch
of the service at a cost to that service alone of more than Rs. 25,000 a year, or (c) the average pay
of a service of which the maximum pay exceeded Rs. 500 a month and raise it above the
average rate approved at the last revision of the service by the Secretary of State or the
Government of India, or (d)
the local allowances as compensation for dearness of living or for increase of rents in
any locality.[f14]
II.
limitations on financial powers
(1)
General
Before
actually detailing with the limitations on the financial powers of the Provincial
Governments it is necessary to recall that the financial settlements made with the
Provinces consisted in handing over to them certain heads of revenue and expenditure. From this
accidental feature it is not to be supposed that the settlements were a collection of
separate settlements for each head of revenue and expenditure incorporated into the
Provincial Budget. To obviate such a construction by the Provincial Governments and the
consequences thereof, it was ruled that—
(1)
The
Provincial Governments were to understand that the funds assigned to them formed a
consolidated grant for all the services en masse entrusted to their respective administration and
that no claim could therefore lie against the Imperial treasury
on the ground that the actual cost of any service exceeded the amount at which it was
estimated in the calculations of the consolidated grant.[f15]
(2)
And they were not to make any extra demands on the Imperial treasury, but were bound to
maintain from the funds given to them all the services entrusted to their management in a
state of administrative efficiency.[f16]
With
regard to the powers of the Provincial Governments concerning the custody of their funds
it was ruled :—
(3)
That the funds allotted for their use were to be lodged in the Imperial treasury, and were
not to be removed for investment or deposit elsewhere; nor were the provincial Governments
competent to withdraw such money except for expenditure upon the public services.[f17]
(2)
Revenue
Rules
Turning
from the general limitations to those pertaining to the revenues of the provinces, it
should be noted that they were required to maintain themselves within the funds allotted
to them by the Central Government at each settlement.
The
provinces could not augment their resources
beyond the yield due to their natural growth by any possible means, for it was provided
that Provincial Governments were—
(i)
Not to impose any additional taxation or make any change in the existing system of revenue
management. [f18]
(ii)
Not to alter or augment within its area the
rates of discount upon the retail of Stamps, Court Fee labels, and duties on spirits and
drugs.[f19]
(iii)
Not to raise for its own finances any loans in
the open market.[f20]
Powerless
in the matter of augmenting their resources, the Provincial Governments were not free to
will them away to any other authority subordinate to them. To guard against such
eventualities it was ruled that Provincial Government were—
(iv)
Not to alienate any item credited to the general revenues, Imperial or Provincial, so as
to form an asset of a local or Special Fund.
This
provision as regards the non-alienation of the resources of revenue made over to the
provinces was a little relaxed by the Rules of 1912 so that it was permissible for them to
assign to a local body or special fund, as defined in Article 33 of Civil Service
Regulations, constituted by law, petty items of Wholly Provincial Revenue of a recurring
character, not derived from the proceeds of general taxation and not yielding on an
average more than Rs. 25,000 a year. [f21]
(
v) Not to make grants, subventions or assignments from the
funds at their disposal to local or Municipal bodies so as to create a permanent charge on
the revenues of India.
This
by no means prevented grants, subventions or assignments from being made to local or
municipal bodies by the Provincial Governments from their funds although the Government of
India had sounded to them a note of warning by declining to bind itself to continue the
grants after the expiration of the settlements or to provide for them in the succeeding
settlements[f22]By
the Rules of 1912, however, the power of making such grants was more clearly circumscribed
so that a Provincial Government could not make (1) recurring grants to local bodies from
provincial revenues exceeding Rs. 1,00,000 a year in any one case,
[f23]or
(2) non-recurring grants to local bodies exceeding Rs. 10,00,000 in any one case[f24]
or (3) a grant to a charitable or religious institution other than educational, not being
outside India, in excess of Rs. 10,000 a year if recurring, and Rs. 50,000 if
non-recurring.[f25]
(vi)
Not to make any grants to non-official (1) on political considerations of (a) land, either
free of revenue, or on favourable terms, or (b) of
assignment of land revenue, if the value of the land or land revenue exceeded Rs. 1,000 a year. [f26](2)
on the consideration of injury to himself or to his family in the event of his death
during or in consequence of service rendered to Government, or (3) on the consideration of
exceptional services to the Government of a pension exceeding Rs.
1,000 a year or a gratuity. exceeding Rs. 3,000 in any one case.[f27]
(3)
Rules of Expenditure
The
powers of sanctioning expenditure granted to the Provincial Government were as limited as
their revenue powers. While they were free to spend their funds on the services entrusted
to them, certain limitations were laid down for the purposes of expressly ruling out
certain objects and subjects of expenditure from the provincial domain.
With
regard to the objects of their expenditure
Provincial Governments were required—
(i)
Not
to sanction any expenditure from public money on anything outside the category of objects
of expenditure recognised by the Government of India.[f28]
(ii)
To
confine themselves to the carrying on of the services particularly entrusted to them by
the terms of the settlement.
Prior
to 1912 they could undertake a " new general service
or duty " only if they satisfied the Government of
India that they could provide the necessary funds temporarily if it was temporary, and
permanently if it was permanent.[f29]
This provision was altered in 1912 so that a Provincial Government could undertake a new
general service or duty provided it was not (a)
of an unusual nature, or {b)
devoted to objects outside the ordinary work of administration, or (c) likely to involve at a later date expenditure beyond its
powers of sanction.[f30]
(iii) Not to spend—
(a)On State ceremonies and assemblies, and on the entertainment at the public charge of
distinguished visitors to India more than Rs. 1,00,000. [f31]
(b)
On Railway Carriages especially reserved for the use of high officials otherwise than in
connection with the maintenance of the carriage.[f32]
(c)
On the purchase of a Motor-car or Motor-cycle for the use of an official, or on the
maintenance of it otherwise than from the " Contract
Grant " with the Head of the province. [f33]
(d)
On the increase of the " Contract Grant " to the Head of the province.[f34]
(e)
On the construction or purchase of a vessel required for inland navigation and for use at
ports, the cost of which exceeded Rs. 1,00,000.[f35]
(f) On an Irrigation or other Public Works projects of which the
estimated cost chargeable to the general revenues exceeded Rs. 20,00,000 inclusive of
establishments, tools and plants. It was however competent for a Provincial Government to
spend up to an amount 10 per cent. in excess of the original sanctioned estimate provided
such excess was not more than Rs. 12 1/2
lakhs inclusive of establishment, tools and plants.[f36]
As
to the limitations respecting the subjects of provincial expenditure, it was ruled that in
virtue of the application of the general condition precedent to the delegation of all
authority to disburse public money, that it shall be bona
fide for a public purpose, Provincial Governments could not spend from their funds for
benefiting—
(i)
Any
individual or body of private persons unless in accordance with some declared or
established rule or principle recognised by the Government of India.[f37]
(ii) Native States, directly beyond Rs. 10,000 a year on
any one project or Rs. 50,000 if non-recurring.[f38]
(4)
Budgetary Rules
Besides
being subject to the ordinary rules of the Budget System introduced into India for the
first time by Mr. Wilson in 1860, [f39]
by
which they were required to submit their budget estimates for sanction to the Government
of India, and to observe the rules of appropriation in the
execution of the grants, Provincial Governments were further given to understand that
without the previous consent of the Government of India they—
(i)
Could not exhaust their balances in the Imperial Treasury.
Prior
to 1887 a Provincial Government could propose in its budget estimates to draw upon the
whole of its balance. But by the Rules then framed the Provincial Government was required
to maintain at all time a certain minimum balance in the Imperial treasury, the amount of
which varied with each successive settlement.
(ii)
Could not budget for a deficit, that is for provincial expenditure in excess of the
provincial revenues of the year.
The stringency of this rule