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The Rediff Special/Amberish K Diwanji

'Very small states with no source of income should be avoided'

The problem of financial viability is most profound in the North-East, when giving in to the demands of the various tribes and hill peoples, tiny states were carved out of Assam. Thus, at present there are seven states in the northeast – Arunachal Pradesh (India’s easternmost state, largest in area in the North-East, but very sparsely populated), Assam, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura. Save the first two, the rest are extremely small, with little industrialisation, rampant backwardness, and torn by strife and civil violence. And there are further demands to further divide Assam and Meghalaya!

A state’s major sources of revenue are the tax and the non-tax revenues. Within the tax revenue, sales tax accounts for the lion’s share, followed by excise, industrial tax, sales tax, registration, stamp duty, etc. Non-tax revenues come from sources such as electricity tariffs, transport surcharges, water charges, etc.

“In most Indian states, the non-tax revenues not just non-existent, but often a sources of losses. Electricity is subsidised, transport costs are artificially low, so it is actually the government who is paying instead of earning. And as of yet, no state has shown the courage to scrap these politically important subsidies,”said the official.

Then comes the tax revenues. Sales tax comes from the sale of non-essential commodities, often industrial goods. “Low income states have limited sales of such goods, hence their revenue from sales tax is extremely low. They also earn little from excise and other taxes,” adds the official. “Thus, such poor income states at present lack the means to earn more, and depend on the Centre for assistance.”

“These states are clearly not financially viable,” says Pronab Sen, advisor to the Planning Commission. “Their income is low, this makes industrial consumption low, and this makes revenues low. Thus they end up surviving on central support.” Assam, incidentally, earns massive revenue from its vast tea gardens and oil resources. But insurgency, financial mismanangement and host of other ills have kept the state and region poor.

An unfortunate disadvantage of the North-East is its location which keeps it far away from the huge Indian markets. Despite repeated requests from the government, the industrialists have been reluctant to invest in the region which sees transport costs rise exponentially. Agriculture remains backward, productivity yields low. Yet, the region abounds in natural resources waiting to be exploited.

The government official does feel that while states may not have a financial advantage, they do have an administrative advantage. “Tax collection is easier even if it is less, the administrative response is better. But very small states with no source of income should be avoided. In that sense, one must see the ability of a state to earn its revenue, of its people’s ability to pay taxes, before creating new states,” he said.

Leaving aside the North-East, Bihar has complained that losing Vananchal will hurt the state dear since the latter region has rich resources. “Yet, there is little evidence to show that Bihar has used these very resources optimally,” points Sen. “And the people of Vananchal have always felt that despite having the wealth, they were given a step-motherly treatment by Patna.

Former Cabinet secretary Zafar Saifullah felt actually losing the resource-filled region might actually do Bihar a lot of good. “Look at Goa. It is such a small state that has been able to thrive on a single industry – tourism. By comparison, Bihar still has fertile plains, and once it is without Vananchal, the politicians and administrators will be forced to come up with solutions to earn revenues. This might actually lead to land reforms and higher productivity.”

He pointed out that while Maharashtra was a big state (third largest in population and size), its development was lopsided, concentrated along the western part. This was the reason the eastern side was demanding a separate state of Vidarbha. Small states, felt Saifullah, ensured better all-round development, industrially or agriculturally. And he cited the examples of Punjab and Haryana, the richest states in terms of per capita income and yet with little industrialisation.

“Ultimately,”says former Cabinet secretary T S R Subramaniam, “what matters is the government. A big state has huge advantages, but if the big states do not make use of these advantages, they are bound to suffer. Maharashtra is one huge state that leveraged its advantages to emerge as India’s most industrialised state.”

Subramaniam also points out that after years of being in the lower half of the development indices, Andhra Pradesh had a visionary at the helm in N Chandrababu Naidu. “If he continues, the state is bound to do well. In that sense, the man at the top makes all the difference,” he says.

Saifullah is in complete agreement. “Maharashtra had some great administrators, men who went beyond politics to give the state a solid base in industry and in the sugar co-operative movement which brought prosperity to millions of poor farmers. Similarly, Karnataka shot ahead because of the far sightedness of Devraj Urs. Which north Indian state can boast of such great men?” he asks.

Sen and the government official too echoed the sentiment. “Ultimately, financial viability itself is a component of the state’s governance, administrative ability, and political will,” said the official. “Size by itself is of little relevance.”

Subramaniam’s suggestion is to allow each district more liberty in matters of administration and finance, to meet its citizens needs as far as possible without recourse to higher authorities, as has become the norm. Districts then can pool together for common plans, right up to the state, he added.

“Size is really not an issue. What is needed is a strategy for each state – big and small – to meets its economic needs. And planning should come from the bottom upwards. That is what the 73rd and 74th Constitutional amendments are seeking to do, but unfortunately they have yet to be implemented,” said Pronab Sen.

Clearly, where the citizens needs and aspirations are met, demands for statehood will be muted, regardless of the state’s size. But even in small states where citizens feel neglected, there will be demands for further divisions. Compare huge Rajasthan (no demand, yet, to carve this huge state which will be nation’s largest after Chhatisgarh is created from Madhya Pradesh) and small Meghalaya (where there is now a demand for Garoland).

Part I: The Smaller States controversy

The Rediff Special

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