Untitled Document

SPEECH OF SHRI T T KRISHNAMACHARI

MINISTER OF FINANCE

INTRODUCING THE BUDGET FOR THE YEAR 1957-58 (FINAL)

Dated : May 15, 1957

In March last I presented to the predecessor of this House an interim budget for the year 1957-58 in order to obtain a vote on account to meet Government's expenditure until the new Parliament assembled. The expenditure estimates I am presenting today are more or less the same as the ones I presented in March. They have, however, been reclassified in terms of the reorganised Ministries, and there are a few new items to which I shall refer in the course of my speech.

2. A White Paper reviewing the major economic developments in the economy during 1956 and outlining the perspective against which policies for the current year have to be formulated was circulated along with the Budget papers in March last.

Copies of that White Paper are being made available to Hon. Members. The broad analysis of economic trends given in the White Paper needs little modification in the light of subsequent data. I shall, however, review briefly the latest available economic indicators and attempt an assessment of emergent and prospective trends.

3. Before I do so, I would say that the economic classification of the budget as it is now being presented will be issued in 2 or 3 days’ time. We attempted this reclassification for the first time in March last, and we propose to continue the practice.

But, the document will have to be released after the short time-interval needed for working into the tables the proposals I am now placing before the House today.

PRICES

4. The White Paper of March last gave an analysis of the factors responsible for the upward pressure on prices during 1956. In recent months the index of wholesale prices has remained stable around 420. For the week ending April 27, it was 423.5, which is a rise of 8.5 per cent over the level a year ago. Rice prices are now at633 and wheat prices at 581; they are 14.1 per cent and 16.4 per cent respectively above the level that obtained a year ago. Prices of industrial raw materials have risen by 9 per cent during the year, of semi- manufactures by 5.3 per cent and of manufactures by 2.4 per cent. The rising price trend is due in part to the insufficiency of food production in relation to the demand, and in part it is attributable to certain external factors. There are, however, clear signs of demands in the economy tending to outstrip the supplies available. If unchecked, these trends cannot but get reflected in further increases in the cost of living and in the cost structure of industries.

PRODUCTION

5. The latest available estimates of agricultural Production indicate that the fall in production in 1955-56 was somewhat smaller than had been estimated earlier. The output of rice is now estimated at 26.8 million tons, as compared to the earlier estimate of 25.5 million tons and the estimate for the total foodgrains output for the year has now been revised upwards from 63.4 million tons to 64.8 million tons. Even so, the year shows a shortfall of some 4 million tons as compared to 1953-54 and some 2 million tons as compared to 1954-55. The decline in foodgrains output in 1955-56 was mainly in respect of coarse grains, while the output of rice was higher and that of wheat only slightly lower than in the previous year.

6. The output of commercial crops shows no significant change relatively to the estimates given in the White Paper issued in March. The over all index of agricultural production, taking food crops and commercial crops together, would still show a fall of about 2 per cent in 1955-56 as compared to 1954-55.

7. The estimates of the likely level of agricultural production in 1956-57 indicate that the out turn should, on the whole, be somewhat better than the previous years. The production of rice is expected to be around 28 millions tons, that is, about 1.2 million tons better em in 1955-56, and of wheat about 8.6 million tons as compared to 8.3 million tons in 1955-56. The output of coarse grains and pulses is estimated at about the same level as in 1955-56. Among commercial crops, latest reports indicate that the production of cotton has increased by 20 per cent, groundnut by 6 per cent and sugarcane by about 17 per cent. Nevertheless, reports on the food situation in recent weeks indicate difficult conditions in some of the States. I would not like to minimise the gravity of the situation as it obtains in these pockets. But statistically, it does seem that if at all there is an overall shortage, it is of a marginal character. With the arrangements that have been made for the import of foodgrains from abroad to meet our normal needs and with the availability of additional supplies under the P.L. 480 agreement, it should be possible to ensure adequate supplies to enable us to hold the price line. I would however concede that the situation will need, careful watching and the apparatus necessary to deal with the situation as it develops from time to time would have to be kept in readiness.

8. Industrial production has continued to rise at an annual rate of about 8 per cent, the newer industries, both in the capital goods and in the consumer goods sector advancing more rapidly than the older industries. The pace at which industrial development has been proceeding is encouraging. In that process, it generates heavy demands on our foreign exchange resources for import of capital goods as well as raw materials. The immediate difficulties in respect of foreign exchange notwithstanding, it would be reasonable to hope that the rate, of progress in the industrial sector will be maintained.

9. The overall position that emerges from the review of production trends so far is that the supply of domestic goods and services has, on the whole, shown only a modest improvement over the previous year and that the rise in prices during the year reflects the pressure of a shortage in supplies relatively to the strength of the expansionary factors in the economy generated by the rising levels of both public and private investment.

MONETARY FACTORS

10. Considered by itself, the increase in money supply over the last 12 months or so is not very large. Between the 13th April, 1956, and the 12th April this year, it increased by about Rs.132 crores. This increase, it must however be remembered, occurred in spite of the large balance of payments deficit which resulted in a precipitous fall in the Reserve Bank’s foreign exchange holdings. The increase in rupee securities held by the Reserve Bank works out at Rs.273 crores over the past twelve months.

This is, clearly, an expansionary factor which reflects, in the main, the growing borrowings of Government from the Reserve Bank; in part, it arises from the pressure on commercial banks to replenish their resources by selling securities. Scheduled bank lending to the private sector was up by Rs.147 crores during the year. The liquidity of the banks has in the process been strained and money rates have hardened.

Stringency in the money market has continued. This stringency is a usual accompaniment of a phase of economic boom when investment tends to outturn savings;

it is not an indication of an insufficiency of the monetary media. Ali abatement of monetary stringency has at this stage to be sought not through a general increase in the supply of credit but through measures to prevent an excessive diversion of credit to less essential uses and through the creation of special institutions or facilities for supplying selectively the type of credit needed for priority developments.

FOREIGN EXCHANGE

11. The major problem before the country is the large and continuing strain on foreign exchange resources. Since the beginning of the fiscal year, 1956-57, there has been a persistent pressure on the balance of payments resulting in a draft on the country’s foreign exchange resources of about Rs.300 crores. Since, during this period, a credit of Rs.60.7 crores was obtained from the International Monetary Fund, the fall in the Reserve Bank’s holdings amounted to about Rs.240 crores.

12. The balance of payments for the first quarter of 1956-57 showed a current account deficit of Rs.44.5 crores; the deficit widened to Rs.81.4 crores in the second quarter. For the third quarter for which data are now available, there was a further increase in the deficit which worked out at Rs.84.8 crores. Excluding ‘official donations’ which enter into the current account, the deficits for the three quarters were Rs.54.1 crores, Rs.89.9 crores and Rs.92.4 crores. Since January, 1957, further foreign exchange resources of the order of Rs.86 crores have been used up. The foreign, assets of the Reserve Bank now stand a little below Rs.500 crores. Despite the measures already taken to restrict imports, there is no indication yet of an abatement in the rate of drawals which averages Rs.5 to 6 crores a week. This embarrassing ‘lag’ notwithstanding the steps we have already taken and the further steps we shall take as necessary will, it is believed, begin to produce their effect before long.

13. On a rough estimate, imports for the year, 1956-57 will aggregate to over Rs.1000 crores, while exports will be around Rs.650 crores. The bulk of the additional imports received during the year is for developmental purposes and should help strengthen the economy in due course. It is, however, obvious that foreign exchange expenditure has to be limited to the availability of resources, and the present imbalance in the country’s external account rectified. The various corrective measures adopted during the year were reviewed in the March White Paper; further action in the same direction which is necessary will, as I have just said, be taken.

14. There is hardly any, cushion left in our foreign exchange reserves to permit, a further significant draft on them. The level of imports hereafter has necessarily to be regulated in the light of our current earnings and the inflow of supplemental resources we can secure from abroad and should be closely related to essential requirements of the high priority projects in the Plan. The import policy for the second half of 1957- 58 is being formulated with the objective of scouring a further sizeable saving on imports. The large volume of imports of capital goods and of developmental commodities that has already come in should make it possible for investment within the economy to go forward for a time at a satisfactory rate and care will be taken to allow such imports as are necessary for getting the benefit of whatever equipment has been obtained and for maintaining production at a reasonable level. It would, however, be idle to pretend that all hardship can be avoided. The exigencies of the situation require that a balance on external account must be restored as early as possible, and the necessary price has to be paid.

15. An improvement in the balance of payments situation is, I should add, largely conditional upon the adoption of domestic policies designed to hold inflationary pressures in check. An excess of purchasing power within the economy raises internal prices; it also reduces the availability of supplies for export and pushes up the demand for imports. It is, therefore, necessary to orient fiscal and monetary policies to the keeping down of domestic consumption and to the diversion of a part of the domestic output to export markets. I may mention in this connection that the exports of cotton textiles in the first three months of 1957 have reached a total of 260 million yards, which gives an annual rate of over 1,000 million yards. The increase in excise duty on cloth in September last has it seems succeeded in one of its objectives without raising prices in the process. We should constantly be on the watch for similar opportunities to enlarge our foreign exchange earnings.

16. After this broad review of the latest economic trends, I should now like to give an account of the budget estimates for 1957-58.

17. In the estimates presented on the 19th March, 1957, revenue was taken at Rs.636.22 crores and expenditure at Rs.66 3.09 crores, leaving a deficit, on revenue account, of Rs.26.87 crores. As a result of certain modifications which have since been found to be necessary, revenue deficit on the basis of existing taxation, to now estimated to increase by Rs.6.25 crores. This is as a result of a reduction of Rs.1.25 crores in the net contribution of the Posts and Telegraphs Department to General Revenues and an increase in expenditure of Rs.5 crores.

18. The reduction in the Posts and Telegraphs contribution is due to an additional provision of Rs.1.25 crores for the Renewals Reserve Fund. Abroad examination has revealed that the provision made in recent years for depreciation and replacement of assets has been very inadequate and that at least 2.75 per cent of the capital at charge should be provided as a depreciation reserve. Provision made this year amounts to Rs.1.25 crores which represents only 1.25 per cent on the capital at charge of about Rs.100 crores. Pending a detailed examination, the provision is now being doubled for the current year.

19. The increase in expenditure is accounted for by three items. The first is a provision of Rs.3.12 crores for grants to the Khadi and Village industries Commission for development of Ambar Charkha. A programme for the introduction of 75,000 Ambar Charkhas was started last year. The results of this programme have been reviewed recently and it has been decided to continue and expand it further daring 1957-58. For the present the expanded programme provides for the introduction of an additional 90,000 Ambar Charkhas. The total cost of this programme, during the current year, is, estimated at Rs.10.09 crores of which Rs.3.12 crores will be by way of grants and the balance by way of loans to the Commission.

20. The second item is a grant of Rs.1.55 crores to the Government of Assam towards the extra expenditure which they have had to incur recently for the maintenance of law and order as a result of the disturbances in certain border areas. The State Government have had to incur large expenditure on providing relief to the affected population, borrowing police forces from other States and constructing roads and bridges to facilitate, communications. This abnormal expenditure has caused a great strain on the State’s resources and the Government of India have agreed to meet 50 per cent of the cost of relief measures and of roads and bridges and the entire expenditure on the police borrowed from other States.

21. The last item to a provision of Rs.33 lakhs for incidental expenditure on transport etc., in connection with the return of Lend-Lease silver to the Government of U.S.A. During the last War, the U.S. Government leased 226 million fine ounces of silver to the Government of India to be returned five years after the termination of the emergency. The liability for the return of this silver was divided between India and Pakistan, India’s share being approximately 172 million fine ounces. It has now been agreed that the Government of India would make immediate arrangement for the shipment of 50 million fine ounces of silver and that the balance of 122 million fine ounces should be made available in the form of quaternary alloy coins. The cost of shipment of fine silver would be borne by the Government of India while the alloy silver would be delivered in India and the U.S. Government would meet all cost of handling, transport and refining and also retain the metals recovered in the refining process.

22. On the capital account, the estimates presented in March last provided for an outgo of Rs.772.21 crores for capital expenditure and loans to State Governments and others. As stated earlier, an addition of Rs.6.97 crores is now required for loans to Khadi and Village industries Commission for the Ambar Charkha programme.

23. A provision of Rs.15 crores is being made for loans to the Refinance Corporation which is proposed to be constituted shortly. The Agricultural Commodities Agreement between the Government of India and U.S.A. under American Public Law 480 provided, among other things, that a sum of about Rs.26 crores would be reserved for re-lending to private enterprise in India through established banking facilities.

As a result of subsequent discussions with the U.S.A. authorities, a scheme has been evolved, for channelling these funds through a Refinance Corporation, which will provide re-lending facilities against loans given by Indian Banks. The Corporation is proposed to be constituted as a joint stock company under the Companies Act, 1956, initially with an ordinary share capital of Rs.12.5 crores to be subscribed by the Reserve Bank of India, the State Bank of India, the Life insurance Corporation of India and about 14 from amongst the larger scheduled banks in India. It is anticipated that the Corporation will require loans from the Government of India out of the earmarked funds relating to the P.L.480 Agreement, to the extent of about Rs.15 crores during the current financial year.

24. Another provision of Rs.50 lakhs is being made for investment in the share capital of the Export Risk Insurance Corporation. The Corporation will be registered under the Indian Companies Act as a Private Limited Company with an authorised capital of Rs.2.5 crores and paid-up capital of Rs.50 lakhs. The maximum risks which the Corporation should carry will be 10 times the subscribed capital and the reserve built by it. In setting up the Corporation to introduce a scheme of export risk insurance in India, the Government of India have been actuated by the desire to place the Indian exporter on even terms with exporters of other countries, who are aided by similar schemes in their countries.

25. These three items on Capital account will aggregate Rs.22.47 crores. Against this Capital receipts are now expected to improve by Rs.25.83 crores. Of this increase, Rs.9.56 crores represent the additional contribution to the Railway Development Fund which has been announced in the Railway Budget presented on the 14th May, 1957, and Rs.1.27 crores the additional contribution (inclusive of interest) to the Post and Telegraphs Renewals Reserve Fund mentioned earlier. The balance of Rs.15 crores is on account of assistance under the Agricultural Commodities Agreement with the U.S.A. which is now estimated at Rs.65 crores against the credit of Rs.50 crores assumed earlier, the total foreign aid thus amounting to Rs.150 crores. In the result, there will be a net receipt of Rs.3.36 crores on Capital account.

26. Taking the Revenue and Capital accounts together, the over-all deficit of Rs.365 crores estimated earlier will now increase by Rs.2.89 crores to Rs.367.89 crores.

ASSESSMENT IN BRIEF

27. The review of economic conditions and of the financial position as it emerges for the budget year shows clearly that while more resources are required for meeting the increasing demands of the investment programme, both public and private, the economy is not generating the necessary savings. Budgetary deficits, rapid expansion of Bank credit continued pressure on prices and a large balance of payments deficit-all these taken together connote a deficiency of voluntary savings relatively to the size of the investments being undertaken. Further, the emerging pressures have to be judged in relation to the requirements over the entire Plan period. Expenditure on the Plan has inevitably to be stepped up year by year, and the strain on the country’s resources will grow in the period that must elapse before the investments being made come to fruition. These demands on the economy can be met successfully only by sustained effort at increasing productivity and mobilising savings on a national scale. Simultaneously, it is essential that the pace of investment, both in the public and private sectors is kept in reasonable relationship to the progress made in enlarging domestic savings and securing an inflow of external finance adequate to meet the foreign exchange requirements of the programmes in hand.

This is the setting against which the policies and proposals that I propose to place before the House have to be judged.

CREDIT POLICY

28. The first item of policy I wish to consider is credit policy. I referred earlier to the expansion of bank credit that has taken place over the last twelve months and the consequent strain this has imposed on the liquidity of the banking system. In the last few years the tempo of investment activity in the private sector has been steadily rising, and more recently there is evidence of a marked quickening of this tempo. This has entailed larger demands on the banking system by trade and industry.

The credit advanced by scheduled banks rose during the year 1956 by Rs.153 crores to a record level of Rs.788 crores, and in the first four months of this year, it has risen by another Rs.119 crores. The deposit resources of banks have not gone up to a corresponding extent. As a result, there has been an acute stringency of funds in the money market and an appreciable increase in the call money rate and the lending and deposit rates of banks. Considering the over all trends in the economy, the remedy for a situation of this nature is not an out-right increase in the supply of money and credit to the extent of the demand but a cautious and orderly expansion to meet genuine needs, accompanied by measures to prevent an excessive diversion of credit to less essential uses.

29. Against this background the Reserve Bank has been pursuing a policy designed to moderate the inflationary possibilities of a large credit increase through general and selective credit restraint- without at the same time denying credit to essential lines of activity. This policy of judicious restraint took the form of an increase in the bank’s lending rates; the rate on advances under the bill market scheme was raised in two stages in March and November, 1956 from 3 to 31/2 per cent and in February this year by an enhancement of the stamp duty on usance bills which increased the effective rate of borrowing by banks to 4 per cent. Simultaneously, the bank increased its rate on advances against Government securities to 4 per cent in addition, as it appeared that speculative trading, particularly in essential commodities in short supplies like foodgrains, absorbed some portion of bank credit, the Reserve Bank issued directives with a view to regulating advances against such commodities.

30. These measures have generally been effective. In the busy season now coming to a close credit extended has been of a somewhat smaller order than in the last busy season. The technique of selective control has had some effect on the level of bank credit; it has restrained the rise in prices in the sectors to which it was directed and has helped in channelling resources to more desirable outlets. It must be emphasised that the Reserve Bank’s policy has not been one of mere restriction of overall credit;

in fact, it has been one of ensuring controlled expansion- a process which has been helped in particular by the liberalisation of the bank’s credit facilities under the bill market scheme and also through its open market policy. The expanded facilities under bill market scheme could be availed of by banks on a larger scale by a greater accretion to their deposit resources. Some progress has been achieved in this respect, but, I feel that a greater effort on the part of the banks to attract resources especially by reaching classes which have not yet developed the banking habit is called for.

31. In view of the increasing tempo of developmental activity programmes for the current year and in the succeeding years, I am convinced that credit policy should continue to be directed towards moderating the pressure of demand for funds without at the same time hampering essential lines of productive activity. It is in this context that the Reserve Bank has been continuously keeping its bank rate under review. Earlier today, the bank announced an increase in the bank rate from 31/ 2 to 4 per cent. As the effective lending rate of the Reserve Bank to scheduled banks has been 4 per cent for some months now and the markets have had sufficient time to adjust themselves to this rate, this seems an opportune moment for rationalising the lending rate structure of the Reserve Bank by raising the bank rate itself. There are other considerations also which indicate the desirability of making this adjustment in the bank rate at this stage. I am not unaware of the limitations of the bank rate as an effective weapon in a developing economy. Nevertheless, an increase in the bank rate should assist the Reserve Bank in its task of moderating the pressure of demand for credit. While the Bank’s latest decision might appear to be only a formal recognition of a de facto situation, it is an action in keeping with the analysis of the economic situation I have presented today, to curb the inflationary potential in the economy. In view of the increase in the bank rate, there is no longer the need to keep the stamp duty on usance bills at existing, levels, and I am therefore reducing it with immediate effect to 50 Naye Paise per Rs.1,000 for three months.

32. I may mention, once again, in this context, the steps we are taking to set up a Refinance Corporation to cater to medium term needs of industry. This Corporation will in time, I hope, fill a lacuna in our existing system of industrial financing. This is an instance of the positive aspects of the policy of controlled expansion which I have mentioned a little while ago.

INCENTIVES FOR SMALL SAVINGS

33. This brings me to my next point, which relates to small savings. In the ultimate analysis, the limit to expansion in the economy is set by the availability of savings, and in a country like ours where the banking habit is undeveloped, small savings have a special role to fill. Taking the first Plan period as a whole, the progress of the small savings movement has been encouraging. The target for the Second Plan requires substantial stepping up of collections year by year and I am anxious to ensure a sufficient incentive for the investor in small savings in all forms. The small savings movement is to my mind more than a way of collecting money; it is a scheme for spreading the habit of thrift and of encouraging participation by the common man in the Plan effort. I wish to take this opportunity to appeal to every family whether in the urban or in the rural areas to save more and make the small savings movement a success.

34. While the campaign for small savings has to be intensified, I propose also to increase the rate of interest on small savings investments with effect from the 1st of June 1957. Briefly, I have decided to increase the rate of interest on Post Office Savings Bank accounts by 1/2 per cent and to have a new series of 12 years certificates to be called National Plan Savings Certificates in replacement of the present National Savings Certificates and National Plan Certificates. The interest on Savings Bank accounts will now be 21/2 per cent on balances upto Rs.10,000 and 2 per cent, on balances in excess up to Rs.15,000 in the case of individuals and 2 per cent on balances in the public accounts. There will be only two types of savings certificates hereafter:

(1) the National Plan Savings Certificate with a maturity of 12 years and (H) the Treasury Savings Deposit, Certificate with a maturity of 10 years. The yield on both these will be increased; for the former to 4.25 per cent compound interest, at the end of 12 years and for the latter to 4 per cent at the end of 10 years. Both these certificates will be tax-exempt. For people who hold these certificates for periods less than 12 years the yield will be suitably adjusted. For example, Rs.100 invested in National Plan Savings Certificate will become Rs.127 at the end of 7 years, Rs.148 at the end of 10 years and Rs.165 at the end of 12 years. In the case of the Treasury Savings Deposit Certificates interest is paid every year but an adjustment is made in the event of the holder deciding to encash it before maturity. In the case of National Plan Savings Certificates the period of non-cashability will be fixed at 12 months. The further issue of National Plan Certificates and 7 years National Savings Certificates will be discontinued.

FOREIGN EXCHANGE POLICY

35. Fiscal and monetary policy at this juncture has to be designed in a way that will make it clear beyond doubt that we on our part, are determined to do our best to implement the Plan as fully as possible. We have to make the fullest effort to raise the domestic resources required and I shall come presently to my tax proposals -which reflect this determination. It is clear, however, that the problem is not merely one of raising more domestic resources but also of finding ways and means firstly to conserve and secondly to augment our foreign exchange resources in keeping with the large requirements of the Plan. The steps we are taking in the field of domestic economic policy will it is hoped, react beneficially on our foreign exchange position as well, but this latter is, admittedly, a more difficult problem. What we can earn by way of foreign exchange on our exports is not a matter entirely in our hands; it depends on the trend of world prices and demands. Similarly, the prices we have to pay for our imports are beyond our control and all that we can do is to limit the volume of our imports. Here again, there are problems. The cuts we impose on imports become effective only after a time lag. Moreover, a developing economy needs increasing imports and there is danger, in a restrictive import policy, of impending the flow of imports needed for the very purpose of development. Foreign exchange policy is thus a matter of delicate balancing and it is a balancing If I may say so, in which a favourable turn of the wind could make a material difference.

36. In the March White Paper the various measures taken to save and conserve foreign exchange have been listed. The import programme for the first half of this year involved considerable cuts in imports, and the process will, I am afraid, have to be carried considerably farther in the import programme for the second half of the year. Government have already announced their policy in regard to licensing of capital goods imports. Private investors are being encouraged to seek medium term credits from abroad and to invite foreign enterprise to associate itself increasingly with Indian enterprise. We have in front of us a rather difficult period and we will have to exercise the utmost caution and vigilance in the matter of imports while taking every possible step to increase our export earnings. The fact that in the last twelve months the level of imports has been exceptionally high warrants the presumption that the economy can put up with sizeable import cuts for some time to come without serious dislocation. At any rate, I wish to reiterate the Government’s determination to restore a position of better balance in external account as early as possible.

37. An under-developed economy which launches upon programme of industrialisation suffers from the inevitable handicap of having to import from abroad, all or practically all, of the equipment and capital goods that it needs to make the right start. Nevertheless, a start has to be made and in the process risks have to be undertaken. In the nature of things it is not possible to chalk out the course of policy and action in the field of foreign exchange with the same precision of detail as in case of domestic policy. The second five year plan involves heavy foreign exchange expenditure and the estimated gap in the balance of payments has widened partly because in some respects the initial estimates were on the low side and partly because of the rise in prices abroad. This gap is by no means easy to fill. We shall have to make our best effort along the lines I have mentioned. At the same time, we must recognise that external resources on a considerable scale will be necessary in order to enable us to see through the developmental tasks we have taken in hand. Given reasonable effort all along the line on our part, we shall, I am confident, get over the transitional difficulties that are confronting us at present.

THE PLAN

38. The estimates of required outlay have gone up since the Plan was formulated. The fulfilment of the Plan to schedule postulates, inter alia, the availability of external resources on a considerable scale, and the need for these resources is the greatest in the earlier part of the Plan. Evidently, shortfalls in this respect cannot be made good by a draft on domestic resources. We have this aspect of the problem under continuous review. It is not possible to say at this stage to what extent the progress of the plan will be affected because of foreign exchange shortage. The core of the Plan is steel, coal, transport and ancillary power. With the external assistance that has been already promised and with further support from the International Bank and other sources, we shall, I think, be able to carry through the projects in this “core”. This group of programmes has the highest priority in view of its bearing on further development. But, in regard to other projects, especially those for which no external resources are specifically forthcoming, and which are not otherwise of high priority, it would be prudent for us not to make fresh commitments for some time until the outlook becomes clearer and we have more assurance of our being able to find the foreign exchange resources needed for them. Some rephasing of the Plan is thus, inevitable, but, if, as I hope, the balance of payments situation takes a turn for the better before long and if we succeed in securing adequate external resources, the achievement on the Plan should not fall much behind schedule.

39. Even if the Plan did not encounter difficulties in certain sectors-which it does-a rephasing of it might be necessary in certain parts. The rapid development of the country in the last few years has made it incumbent on our part to give closer attention to the socio-economic objectives of the Plan. The Plan has set to itself the objective of increasing national income progressively over a period of 15 to 20 years. The urgency of development is related to the need for raising living standards all round and for creating an environment in which democratic values and ways of life take root and gather strength. To those who regard the Plan as too ambitious, I would respectfully submit that they should take a good look at the living conditions of the bulk of our people. If they would only do this, I am sure they will, along with me, be able to see the several directions in which the Plan is inadequate. In the last few years there has been some visible improvement in the standards of nutrition and probably, of clothing. The housing conditions and environmental hygiene in urban and rural areas of the low income groups are deplorable; the slums in our cities are a disgrace to any society which claims to be considered civilised. I am deeply anxious to see that the Plan is strengthened in this respect.

40. Let us not forget that the very fact that a measure of success has been achieved already in raising living standards makes it all the more urgent that the process be carried forward with vigour and determination. The millions in India have woken up to new desires and new wants for the first time in many generations. With knowledge that a better future for all is possible has come the aspiration that the desired improvements should take place without delay. Whether it is the demand of industrial labour for higher wages and better housing conditions, or of low-paid teachers and government employees for a fair deal and greater security-all these are but manifestations of the new awakening and of the new striving for an economic future which is consistent with the dignity of the citizens of a free society. One cannot merely shrug one’s shoulders in the midst of such a situation and say that all these things must wait till somehow or other the financial situation in the country improves. Whatever the difficulties of the moment, the demands of the people-especially of the low-income groups-must be assessed carefully and met to the maximum possible extent. Admittedly, there has to be some order of priorities in dealing with the legitimate but innumerable claims of the people. Even among the less fortunate sections of the society, there are at present wide disparities in income- and it is essential that the needs of some should take precedence over those of others. The employees of State Governments and local bodies, for example who are also doing great national service enjoy conditions of service which are less favourable than those for Central Government employees. I would humbly venture the claim that the Central Government have taken a lead recently in bettering the conditions of these people; but in view of the somewhat strained finances of many States, we have not been able to make much headway. The point remains that in attempting to improve the living conditions of the people, every care has to be taken to make a beginning where it is most needed. I am also aware that the claims of investment should not go overboard in attempting a speedy improvement in the living conditions. But when all the concessions to reality are made, the fact remains that to pronounce that our present plan is too ambitious would be a declaration of defeat in advance. The tasks we have in hand are worthwhile. Their successful completion will make a significant contribution to further development. There should be no stinting of effort or sacrifice in the furtherance of these tasks.

41. The Plan is the main theme and the dominant concern of all our thinking and policy formulation. It could not be otherwise in a country which accepts development as its topmost priority. The Plan has run into difficulties, but I see no warrant for alarm or panic. What is required is preparedness to make the necessary sacrifices, and courage and resourcefulness in handling the problems that arise in the course of its implementation.

TAXATION POLICY

42. This brings me to the most crucial aspect of economic policy, viz., taxation.

I should like first to enumerate briefly the objectives of our taxation policy before I come to taxation proposals for the year. Taxation policy and Proposals at this juncture have to be shaped in the light of the following criteria:-

(a) They must produce a sizeable addition to public revenues;

(b) they must, provide incentives for larger earnings and more savings;

(c) they must restrain consumption over a fairly wide field so as to keep in cheek domestic inflationary pressures and to release the resources required for investment; and

(d) they must initiate such changes in the tax structure as would make tax yields progressively more responsive to increased incomes and facilitate an orderly development of the economy with due regard to the social objectives we have adopted.

43. As I stated in my Budget speech in March last, the overall budgetary deficit of Rs.365 crores which I left uncovered then is too large in the context of the present economic situation. The changes which I am now incorporating in this Budget leave this initial deficit practically unchanged, and I think it is vital for us to find ways and means of bringing down this deficit significantly. The other criteria of policy which I have just mentioned need hardly be elaborated but their application, I hope, will be clear as I proceed with the elucidation of my tax proposals for the year.

INDIRECT TAXATION

44. I might begin first with my proposals in the field of indirect taxation.

Taking Customs first, it will be appreciated that the scope for raising additional revenues from, them is limited. Hon’ble Members are aware of the severe restrictions we have imposed on imports in order to curtail our foreign exchange expenditure. Moreover, import duties on most of the so-called luxury articles are already fairly high and the duties on capital goods and industrial raw materials have necessarily to be kept as low as possible. The proposals I have made envisage the raising of the rates of duty by small amounts on about 90 items. I have also taken this opportunity to rationalise the rates in the Customs Tariff which run into several hundred items. There is considerable diversity in these rates which is of no real significance and is in fact administratively cumbrous. I have tried to give the tariff rates a simpler form and in this process the surcharges have been merged into the basic rates. I have also availed myself of this opportunity to convert the rates of duty both in the import and export tariff in terms of decimal coverage. No other change is being made in the export duties. Altogether, my proposals in respect of import duties will yield a revenue of about Rs.6 crores spread over a large number of items, too numerous to mention here.

45. (Excise Duties) - I now come to Union Excise Duties. I may say at once that I have fairly substantial proposals under this head, and in doing so, I have in mind the double objective of restraining consumption and of giving a fillip to exports. I propose the following increases:-

(i) (Motor spirit) - The existing excise duty which works out at 96 N.P. per Imperial Gallon inclusive of surcharge be raised to 125 N.P. per Imperial Gallon. This will yield an additional revenue of Rs.6.65 crores in a full year.

(ii) (Refind Diesel Oil) - The existing duty of 25 N.P. per I.G. be raised to 40 N.P. per I.G. This is estimated to yield Rs.1.90 crores in a full year.

(iii) (Diesel oil, not otherwise specified) - The duty be raised from Rs.30 per ton to Rs.40 per ton, the additional yield from which over a year is estimated at Rs.35 lakhs.

(iv) (Kerosene) - The existing duty of 18.75 N.P. per I.G. be increased fractionally to 20 N.P. per 1.G. This will yield Rs.2 0 lakhs in a full year.

(v) (Cement) - The existing duty of Rs.5 per ton be raised to Rs.20 per ton, the estimated annual yield being Rs.6.7 crores.

(vi) (Steel ingots) - The existing duty of Rs.4 per ton be raised to Rs.40 per ton, yielding on an annual basis Rs.5.7 crores.

(vii) (Sugar) - The existing duty of Rs.5.62 per cwt. be raised to Rs.11:25 per cwt. This will yield Rs.18.55 crores in a full year.

(viii) (Vegetable non-essential oils) - The duty of Rs.7 0 per ton be raised to Rs.112 per ton. This will mean an increase from about 3 N.P. to 5 N.P. per lb. The estimated yield on this account is Rs.3.15 crores in a year.

(ix) (Tea) - The duty be raised as follows:-

(a) loose tea-from 6.25 N.P. per lb. to 10 N.P. per lb.

(b) package tea converted from duty paid loose tea-from 18.7 5 N.P. per lb. to 35 N.P. per lb.

(c) package tea-from 25 N.P. per lb. to 45 N.P. per lb.

This will yield an additional revenue of Rs.2.45 crores in a year.

(x) (Coffee) - The existing duty be raised from 18.75 N.P. per lb. to 35 N.P. per lb., the estimated additional yield being Rs.80 lakhs.

(xi) (Unmanufactured tobacco) - The duty be raised as under:-

(a) if other than flue-cured and used for the manufacture of cigarettes or smoking mixtures for pipes and cigarettes-from 56 N.P. per lb. to 75 N.P. per lb.

(b) if not flue-cured and not actually used for the manufacture of cigarettes or smoking mixtures for pipes and cigarettes and such tobacco cured in whole leaf form and packed or tied in bundles, hanks or bunches or in the form of twists or coils-from 37 N.P. per lb. to 50 N.P. per lb.

(c) if other than flue-cured and not otherwise specified-from 87 N.P. per lb. to 10 0 N.P. per lb.

The additional yield from these increases aggregates Rs.6.15 crores in a full year.

(xii) (Matches) - The existing duties be raised so as to permit of sale of match boxes at 6 N.P. and 4 N.P. per match box of 60’s and 40 is respectively. The gain to revenues in full year by these increases is estimated at Rs.6.2 crores.

(xiii) (Paper) - My proposals involve an increase in the existing duty on various types of paper the aggregate additional yield being estimated at Rs.2 crores on an annual basis.

46. These proposals in respect of Central Excise Duties are estimated to yield Rs.60.80 crores in a full year. For the remaining part of the current year, their yield is estimated at Rs.53.20 crores, out of which the share of the States will be about Rs.4.2 crores in respect of tobacco and matches.

47. In recommending these increases, I have kept in mind the need for a balanced increase among the various items I have listed. The increases proposed in respect of cement and steel are large, but they are warranted by the rapid increase in the demand for them within the economy and the situation of growing shortage and the consequent increase in retail prices which we are facing. The increase in the duty on sugar has the same objective as the increase we made last year in the excise duty on cloth, namely, to restrain domestic consumption in the interest of larger exports. In the case of matches, the existing duties were fixed with a view to ensuring sale at 3 piece per match box of 60’s and 2 piece per match box of 40’s. Under the decimal coinage system the equivalent of these pr ices comes to 4.7 N.P. and 3.1 N.P. respectively and this would have meant in effect a retail price of 5 N.P. and 3 N.P. respectively. With the increase in the excise duty now proposed, the retail price will be 6 N.P. and 4 N.P. respectively.

48. As regards tobacco, it is known that a Tobacco Expert Committee was appointed in January, 1956 under the chairmanship of Shri Raghuramiah, M.P., to review the procedure adopted in applying the criterion for assessment of unmanufactured tobacco. The Committee after careful consideration of the problem has recommended that the criterion of ‘capability’ of use for manufacture of bidis should be revised by the criterion of ‘physical form’ of tobacco other than flue-cured for purposes of assessment. Accordingly, such tobacco is proposed to be reclassified on the basis suggested by the Committee. For revenue purposes, the rates of duties on such tobacco are also being somewhat enhanced. With the proposed increase in the rate of duty on these two types of tobacco the rate of excise duty on unmanufactured tobacco for use in the manufacture of cigarettes is also being proportionately raised.

49. The tariff relating to paper has been re-arranged with a view to greater rationalisation and to absorb the higher profit margins now developing in the retail trade and the rates of excise duty which had been kept deliberately low in the initial stages are being enhanced.

50. Finally, following the increases in the rates of excise duty on vegetable non-essential oils and strawboards and millboards, the existing slab exemption in favour of small producers of these commodities are being suitably revised by executive notifications.

DIRECT TAXATION

51. I turn now to direct taxation. Firstly, I propose to make certain adjustments in personal income-tax and super-tax rates. Till now, these changes have followed a standard pattern which, I think, needs a fundamental change. It is necessary to recognise that the basic rates should apply to the person who earns his income, that is, sweats and tolls for it, and that others who derive their income from property and investments, that is, without making any direct effort should be made to pay more by a surcharge. Under the present system there is no provision for earned income allowance for supertax. For income-tax there is an allowance of 20 per cent subject to a maximum of Rs.4,000.for earned incomes not exceeding Rs.25,000. For incomes in excess of this amount, the allowance of Rs.4,000 is reduced at the rate of 20 per cent of the excess over Rs.25,000 so that for an earned income of Rs.45,000 the allowance is reduced to nil. I now propose to change this system altogether, applying a standard schedule of rates to all earned incomes and imposing a higher surcharge on unearned incomes. I have come to the conclusion that our existing rates of direct tax at top levels deprive the tax structure of all flexibility. It is said that they tend to diminish the incentive for work but I am aware that they encourage large scale evasion. It is now recognised that the very high rates of direct taxation in the top income brackets in many countries of the world are in practice tolerated or tolerable only because of considerable evasion that takes place. In other words, the high rates tend to be applied to a corroded tax base. I now propose a revised schedule of these rates and introduce a new scheme of surcharge levy which will mean that the total of the income-tax, super-tax and surcharge for the highest slab will be brought down from the existing level of 91.8 per cent to 84 per cent for unearned and 77 per cent for earned incomes. The surcharge will be 5 per cent on the tax computed at the standard schedule rates for earned incomes up to Rs.1 lakh and 10 per cent on incomes in excess of that sum, For unearned incomes, there will be a uniform surcharge of 20 per cent over the standard schedule rates. When a person’s income is partly earned and partly unearned, the unearned income will he considered to belong to the slab in which the earned income ends and to higher slabs where necessary. The rates for, the lower slabs have been adjusted in keeping with this change in respect of top slabs. To provide relief to the middle classes, I propose that no surcharge on unearned income be levied where the total income does not exceed Rs.7,500. The reduction in the rates of direct taxation will cost Exchequer Rs.71/2 crores. This reduction should, however, be judged in the light of the other changes in direct taxation which I mention later.

52. I propose also to widen the present income-tax base by reducing the taxable minimum from Rs.4,200 to Rs.3,000. The minimum limit had been raised over the past few years mainly for administrative reasons. An income of Rs.4,200, modest though it is in absolute terms, is quite a large multiple of the average level of incomes in the country. It is reasonable to expect that those with an income over Rs.3,000 should also make their contribution, however small, to the public exchequer, and should come within the range of direct taxation. As development proceeds, there will, I expect, be a large and progressive increase in the number of incomes within this range and I think it is essential if the Exchequer is to benefit proportionately from the expansion i of incomes consequent on development, that these incomes are brought within the income tax range. I, therefore, propose to place the exemption limit now at Rs.3,000 for individuals and Rs.6,000 for Hindu Undivided Families. I propose, however, to couple this with an increased allowance for married people. The extra tax-free slab of Rs.1,000 which at present applied to married people will now be raised to Rs.2,000. The wider coverage of income-tax consequent on this set of proposals will bring in about Rs.5 crores this year.

53. My next proposal relates to the taxation of Companies. I propose to raise the income-tax payable by Companies from the present level of 4 annas in the rupee to 30 per cent and the Corporation Tax from the present level of 2 annas 9 pies in the rupee to 20 per cent. As Hon. Members are aware, shareholders of Companies are entitled to credit of income-tax paid on their behalf by the Company. The net effect of the proposal to increase income-tax on Companies will, therefore, not be very significant. It will to some extent help us to cheek tax evasion. The need for corporate savings is as great as ever. In view, however, of the increase proposed by me in the rate of Corporation Tax, I propose to reduce the Excess Dividends Tax -

to 10 per cent on distribution of dividends between 6 per cent and 10 per cent of the paid-up capital,

to 20 per cent on distribution between 10 per cent and 18 per cent of the paidup capital, and

to 30 per cent on the balance.

During the debate on the Finance (No.3) Bill introduced by me last December, reference was made by certain Members to the stimulus that my proposals were likely to give to bonus share issues. I was aware then that with the increase in the rates of Excess Dividends Tax and the introduction of the Capital Gains Tax, there should be some change in the rates of tax on bonus issues. I have considered this matter and propose to raise the tax thereon from the present level of 121/2 per cent to 30 per cent.

54. At present, rates of super-tax for inter-corporate dividends are about 17 percent for Indian Companies and 20 per cent for foreign companies. With increase in the basic rates of Corporation Tax, these rates require adjustment. I propose accordingly, to reduce the rate of inter-corporate super-tax to 10 per cent for both Indian and foreign companies on dividends received from Indian subsidiaries. The effect of this will be that, so far as foreign companies working through subsidiaries are concerned, the total tax payable by them will remain practically unaltered. Similarly, for foreign companies operating through branches and earning other incomes, the rate of Corporation Tax will be reduced from 36 per cent to 30 per cent. I expect that, with these changes, there will be some encouragement to the investment of foreign capital in India.

55. My next proposal with regard to Companies relates to the tax on undistributed profits of companies in which the public are not substantially interested.

This tax has frequently been the subject matter of considerable argument. The principle on which the tax is based is unexceptionable, namely, that individuals having income in the higher brackets should not be allowed to avoid payment of super-tax by forming close corporations and not distributing their profits in such corporations. However, in the context of our development plans, we have to balance against the need to prevent super-tax avoidance the needs of companies for funds required for expanding industrial activities. I propose to reduce to 45 per cent the minimum percentage of available profits which an industrial company of the above type should distribute in order to avoid the penal consequences of inadequate distribution; for non-industrial companies the percentage will continue to be retained at 60 per cent. For a company which derives profits partly from industrial activities and partly from other activities, the minimum distribution required will be 45 per cent of available industrial profits and 60 per cent of other available profits. Investment companies will be required to distribute 100 per cent as usual. In cases where the accumulated profits and reserves are not less than the paid-up capital or the value of the fixed assets, the minimum percentage required to be distributed is at present 100 per cent for all companies. I propose to reduce the percentage to 45 per cent for the industrial companies and 90 per cent for others. With these reductions in the minimum amount required to be distributed, it will be unnecessary to continue the present scheme of adjudication by the Commissioner of income Tax and the Board of Referees on the business needs of companies seeking total or partial exemption from the operation of the provisions relating to minimum distribution.

56. There are certain other minor changes proposed upon which I do not wish to dilate here. These relate to exemption from income-tax of employers’ contribution to a recognised provident fund, increase in the percentage of the income that will qualify for rebate of income-tax If saved in the provident fund or insurance, limitation on the carry-forward of losses etc. I have also taken the opportunity of redrafting the provision relating to deposits to be made by companies of a portion of their undistributed profits and development rebate and depreciation allowances so as to bring out the Government’s intention more clearly.

57. Altogether, the changes I propose in the taxation of Companies will bring in additional receipts amounting to Rs.71/2 crores.

58. I come now to two new tax measures designed to alter the tax structure in a way that will ensure a more effective and at the same time a more equitable basis for taxation. My first proposal is to levy a Tax on Wealth. It is recognised that income as defined by existing income Tax laws and practice is not a sufficient measure of tax paying capacity and that the system of taxation on incomes has to be supplemented by taxation based on wealth. This is more equitable and it also promises, over a period, to reduce the possibilities of tax evasion. I mentioned earlier the reliefs in income-tax at top levels of income which I am introducing this year. These reliefs are meant as an encouragement to larger effort and greater initiative on the basis of which alone a healthy and progressive economy can be built up. It is necessary at the same time to adopt other measures which are egalitarian in intent but which do not have a disincentive effect. The Tax on Wealth that I am now proposing is one such measure. This tax will be payable by individuals, Hindu Undivided Families and companies. In the case of individuals, values up to Rs.2 lakhs and in the case of Hindu Undivided Families values up to Rs.3 lakhs will be exempted. In respect of wealth exceeding that amount the rate will be 1/2 per cent for the first Rs.10 lakhs, 1 per cent for the next 10 lakhs and 11/2 per cent on the balance. This will thus be a progressive tax which, together with the surcharges I have recommended in respect of income-tax on unearned incomes, will contribute towards a more effective taxation of the richer classes without diminishing incentives to earn in the process.

59. In the case of Companies, there will be no tax on assets up to a value of Rs.5 lakhs; on values beyond that the rate will be 1/2 per cent. The Wealth Tax is intended primarily as a measure of personal taxation but in the peculiar economic structure of India I consider it advisable not to exclude Companies from the purview of this tax. However, the rate of tax has to be low. This is why I have proposed a flat rate of only 1/2 per cent on assets above the exemption limit I have just mentioned.

60. Certain properties will be exempted from this tax., Some of these are:-

Agricultural properties;

Properties belonging to charitable or religious trusts;

Works of art;

Archaeological collections not intended for sale;

Balances in recognised provident funds and insurance policies;

Personal effects including furniture, care, jewellery, etc., up to a maximum of Rs. 25,000; and Books and publications not intended for sale. With a view to achieving simplicity in the procedure for evaluating the various kinds of assets which form part of a business undertaking, it is proposed as far as possible to treat the business undertaking as a whole as a single unit for valuation. Other assets will be taken at their market value. The yield from this tax is estimated at about Rs.15 crores.

The imposition of this tax as also the other measures now proposed should help in checking evasion. I am taking credit of Rs.5 crores on this account.

61. Broadly speaking, the administrative set-up and the procedure for assessment and appeal will be the same as for income-tax. With regard to valuation of immovable non-agricultural property, the assessee will be given a right of reference to an arbitration committee against the decision of the first appellate authority. This committee will consist of a valuer appointed under the Estate, Duty Act and another non-official member drawn from a panel of persons familiar wit) local property values.

62. The other proposal I make is the introduction of a Tax on Expenditure. This is a form of taxation which has no backing as yet of historical experience. It is however, a tax which. given effective administrative arrangements, can be a potent instrument for restraining ostentatious expenditure and for promoting savings. In the present circumstances, I think all we can do is to make a small beginning. I propose to levy this tax only on individuals and Hindu Undivided Families whose income for income tax purposes is not less than Rs.60,000 a year. The tax will be imposed on all expenditure incurred, from whatever source it may be, in excess of certain sums which will vary with the size of the family. The amounts excluded are:-

A basic amount of Rs. 24,000 for an assessee and his wife; and Rs. 5,000 for each dependent child.

The rate of tax will be based on a slab system, the rate for each slab increasing progressively with the increase in the level of expenditure. Thus, for excess expenditure up to Rs.10,000 the rate will be 10 per cent and for higher slabs the rate will increase progressively. As in the case of Wealth Tax, the administrative set-up and the assessment and appellate procedure will be the same as for Income-Tax. I propose to make this tax applicable from the financial year 1958-59 and therefore take no credit for any receipts in 1957-58.

63. I propose to levy a tax on railway passenger fares. The rate of tax will be 5 per cent for distances up to 30 miles, 15 per cent for distances between 31 miles and 500 miles and 10 per cent for longer distances. No tax will be levied on season tickets.

The yield of this tax is expected to be Rs.14 crores in a whole year. In the current year, the yield will be about Rs.8 crores. The proceeds of it less the amount attributable to Union Territories will have to be distributed entirely to the States. The States need more resources and railway travellers, like consumers of other commodities, should, under present conditions, make a contribution. I propose to seek the advice of the Finance Commission before I bring forward proposals before Parliament in regard to the actual distribution of the proceeds of this tax.

CHANGES IN POSTAL RATES

64. The Postal and Telegraph Branches of the Posts and Telegraphs Department are working at a loss. Except for unregistered letters and inland letter cards practically all items of postal traffic are carried at a loss. On a number of items like post cards, money orders, registered newspapers etc. the rates charged have, for many years, been substantially less than the cost of providing the service. For example, it has been estimated that the average cost of carrying a post card is 7.24 naye paise as against the present postage of 5 naye paise. This results in an annual loss of over Rs.155 lakhs.

Every increase in traffic in these items- and traffic has been increasing- results in an increase in the losses. With the progressively increasing expenditure on construction of staff quarters and the provision of other amenities for the staff, the existing postal rates are bound to prove even more uneconomic. The opening of unremunerative Post Offices and Telegraph Offices as part of the Department’s expansion schemes under the first and second five year plans has contributed to the loss in the Postal and Telegraph Branches. The Department has also been building up its capital assets at a fairly rapid rate, the total capital outlay at present being about three times what it was before independence. The annual provision, from revenue, for depreciation and replacement of these assets, as I have said before, is at present only Rs.1.25 crores, and it has been decided to increase this provision to Rs.2.50 crores during the current year in anticipation of a detailed examination of the whole question. In response to a demand which had been widely and persistently voiced by the book trade, both in and out of Parliament, Government had appointed a Committee to examine the question of charging a concessional rate of postage on bonafide books as compared with other items chargeable as packets so that the cost of sending books to rural areas which could be reached only through Post Offices might not be unduly increased. After considering the Book Committee’s Report, it has been decided to allow a concessional rate of postage on books. All these measures, however, inevitably result in reducing the surplus earnings of the Department and of increasing the losses of the Postal and Telegraph Branches. To ensure the financial stability of the Department, it has become necessary to raise some rates. On post cards, the existing rates of 5 naye paise for single and 10 naye paise for the reply post cards will be raised to 6 naye paise and 12 naye paise respectively. Postage on local, post cards will be raised similarly from 3 naye paise for single and 6 naye paise for reply post cards to 4 naye paise and 8 naye paise respectively. For packets containing bonafide books only, the postage on the initial weight slab of 5 tolas will be reduced from the existing rate of 6 naye paise to 5 naye paise but on other packets the existing rate of 6 naye paise will be raised to 8 naye paise. The postage on additional weight slabs, in both these cases, will remain unchanged. In spite of these adjustments in the book, sample and pattern packet rates, the traffic in this category of articles will continue to result in a loss of over Rs.8 lakhs per annum. The rates on parcels will be increased from the existing level of 50 naye paise for every 40 tolas or fraction thereof to 60 naye paise for the 1st 40 tolas or fraction thereof and 50 naye paise for every additional 40 tolas or fraction thereof. On inland telegrams, the charge for every additional word over the minimum of 8 words will be raised from 7 naye paise to 8 naye paise for ordinary and from 14 naye paise to 16 naye paise for express telegrams. The additional revenue expected in the current year from these increases is Rs.85 lakhs.

RECAPITULATION

65. I must now recapitualate briefly the proposals I have made so far:-

(i) Firstly, my proposals involve small increases of import duties on a number of articles, the additional yield from which during the year is estimated at about Rs.6 crores.

(ii) Secondly, the proposals I have made in respect of excise duties involve an enhancement of the rates of duty on various items such as motor-spirit, refined diesel oils and vaporising oil, diesel oil not otherwise specified, steel ingots, cement, sugar, matches, unmanufactured tobacco other than flue cured, vegetable non-essential oils, and paper. The additional revenues on this account are estimated at Rs.53.20 crores for the remaining portion of the current financial year but Rs.4.2 crores will be payable to the States as their share of the additional duties on tobacco and matches.

(iii) Thirdly, the proposals I have made in regard to personal income-tax and super-tax are estimated to bring in Rs.25 crores in the current year of which the share of the States on account of income-tax will come to Rs.3 crores. The reduction in incomer-tax and super-tax rates involve a loss of Rs.7.5 crores. The lowering of the exemption limit is estimated to yield Rs.5 crores. The adjustments in Company taxation will yield about Rs.7.5crores. The Tax on Wealth is estimated to yield Rs.15 crores, and to this I add Rs.5 crores by way of better collections of income-tax reflecting a reduction of tax evasion. The changes I have suggested in direct taxation do not make a big addition to public revenues this year but I expect that they will make an increasing contribution to the Exchequer as we get more experience with the new forms of taxation I have proposed and as the machinery for assessment and collection gets geared to its new tasks.

(iv) Fourthly, I have proposed a tax on fares payable by passengers travelling by Railway. This will yield Rs.8 crores which will be distributed entirely to the States.

(v) Fifthly, I have proposed changes in postal and telegram rates which are expected to yield a revenue of Rs.85 lakhs.

(vi) Sixthly, I have proposed an Expenditure Tax which will be effective from 1958-59 but will apply to expenditures incurred in 1957-58.

66. The net accretion to the Central revenues as a result of these proposals will amount to Rs.77.85 crores and the revenue budget will now show a surplus of Rs.44.73 crores. Ordinarily the over-all deficit would, as a consequence, amount to Rs.290 crores, if the additional revenue of Rs.15 crores which would be passed on to the States as a result of these proposals is not taken into account. As Hon. Members will observe from the White Paper, Central assistance to the States for financing the Plan during 1957-58 has been placed at Rs.278 crores. As a result of the additional revenue accruing to the States, there will therefore be a corresponding reduction in this figure, the reduction being taken in the provision for loans to the State Governments.

The overall deficit will thus amount to Rs.275 crores and will be met by expansion of Treasury Bills.

TAXATION AND DEVELOPMENT

67. I would like to say a few words about the import of these proposals. We are pledged to move in the direction of a socialist society. This means that we wish to develop an efficient system of production and an equitable pattern of income and wealth which will ensure well balanced progress. Such a system requires a strengthening of incentives to work and to save. This is the rationale of my tax concessions in earned incomes. A standard rate of tax on earned incomes, and a differential rate for taxation of unearned incomes, coupled with a tax on wealth and a tax on expenditure, will give us a better basis for assessment of tax liability, especially in respect of higher income ranges, and will help us to close progressively the loop-holes for tax evasion and corrosion of the tax base. If I have brought down the exemption limit for tax liability it is, firstly, because the present limit is too high in relation to the average, level of incomes in the country, and secondly, because I am of the view that the ground must be prepared from now on for bringing into tax net the increases in incomes which will take place in these ranges in the coming years. All my proposals in the field of direct taxation form an inter-related whole, and should, I suggest be judged as such.

68. My proposals in respect of company taxation are designed not merely to increase revenues but also on balance, to encourage the ploughing back of profits through a cheek on dividend distribution. These measures are not intended to curtail genuine investment in the private sector, though it would not be unreasonable to assume that a slight slowing down for a short period will not, in present circumstances be undesirable. There are, however, other devices to regulate private investment. I wish, therefore, to retain the bias in the tax structure in favour of corporate investment.

It is for this reason that I have left untouched the existing liberal depreciation allowances and the system of development rebates, which it is recognised on all hand, are a powerful incentive for investment. I have also as I mentioned earlier, re-adjusted the tax rates to encourage foreign investment. I recognise that the shareholder or the investor expects to get a reasonable return on his capital, but I also think that under modern conditions there is even greater need for providing incentives for those who work and manage concerns and thus fall within the category of earned income earners.

69. My proposals involve a raising of burdens on the near necessities of the common man. This is inevitable in the present circumstances, These burdens, large as they may look in the aggregate, have a low average incidence. A process of development in a country where most incomes are low cannot be financed without calling for sacrifices from all sections of the community, and there are special reasons at this juncture for applying some restraint on consumption in order to cheek inflationary pressures and to stimulate exports. I recognise, at the same time, the need in particular sectors may well be from time to time to assist in maintaining consumption at a reasonable level in terms of the minimum nutritional standards, and to this end, it may be necessary to subsidise food. My intention, therefore, is to build up from out of the additional receipts of taxation a food subsidy fund of the order of Rs.25 crores. This fund will be used to keep down food prices, particularly for the mere vulnerable areas and would I think prove a valuable instrument in the hands of my Honourable colleague, the Food and Agriculture Minister.

70. The proposals that I have made will still leave the overall deficit for the year at a level somewhat higher than I would consider safe; but it is not unwise in my judgement to run a measure of risk especially If by doing so the expansionary impulse in the economy can be maintained at a reasonably high level. A budgetary deficit involves creation of fresh purchasing power in to the hands of the public than it withdraws from it. The stresses and strains that have developed in the economy are a warning against unrestricted deficit financing. I am not against deficit financing as such; I recognise it can play a role in promoting development. But it is a medicine to be taken in small closes; it is not food that would sustain the system. On the whole, I doubt If we shall be able over the Plan period to undertake deficit financing of the order indicated in the Plan, and this means we have to raise more resources by taxation, loans and small savings. Considering the needs not only of the current year but also of the next few years in terms of the second five year Plan, I am convinced that the measures I have placed before the House today are essential and salutary.

71. Indeed, I feel confident that over a period, they will help us in getting out of the stagnancy of public revenue relatively to national income, which is a bottleneck from the point of view of further developmental planning. The ratio of public revenues to taxation in India is low, even by the standards of relatively under-developed countries.

The way to raise it is to initiate structural changes in the tax system so as to make it more progressive in terms of returns. The emphasis of my proposals is on this aspect of the tax problem. The propriety of the changes I have suggested should be judged in this light rather than in terms of their immediate yield. I have in effect, outlined the tax structure for the Plan period. There will, undoubtedly, have to be some adjustments in this structure from year to year, but I expect that these adjustments will be relatively small, and of a marginal character. For the rest of the Plan period, our aim will be to watch how the changes I have initiated this year work in practice and how the system can be improved upon-to the benefit of the tax payer no less than in the interest of the tax-receiver. Within this broad framework, I believe, all concerned can proceed with their plans with confidence and assurance of sympathetic consideration by Government of any genuine difficulties.

CONCLUSION

72. This brings me to the end of my story; I am aware that the policies and proposals I have placed before you add up to a varied and somewhat formidable bill of fare. But the exigencies of the situation demand nothing less. There are moments in the history of every nation when it must advance on a great many fronts at the same time. The task before us is not merely one of raising resources for the immediate needs of the Plan. We have also to attempt at the same time a rationalisation of the tax structure so that it can sustain a mounting crescendo of developmental effort in CW years to come. I am one of those who also believe that the greatest advances towards economic equality and positive social improvement are made in difficult times when the conscience and the solidarity of a people are raised to the highest pitch. This I believe is one of the chief lessons of the second world war. Sacrifice on a nation-wide scale and injustice or excessive inequality go ill together. And that is why I have endeavoured in the present budget to snatch from the needs of the moment an opportunity for imparting a new turn to our tax structure towards greater efficiency and I hope greater equity. A heavy responsibility rests on us all at this juncture, and I have presented to the House an approach in terms of policies and of proposals which is to the best of my judgement appropriate to this responsibility. I hope when the time comes for someone to judge whether we rose to the occasion or not, we shall have to our credit a record worthy of this House and of the nation.