FEBRUARY 27, 2011

Tracing The Union in Budgets!

By Swarnendu Biswas, Asst Editor

A study of the Union Budgets presented over the decades can afford a wonderful insight into how, over the years, our economy has been shaped and reshaped, and eventually grown, both in terms of size and complexity. It can also give a glimpse into the changing and not so changing socio-economic issues, and the economic and financial challenges of a particular era; both pertaining to national as well as global economy.

From studying the excerpts of the budget speeches, we can gauge that how much our economy has changed and how much it has remained essentially the same. For example, from studying the budget speeches of yesteryears, we can easily realize that the inflation is not a new phenomenon. The country was plagued by this seemingly perpetual problem since the onset of Independence. Let us have an excerpt from the Budget Speech of the First Finance Minister of Independent India to drive home the point:

“The deterioration in the economic situation has been particularly noticed in respect of prices which have shown an unchecked upward tendency. Between the 5th April and the 9th August this year the Economic Adviser's index number of wholesale prices rose by 7 points while the Bombay cost of living index advanced by 14 points. Taking the Bombay cost of living index number, while it was 243 in August 1945 it rose to 267 in August 1946 and reached 284 in August 1947. The chief factor which has contributed to this development is the general decline in agricultural and industrial production in the country due partly to the wide prevalence of communal disorders and generally to the increasing Industrial unrest. While the supply position has been

deteriorating, increases in wages and salaries given by private employers and the Government had the effect of augmenting the purchasing power of the people and widening the gap between current money income and production of goods. The situation would not have been so bad if the unbalance between money and goods was confined to these factors only. The most disturbing factor which affects the situation today is the unspent balances of individuals and institutions accumulated during the peak years of inflation which are being spent on the deferred wants of individuals, repairs to industry and on the building of trade inventory. In other words, the money demand for goods is colossal compared to their local production.” These were the excerpts from the Union Budget speech of RK Shanmukham Chetty for the Union Budget of 1947-48, which was the first budget of post-Independent India.

Inflation Then … Inflation Now

Yes, inflation was a huge issue, even six decades earlier too, as it is now. Only its effect and scale have diversified and enhanced respectively. However, then the agricultural and industrial production suffered setbacks due to communal disturbances and “increasing industrial unrest,” which is understandable for an infant nation born out of the bloody operation of  partition, but  now the setbacks in agricultural productivity is blamed by the ruling government, broadly on drought  and hoarders. The fact that a sixty three year old democracy and a so called rising superpower is still hapless before nature and the hoarders does not follow a natural course of logic, and reflect a real drought of pragmatic ideas. And surprise of surprises, then also the then Finance Minister hinted that the favorable economic climate had contributed to inflation. Just consider this following excerpt from the Union Budget speech of 1947-48:

“While the inflation in war time was due to the large increases in currency circulation (which rose from Rs. 172 crores in 1939 to over Rs. 1200 crores at the end of 1945) without any tangible increase in the supply of goods the present inflation is not due to further increase of currency but to a steady fall in the supply of goods. Although the total available money, whether currency or bank deposits, has slightly fallen it has spread out more among a wider circle of people in the form of wages and salaries and thus the actual purchasing power in the hands of those who spend it on ordinary goods has greatly increased. But the supply of goods has meanwhile fallen and has resulted in an upward trend of prices.”

Yes, it is always convenient to blame inflation on the so called favourable economic climate, so as to soothe its affects for the general public at large, and make them feel good.  In the recent times, our present Prime Minister too stated something on not much dissimilar lines. He said that some of the increase in the prices of relatively superior food products like milk, eggs, meat and fish was partly attributable to rising income levels. Strange thing to say in a country where more than 35 percent people are still fighting against the invasion of the continual tsunami of poverty, with almost another 40 percentage of populace already drowned under the poverty line.

The phenomenon of inflation has its presence felt in the Indian economy over the decades, which resulted in the real value of money plummeting to unimaginable proportions within six decades. This can be indicated by the income tax exemption limit, which many think is a popular safeguard in the budget to somewhat soothe the effect of inflationary pressures on the general populace. Let us just go through the excerpts of the Union Budget speech of 1950-51, made by John Mathai, to illustrate this point where he talked about hiking the income tax exemption limit. The 1950-51 budget was the first budget after India became a modern day republic state.

“My third proposal in regard to income tax is that the exemption limit for an undivided family, which was raised from Rs.3, 000  to Rs. 5,000  last year, should be raised to Rs. 6,000. With regard to the Corporation Tax, I propose that the Corporation Tax should be increased from two annas to two and a half annas. But the net result is that in conjunction with the reduction in the maximum income tax rate, the total company rate of taxation will be reduced from seven to six and a half annas,” asserted Mathai in his budget speech.
 
Yes, in the 1950-51 Union Budget, the first Union Budget of the republic of India , the income tax exemption limit was proposed to increase to Rs. 6000 per year or Rs. 500 per month. In the Union Budget 2009-10, it was raised from 1.5 lakh per annum to 1.6 lakh per annum. That amounts to almost 2500 percent increase in income tax exemption over 60 years. This trend affords us considerable glimpse on the declining value of money, and perhaps also some indication on the improvements in the general standard of living in India , over the decades. Mathai's budget speech on corporation tax also makes us realize once more the long lost innocence behind the long lost value of annas , about which nobody talks these days.

Taxing Times

The seeds of the black money tree, which has attained monstrous proportions in today's times, with its branches spread through tax havens scattered across the globe,  may perhaps be traced to the abnormal rates of taxation of the Nehruvian era, a policy which was myopic to say the least. An excerpt from the speech of the former Finance Minister CD Deshmukh, from his budget speech of the Union Budget of 1955-56, unravels to us that it was economically implausible for an honest man to go rich during the nascent years of independent India. The said fiscal witnessed the beginning of the Second Five Year Plan, probably the most talked about and controversial Five Year Plan of independent India till date. The plan signaled the heralding of a new dimension to the Indian growth story, by hugely investing it with capital-intensive hues.  

“I now come to income tax. The only change I propose in personal taxation is a slight adjustment upwards of the super-tax payable on incomes above Rs. 70,000. With this adjustment, the rate of tax on the highest slab of income, that is, above Rs. 150,000 will be 91.9 per cent against the present figure of 88.6 per cent. The extra revenue on this account will be about Rs.1 crore,” read Deshmukh, and the reverberations of his words must have cast a pall of gloom in the hearts and minds of several top-notch honest professionals and entrepreneurs of those times.

Of course, the reason for such high rates of taxation could be unjustly justified through the Nehru-Mahalanobis plan, the theoretical edifice of the Second Five Year Plan(1956-61),  which laid great stress on building of the industrial foundation of India through development of the basic industries and the consequent production of capital goods, which of course entailed huge state investment, but some of the ‘taxing' repercussions of the socialistic model of Indian economy in the 50s were that it dampened the spirit of entrepreneurship, and encouraged the sprouting of the black money economy. We can see from our budget history, that too much socialism is not good for any nation.  

The Reality of Deflation

Another interesting excerpt from the same Union Budget speech draws our attention to the fact that India has had also experienced the rare global economic phenomenon of decrease in prices, even as recently as during its independent history. “The downward trend in wholesale prices which began in 1953 and gathered momentum in 1954, was halted by May 1955 when the wholesale price index reached a low of 342. Since then the index has been rising continuously and in December 1955 it reached 368.4, more or less on par with the level in December, 1954,” read out Deshmukh, some more than five decades ago. He further added, “The all-India index of cost of living moved down from 97 in December 1954 to 92 in May 1955, mainly due to a fall of about 7 per cent in the food index. By October, 1955, the general index had again moved up to 97. Later figures indicate that cost of living indices have moved up in the last quarter of the year, in keeping with the general trend of wholesale prices. The average level of 1955 as a whole, however, is lower than that for 1954.”

Today a common man in India , who is ravaged by inflation, especially food and fuel inflation, would probably be wishing a simulation of the economic situation of 1953-55, but a continuation of such a situation for decades together is hardly desirable, and can eventually result in deflation. A sustained decline in prices reflects poorly on the general economic condition of the country, and on the purchasing power and incomes of the people in the economy. It is undesirable to have inflation or deflation, rather a slight and sustained increase in prices is a sure sign of a growing and healthy economy.

(To be continued tomorrow)