Budget Flashback: An Economic Journey Through Decades

As we approach the financial D-day in India, let’s take a sneak peek into the past and know what impact union budgets have created on the nation’s financial fortunes. Since most of our readers following the union budget currently may not have been able to go through budget details of the past, we aim to give you a brief coverage of the union budget in India across the decades. This lesson intends to look at the impacts that the union budget has created in the most unbiased manner possible, at the same time scrutinizing their progressive and regressive effects. 

by Swati Sinha
1 year, 1 month ago

The first budget of Independent India was delivered in November 1947 by R K Shanmukham Chetty and covered the period of 15th Aug – 31st March 1948. Heavily reeling under the impact of partition and the Bengal famine of 1943, a major part of the expenses were allocated towards import of food grains and rehabilitation of refugees. Socialist policies continued to be adopted as policymakers concentrated their efforts towards nation-building.

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The year 1950 heralded a new era for India when formation of the Constitution established it as a Republic. In fiscal year 1950, agriculture, forestry, and fishing accounted for 58.9 per cent of the gross domestic product (GDP)and for a much larger proportion of employment. Manufacturing, which was dominated by the jute and cotton textile industries, accounted for only 10.3 per cent of GDP at that time. The economy was overshadowed by high inflation, low savings, low investments and these factors called for immediate and radical measures to be taken for the steep road ahead. The budget in 1950 was the stepping stone to development of India as it initiated setting up of the Planning Commission which got implemented in 1952. The Planning Commission has played a vital role towards the development of the nation through its systematic approach. Like the two sides of a coin, the role of the Planning Commission is debated and manages to find critics ready to point fingers at it for the slow rate of economic growth. The 1950 budget also saw decrease of the maximum income tax rate from 30% to 25%.

John Mathai’s stint as the FM was followed by that of C D Deshmukh who had the distinction of being the first RBI governor to hold this portfolio. He is credited with setting up of a high powered. Development Committee to focus on industrial growth. During the 1950s the then PM, Shri Jawaharlal Nehru, strongly believed that steel played an important part in infrastructure development and special emphasis was laid on the development of the industry during the Second Five Year Plan. Three new 
integrated steel plants were set up at Rourkela (Orissa), Bhilai (Madhya Pradesh) 
and Durgapur (West Bengal) under the tutelage of Hindustan Steel Limited.

There were far-reaching implications in the latter half of fifties when an import licensing system was established, putting several restrictions on import. Various changes in taxation were brought about- right from wealth tax to tax on railway passenger fee. Income was segregated based on its source into active (salaried, self-employed) and passive (through rental or interest income). The Export Risk Insurance Corporation was also set up to support exporters by providing export credit insurance. With import restrictions in place, raising external debt became increasingly difficult. These policies have drawn heavy criticism over the years as they insulated Indian companies and businesses against competition and made them inefficient and capital-intensive.

TT Krishnamachari, the fourth FM of independent India, was instrumental in the establishment of the Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Unit Trust of India, Damodar Valley Corporation and Neyveli Lignite projects.

Nationalisation of life insurance companies led to the formation of LIC in 1956, followed by an uproar in the Parliament regarding loss to LIC through purchase of fraudulent shares in Haridas Mundhra’s company in early 1958. Days before the annual budget was to be presented, T T Krishnamachari resigned from the FM’s post and Jawaharlal Nehru was forced to present the budget, becoming the first PM in India to do so. Pt. Nehru introduced gift tax in this budget.

Soon after the budget, Morarji Desai took over the finance portfolio and continued to hold the portfolio till 1963.

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Food security became a major cause for concern in the 1960s and captured the imagination of policymakers for a major part of the decade. Though self-sustenance in food supply was the primary objective, the situation worsened during the 1960’s when two severe drought years led to a sharp increase in import of food grains. Indo-China war and Indo-Pak war also added to the woes as defence expenditure increased and a substantial part of food-supplies were directed towards defence personnel posted at the borders.  

Most of the budgets were drawn keeping in mind that agriculture sector needed an impetus at all cost. Substantial investment was made in rural infrastructure to make India an agrarian economy. Power and irrigation sector which were the key support mechanisms for agriculture were prioritised both at the Central and State government level. Cheap institutional credit and other subsidies were given to encourage farmers
for private investment in agricultural support mechanism such as irrigation thus, leading to large-scale agricultural output. Due importance was given to procurement, management and distribution of food-grains, resulting into formation of Food Corporation of India during the mid-1960s. Large investments were also made in
agro-based research & development under the aegis of Indian Council of Agricultural Research.

Technological upgradation became need-of-the-hour to keep continued focus on agriculture. To emulate the success of Green Revolution in Mexico and USA, India had to systematically invest in plant breeding, irrigation development, and financing of agrochemicals. The seeds of agricultural focus laid in the 1950s and 1960s reaped benefits when in the years to come India was not only self-sufficient but also became a major exporter of agricultural products.

Apart from the agricultural focus, there were some other key budgetary decisions taken during the 1960s. During his second stint as FM, TT Krishnamachari proposed setting up of Commission of Inquiries Act in the budget of 1964-65. Monopolies and Restrictive Trade Practices (MRTP)Commission was set up to enquire into and take appropriate action in respect of unfair trade practices and restrictive trade practices. In the budget of 1968, deputy PM and FM, Morarji Desai, introduced the system of self-assessment of goods by small and big manufacturers. This proved to be major boost for the manufacturing sector as it resulted in procedural relaxation, eliminating the role of Excise Department in quality control. He also removed the spouse allowance which resulted in making husband and wife as individual tax assesses.

The end of this decade also saw another important decision of the government – first phase of nationalisation of 14 major banks (except SBI).

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Morarji Desai was strongly opposed to the socialist vision being gradually adopted by the then PM Indira Gandhi and resigned from the government. Thus, Mrs. Gandhi
became the first and only woman till date to present the annual budget (1970-71) as she was herself handling the Finance portfolio.

The focus on agriculture continued through the 1970s and mixed results were obtained owing to some odds.  Another revolution was about to take shape that in the future would boomerang India into the big-league of diary exporters – the White Revolution or Operation Flood. The first phase of Operation Flood started in 1970.  National Dairy Development Board collaborated with European Economic Community (now EU) for Operation Flood, which received ample attention from the government as well. The program was immensely successful in tackling seasonal price fluctuations of milk & fair price available to milk producers through elimination of middlemen. The Operation Flood – Phase I originally meant to be completed in 1975, actually spanned the period of about nine years from 1970–79, at a total cost of Rs.116 crores.

India was on the verge of an economic crisis thanks to recession, high unemployment, inflation and scarcity of foodgrains. The combined cost of Bangladesh war along with the burden of feeding and sheltering refugees during 1971 had depleted the grain reserves, leading to a steep fiscal deficit. The war had taken its toll on foreign exchange reserves as well. Teeming millions suffered a terrible drought in most part of the country caused by failure of monsoon rains in 1972, followed by 1973. As a result, there was massive shortage of food grains and whatever little was available, the prices were skyrocketing.

A cascading effect of the drought was seen. There was a downfall in power generation as well and combined with the fall in agricultural production, saw a sharp decline in demand for manufactured goods, causing industrial recession Thus, a rise in unemployment levels in 1973 was inevitable. The global economy didn’t give a much different picture though the reason was different - global prices of crude oil increased four-fold, prices of petroleum products and fertilisers had hit the roof. With all this, prices rose continuously, registering a 22 per cent increase in 1972-73 alone. Price
rise had affected both the rich and the poor and food scarcity became the biggest problem to tackle in day-to-day life. Large-scale industrial unrest had become the order of the day and scores of strikes happened in different parts of the country during 1972 and 1973, culminating in an all-India railway strike in May 1974 which lasted for 22 days.

The budget of 1973, presented by Yashwantrao Chavan is supposed to have an adverse impact on coal production. The budget brought two major decisions – nationalisation of general insurance companies and coal mines. All major coal mines were brought under the umbrage of government owned Bharat Coking Coal Limited (BCCL) which had to face no market competition. India has been an importer of coal for the last four decades which is mainly attributed to the decision of nationalisation of coal mines.

Turbulent times had hit Indian politics and political parties opposed to Congress
principles came into prominence.

The year 1977 saw the first budget presented by a non-congress government. H M Patel delivered the shortest budget speech till date (800 words) and this budget ended barriers to foreign investment at the same time protecting home industries. He introduced the policy of Indian companies holding a 50 per cent stake in foreign companies operating business in India.

In the budget of 1979, Charan Singh introduced heavy excise duties on goods of mass consumption like prepared or preserved food, tea instant coffee, biscuits, processed cheese, cocoa powder, chewing gum and chocolate. Prices spiralled upwards by 21 per cent.  The automobile industry became a victim of high duty rates – duty on two and three-wheelers was increased from 13.13 per cent to  20 per cent duty, while the duty for cars went from the already high 18.38 per cent to 25 per cent. 

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Though much has been discussed about the rise and shine of India in the period starting 1991, the governments of Indira Gandhi and Rajiv Gandhi had started laying the foundation in the 1980s. Some sections of the MRTP Act were let go off for good,
which helped in growth of chemicals & cement business. The private sector started to contribute more towards economic development. The agricultural sector made rapid strides in the 1980s and this reflected in reduction in the percentage of people living in abject poverty to around 39% from 51% at the starting of the decade. However, this growth was propelled by a string of subsidies provided to the agricultural system and hence was not sustainable in the long run.

The budget of 1980 was mainly directed towards bringing little comforts into the life of
rural masses. Excise duty exemption was provided to life-saving medicines, cycles, sewing machines and pressure cookers and licence fee on radio was also removed. Several export incentives were introduced after 1985, relaxing the foreign exchange constraint. Only 50 per cent of business profits sourced from exports was income tax deductible.

There was a major reform of the tax system in the budget of 1986. FM, V P Singh converged the multi-point excise duties into a modified value-added (MODVAT) tax. Under the MODVAT scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in the manufacturing process. MODVAT Scheme ensured that revenues received were of the same order as in the past and at same time the price of the final product could be lower. The cascading effect of tax payable at each and every stage of manufacturing was eliminated. Thus, the scheme brought certainty to the tax structure and also ensured that consumers could understand the tax component in the final product. The proposition for setting up of Unit Trust of India's Mutual Fund and Mahanagar Telephone Nigam Ltd. for Delhi and Mumbai also came up in the budget of 1986.

Against the background of country-wide raids being conducted in 1987, Congress loyalist V P Singh was stripped of the finance portfolio by PM Rajiv Gandhi. Continuing the trend set by his grandfather & mother, Rajiv Gandhi became the third PM to present the Union Budget. He proposed the minimum corporate tax, known today as 
MAT or Minimum Alternate Tax.  MAT ensured that no company could evade the tax net and each company should pay a tax of at least 15% of book profits. MAT became a considerable source of revenue for the government in the years to come.

In the 1988 budget, two pronged measures ensured that exports were further boosted – firstly, by providing 100 per cent income tax exemption to export profits and secondly, by reducing interest rate from 12 to 9 per cent on export credit. Imports of petroleum, oil and lubricants imports declined and manufacturers instead invested in import of machinery and raw materials.

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Indian economy had been growing at an average rate of 3.5% for the period of 1950 – 1980 and showed a silver lining in the 1980s. This slow pace was frequently termed as the Hindu rate of growth which was also characterised by very low increase in per capita income over the years. Though some development activities had happened in the 1980s, they had dented the exchequer badly as they were based on subsidies or incentives. The inefficient functioning of many of the central and state public sector 
enterprises further burdened the government budget. By 1990, internal debt liabilities had increased to 53 per cent of GDP interest and 24 per cent of total government expenditure was directed towards interest servicing. The signs of an economic meltdown had started showing in the form of a huge fiscal deficit. Raising international credit also became difficult as India’s credit rating had been downgraded. Adding to the woes was the Persian Gulf War which doubled oil & petroleum prices. Inflationary trends were also registered as high as 17 per cent in 1991.

Also, economies across the world had started changing rapidly. To keep pace with global trends and to propel India towards unsurpassed economic growth, the government needed to take drastic measures that would help it to step on the accelerator. Middle classes frustration towards India’s slow economic progress was answered by then FM, Manmohan Singh through the LPG policy adopted – Liberalization, Privatisation and Globalisation in the early 1990s. Short-term goals such as increase in foreign exchange reserves, reduction in fiscal deficit, reforms in trade policy were focussed on. Middle-term goals were set such as disinvestment and professional management of public sector enterprises, strong progress of capital markets. It also needs to be remembered that building blocks of the economic reforms had been laid by Yashwant Sinha during the interim budget he presented in 1991 and Manmohan Singh was able to further capitalise on these while presenting the annual budget in July 1991.

Liberalization was adopted by abolishing stringent licensing norms. Concerted efforts were directed towards making public sector companies profitable, through disinvestment, mergers and acquisitions and organizational restructuring. Globalization not only helped in inflow of foreign direct investment but also brought
rapid strides in production technology and increased access to world markets.

Though the first few years did not yield much result, ripples of change were observed post mid-1990s. IT sector benefitted heavily from the tax incentives provided to software exporters which in turn made India the IT capital of the world. Also, notable is the fact that proposition for formation of SEBI had come up in the late 1980s, it was established and endowed greater powers in the early 1990s which resulted in systematic development and growth of capital markets in India.

The year 1997 is remembered by industry doyens as the year of the dream budget presented by P. Chidambaram. Pro-industry changes were ushered such as adjustment of MAT paid in advance against tax liability of subsequent years and slashing of surcharge rate on corporate tax from 15 per cent to 7.5 per cent. India Inc welcomed the budget as corporate tax was reduced to 35 per cent and the maximum slab for income tax was reduced to 30 per cent.

However, despite policy changes, there were miles to go before economic disparity could be reduced. Abject poverty was still prevalent on one side and the great economic divide was on display when a demand for luxury goods was seen on the rise.

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The dawn of the millennium brought further changes and Indian economy witnessed some highs and some lows in this decade. Yashwant Sinha, who presented the first budget of the millennium worked on boosting the confidence of IT sector by phasing out the tax holiday enjoyed by the sector in the last decade. IT sector successfully rose up to the challenge, relying heavily on its talent pool. MODVAT made way for CENVAT, wherein restrictions of the MODVAT Scheme were put to an end. This helped in promoting industrial growth within the country and CENVAT scheme continues as a form of tax revenue for the government.

The foundation laid in the previous decades was finally giving outputs that catapulted India to the status of the second fastest growing economy in the world. Economic reforms picked up pace in 2000-04 and fiscal deficits showed a downward trend after 2002. Growth rate throughout the decade clocked at an average of 8 per cent. Industrial growth was boosted by setting up of Special Economic Zones and Agri-Economic Zones to promote exports. State-level industrial policies were also formulated to attract investments.

Amongst the zeal to promote industrial growth, agriculture sector had taken a back-seat during the decade staring from 1990 and the trend continued even in the 2000s. The ugly side of life was unleashed when a spur in farmer suicides forced the government to spare some attention towards this sector. In the budget of 2008 delivered by P. Chidambaram, the government provisioned for waiving off all loans given to small and marginal farmers. This populist move of the government was heavily criticised for its politically motivated timing, exclusion of informal loans (from sources such as money lenders). An estimated 716.8 billion rupees was spent on this initiative. National Rural Employment Guarantee Scheme was also introduced in the later part of the decade to create employment opportunities in rural areas.

The hornet’s nest was stirred when economic turmoil across the globe also came knocking to India’s door-steps in 2008. The economy was globalized enough to feel the trembles of fall of financial giants such as Lehmann Brothers, but thanks to sound banking practices India did not see any infamous collapses. The government had to quickly get into action to have industry-specific relief packages and India soon emerged taming the storm.
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India has grabbed the attention of the world by showing its resilient side time and again. The start to this decade has not been that auspicious with fiscal deficit levels giving constant worry to the government. It is time that India gears up for greater growth and inclusive development of all sections of society. The budget of 2013-14 will play a crucial role in which direction the economy sails; only time and tide will
decide if India is ready to take the next big leap!

The rapidious economic progress in recent India is talked by one of the greatest superstars ...
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1. Independent India
2. The 1950s - Seeds for building an economy are sown
3. The 1960s - Small steps towards economic progress
4. 1970s - Political turmoil eclipses the Indian economy
5. 1980s - Light at the end of tunnel
6. 1990s - Guiding India through the doldrums
7. The 2000s - India, Rising & Shining
8. What the future beholds
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