Successive Indian governments have tried to do what they can’t: target economic growth and equitable distribution simultaneously
The finance minister recently said something about her forthcoming Budget being the only one of its kind in 100 years. People laughed at her.
Technically, however, what she said is true by a slender margin. We have not had a lockdown caused by a pandemic ever before. But there was one other occasion when the finance minister had to present a Budget in equally terrible, if not worse, circumstances — in 1947, just after India had been divided by the British into two countries.
Sir R K Shanmugam Chetty, a businessman from Madras with no particular expertise in the business of running government finances, presented that Budget. No one knows even now why Jawaharlal Nehru chose him as the first finance minister of independent India.
It’s worth mentioning here that independent Pakistan also chose a man from business — from Mahindra & Mahindra, in fact — as its first finance minister. But there is no proper record of what he did. He did present a five year plan, though.
Chetty presented his first Budget on November 26, 1947. It was an interim one. The main Budget was to follow three months later. In 1947 and 1948, there was a huge fiscal burden from paying off Pakistan to go away and paying for the refugees it sent in return. And because of demobilisation after World War 2, the defence services were gobbling up the bulk of the government’s revenues. As usual, the government was broke.
Déjà vu
The most important part of Chetty’s Budget speech was the reference to a high levels of taxation and the cheap borrowing by the government. Déjà vu.
In those days, the Reserve Bank of India (RBI) was privately owned. Mr Chetty told Parliament that its board had admonished the government for saying that both high taxation and cheap borrowing were proving a disincentive for private industry. Déjà vu again.
So he didn’t raise taxes, and left a small deficit — Rs 25 crore — uncovered. He thus decided to persist with the policy of cheap government borrowing on the grounds that it was necessary in the national interest. Déjà vu.
But he did make a very important change. He started a restrictive import policy. Déjà vu.
“The rapid depletion of sterling balances is causing some anxiety to the government,” he said and proceeded to divide imports into three categories: free, restricted and prohibited. Déjà vu.
Over the years, the first category has almost vanished, while the latter two have continued to grow. Déjà vu. His next Budget was for the full year, 1948-49. And Mr Chetty started another practice, of raiding the surpluses of other parts of the government. In his time it was the railways. Déjà vu.
But, like another Tamil finance minister, P Chidambaram, would do 50 years later, he also reduced taxes with two objectives: to increase the rate of savings which was a paltry 4 per cent of GDP and to increase private investment. He was thus the original Laffer Curve practitioner. It didn’t work. Déjà vu.
Sometime in 1948, Chetty was sacked by Prime Minister Nehru on a mere suspicion of corruption.
The lesson
The French have a saying: Plus ca change, plus c’est la meme chose: the more things change, the more they remain the same. This applies almost exactly to India’s Budgets.
It happens because successive governments have tried to do what they can’t: target economic growth and equitable distribution simultaneously. It would truly be a never-before Budget if the forthcoming one focuses, for once, solely on growth. But somehow I think I will be able to say déjà vu again.
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