Business Today

10 budgets that changed India

All budgets are important, but some budgets are more important than others. Business Today chooses ten that have had the most impact on the nation's economy.

Puja Mehra        Print Edition: March 20, 2011

Business Today commissioned KPMG to study all the 79 budgets various finance ministers have presented since Independence (Pranab Mukherjee's Budget on February 28 this year was the 80th) KPMG Executive Director Prateek Jain and Director Nabin Ballodia, aided by Abhinav Srivastava, Sumit Aggarwal and Rajeev Dewan went through every speech and made extracts, based on which Business Today made its choices.

R.K. Shanmukham Chetty
R.K. Shanmukham Chetty
1947: Independent India's First Budget
Whodunit: R.K. Shanmukham Chetty
India's first finance minister
Presented: November 26, 1947

The Budget Decision: Well, the decision to present a budget itself, since it covered just 7-1/2 months, from August 15, 1947, to March 31, 1948.

Why he did it: With the Partition of India and the emergence of two independent governments, the Budget for 1947-48 passed by the Legislature the previous March ceased to be operative. New Delhi could have authorised the expenditure necessary for the rest of the financial year, but it was felt that the newly freed country would like a budget to be presented at the earliest.

Did you know: The Budget Estimate for total revenues was Rs 171.15 crore. Of this, notably, Rs 15.9 crore was to come from the Posts and Telegraphs Department. The total expenditure for the year was estimated at Rs 197.39 crore, of which the defence budget was Rs 92.74 crore. A large burden was thrown on this budget by the unavoidable expenditure on rehabilitating refugees of the Partition and the payment of subsidies for food grains in a year of food crisis. "If these special factors are taken into account it will be seen that we have not been living beyond our means or heading towards bankruptcy," Chetty had said in Parliament to explain the estimated fiscal deficit of Rs 24.59 crore. The only tax proposal in the budget was an increase in the export duty of three per cent on cotton cloth and yarn by an additional amount of four annas per square yard on cotton cloth and six annas a pound on cotton yarn.

John Mathai
John Mathai
1951: The first Budget of the Republic of India
Whodunit: John Mathai
Finance minister in the Congress government
Presented: February 28, 1950

The Budget decision: This budget laid down the roadmap for the creation of the Planning Commission. The Commission was entrusted with the responsibility of formulating phased plans for effective and balanced use of resources.

Why he did it: High inflation, increased cost of capital, low level of savings and thus low level of investment and production had marked the years following Independence. The Commission was to be instrumental in making assessments of available resources and identifying areas requiring greater attention.

How this changed India: A large part of the blame or the credit - whatever way it is looked at - for the Indian growth model goes to the Planning Commission.

Did you know: Convention was broken in this budget: A White Paper containing practically all the material set out in a 'normal' budget speech was presented along with the Explanatory Memorandum. The speech thus was more informal on the matters covered by the budget. This budget also reduced the maximum rate of income tax from five annas per rupee, or 30 per cent, to four annas or 25 per cent. Incomes above Rs 1.21 lakh attracted a super-tax rate of 8.5 annas per rupee. The maximum rate of personal taxation was 12.5 annas or about 78 per cent.

Tiruvellore Thattai Krishnamachari
Tiruvellore Thattai Krishnamachari
1957: The 'Krishnamachari-Kaldor' Budget
Whodunit: Tiruvellore Thattai Krishnamachari
Minister of Finance in the Congress Government
Presented: May 15, 1957

The Budget decisions: Put severe restrictions on imports through an import licensing system; withdrew budgetary allocation for non-core projects, set up Export Risk Insurance Corp to protect exporters against payment risks. Brought in wealth tax, a tax on expenditure and a tax on railway passenger fee. Raised peak excise to 400 per cent. First attempt to distinguish between active income (salaries or business) and passive income (interest or rent). Raised income tax rates.

Why he did it: To ease the pressure on the balance of payments and foreign exchange reserves caused by the high imports of food grains and industrial goods effected to check high inflation. How this changed India: The import curbs and high tax rates made things worse. Raising external debt became increasingly difficult.

Did you know: Krishnamachari, or TTK, had taken his taxation decisions on the advice of Hungarian economist Nicholas Kaldor. TTK also played a big role in setting up of Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Unit Trust of India, Damodar Valley Corporation and Neyveli Lignite projects.

Morarji Ranchhodji Desai
Morarji Ranchhodji Desai
1968: People-sensitive Budget
Whodunit: Morarji Ranchhodji Desai
Deputy Prime Minister and Minister of Finance in the Congress Government
Presented: February 29, 1968

The Budget decision: Ended the requirement of stamping and assessment by the Excise Department authorities of goods right at the factory gate and introduced the system of selfassessment by all big and small manufacturers, a system still in use. Today, except for some goods such as cigarettes and alcoholic preparations most products are on the self-removal mode for the levy of excise duty.

Why he did it: To reduce administrative burden on the Excise Department and curb discretionary powers with its field officers.

How this changed India: Selfremoval of goods was a major procedure relaxation that went a long way in boosting manufacturing. Administrative convenience in removal of goods made the process less complicated and tedious.

Did you know: Morarji Desai is the only finance minister to have presented the budget on his birthday, February 29, twice- in 1964 and 1968. Altogether, he presented ten budgets, the most by a Union finance minister. In this particular budget, where both a husband and wife were income tax payers he withdrew the "spouse allowance" for, as he said in his budget speech: "it would be improper for any outsider to decide as to who is dependent on whom… to eliminate this unintended strain on the relationship of marriage".

Yashwantrao B. Chavan
Yashwantrao B. Chavan
1973: The Black Budget
Whodunit: Yashwantrao B. Chavan
Minister of Finance in the Congress Government
Presented: February 28, 1973

The Budget Decision: Provided Rs 56 crore for the nationalisation of the general insurance companies, Indian Copper Corp and coal mines. This was a huge sum: the estimate for the budget deficit for 1973-74 was Rs 550 crore.

Why he did it: It was considered absolutely necessary to maintain uninterrupted supply of coal in line with the growing demand for coal in various industries like power, cement and steel at the time. It was also believed that the interest of mine workers would be best served in a government-run set-up.

How this changed India: It is argued that nationalisation of coal mines had an adverse impact on coal production in the long run. The coal assets were bundled together under a single government-owned entity with no scope for market competition. There was little incentive for deployment of efficient production techniques and introduction of new technologies. India has been a net importer of coal over the past 40 years.

Did you know: Chavan, who had been chief minister of Maharashtra, increased tax rates on cigarettes in a couple of his budgets. In one such speech he said: "There comes perhaps a time in the life of every smoker when the concern for his own health begins to outweigh the loyalty to an old and faithful companion. For those who cannot shake off their consuming passion, there is at least the consolation that the more taxes they pay, the more they serve the common cause."

Agreeing to one of the recommendations of a committee on taxation of agricultural income, Chavan also introduced the clause that requires taxpayers to factor in their agricultural income to decide the rate at which to pay income tax.

V.P. Singh
V.P. Singh
1986: The carrot & stick Budget
Whodunit: V.P. Singh
Minister of Finance in the Congress Government
Presented: February 28, 1986

The Budget decision: Introduced MODVAT credit. This allowed credit/ set-off of duty paid on raw materials against the duty on final products. Why he did it: To reduce the cascading effect of taxes on the final price of goods.

How this changed India: This was a modest beginning at major indirect tax reform that will culminate in the shift to the Goods & Services Tax regime. With the introduction of Cenvat Credit Rules in 2004, cross credit between service tax and excise was allowed for the first time, reducing effective tax costs and boosting industry.

Did you know: This budget also proposed the setting up of a small industries development bank, an accident insurance scheme for municipal sweepers and railway porters, bank loans with a subsidy for rickshaw pullers, cobblers and such self-employed people. It also proposed the setting up of Unit Trust of India's mutual fund and Mahanagar Telephone Nigam Ltd. for Delhi and Mumbai. Singh oversaw the beginning of the dismantling of the license raj. He also gave teeth to the Enforcement Directorate of the Finance Ministry and the mandate to sniff out tax evaders. High-profile raids on suspected evaders - including Dhirubhai Ambani - forced Rajiv Gandhi to divest Singh of the portfolio.

Rajiv Gandhi
Rajiv Gandhi
1987: The Gandhi Budget
Whodunit: Rajiv Gandhi
Prime Minister in the Congress government
Presented: February 28, 1987

The Budget decision: Introduced provisions related to minimum corporate tax, better known today as MAT or Minimum Alternate Tax.

Why he did it: It was brought in with the primary objective of bringing into the tax net highly profitable companies that were legally managing to avoid paying income tax.

How this changed India: The budget estimates for collections of this tax were modest (Rs 75 crore) but it has since become a major source of revenue, though the figures are no longer revealed.

Did you know: The idea may have been inspired by the United States. In the 1960s, the US government, desperate for more finances due to the Vietnam war, decided to target 155 individuals, all with incomes above $200,000, who were avoiding paying federal income taxes by successfully using all the tax loopholes available. It devised a formula that placed a 50 per cent ceiling on the amount of an individual's income that could enjoy tax-exempt status. Treasury Secretary Joseph Barr moved the proposals that led to the creation of the alternate minimum tax, or AMT. Cigarettes evoked a light moment in Rajiv Gandhi's only budget speech. "In looking for more revenue, I have to fall back on the ever dependable and reliable friend of Finance Ministers and the certified enemy of Health Ministers." He switched to the current system of basing the excise rate on the length of a cigarette rather than its printed price.

Manmohan Singh
Manmohan Singh(Extreme left)
1991: The Epochal Budget
Whodunit: Manmohan Singh
Finance Minister in the Narasimha Rao government
Presented: July 24, 1991

The Budget decisions: Overhauled the import-export policy, slashed import licensing and went for vigorous export promotion and optimal import compression to expose Indian industry to competition from abroad. Began rationalisation of duty structures by pruning the peak customs duty from 220 per cent to 150 per cent.

Why he did it: The balance of payments was precarious and any further postponement of long overdue steps would have been disastrous. How this changed India: India is today the second fastest growing economy in the world.

Did you know: Singh introduced service tax in the 1994 Budget to tap into the fastest growing sector of the economy then. Service tax today fetches Rs 58,000 crore against Rs 400 crore in 1994.

Singh, normally a reserved person, is known to garnish his budget speeches with humour. In those days, he was accused by the Left of bowing to pressure from the World Bank. For a particular budget proposal he said dead-pan: "I am doing this under pressure from WB and WB is not World Bank but West Bengal". Announcing benefits for Mumbai, where he had stayed earlier as Governor of the Reserve Bank of India, he said: "Voting Congress is not only good politics, but good economics". The Congress had just won the civic elections in Mumbai. On the northeastern states, he said: "This is in gratitude to the East for providing a home to a homeless Finance Minister".

Even today Singh is a Rajya Sabha member from Assam. Delivering his speech for the 1992-93 Budget, Singh said, "It is said that child is the father of the man, but some of our taxpayers have converted children into tax shelters for their fathers."
 
Palaniappan Chidambaram
P Chidambaram
1997: The dream Budget
Whodunit: Palaniappan Chidambaram
Finance Minister in the United Front Government
Presented: February 28, 1997

The Budget decisions: Made tax rates moderate for individuals as well as companies. Allowed companies to adjust MAT paid in earlier years against tax liability in subsequent years. Launched the Voluntary Disclosure of Income Scheme or VDIS, to bring out black money. Phased out ad hoc treasury bills used for financing the budget deficit.

Why he did it: A little over one per cent of the population had been for income tax so far. Budget 1997 aimed to widen the tax base. How this changed India: India had a peak income tax rate in the late 1960s and early 1970s of 97.5 per cent. The moderation in rates improved overall compliance as those who used to find rates prohibitive earlier began to pay up instead of hiding their incomes. Since 1997-98, personal income tax collections have gone up from Rs 18,700 crore to Rs 100,100 crore during April 2010- January 2011. The VDIS garnered about Rs 10,000 crore. Higher disposable income in the hands of taxpayers helped generate demand. The incremental tax revenues were leveraged into developmental public expenditure on social welfare and the infrastructure sector.

Did you know: American economist Arthur Laffer studied the inverse relationship between tax rates and tax collections. Economists call the trade-off the Laffer Curve. Between 1979 and 2002, more than 40 countries, including Britain, France and Germany, cut their top rates of personal income tax and gained revenue in bargain. In his budget speech, Chidambaram quoted not just his favourite poets Saint Tiruvalluvar and Rabindranath Tagore, but also Chinese leader Deng Xiao Peng: "From our experience of these last few years, it is entirely possible for economic development to reach a new stage every few years. Development is the only hard truth." Chidambaram is an MBA from Harvard University.
 
Yashwant Sinha
Yashwant Sinha
2000: The Millennium Budget
Whodunit: Yashwant Sinha
Finance Minister in the NDA Govt
Presented: February 29, 2000

The Budget decision: Phase out of Manmohan Singh's incentive for software exporters. In Budget 1991, Singh had made income from software exports tax-free for three years , and then extended the tax holiday to perpetuity in Budget 1995.

Why he did it: To improve the ratio of taxes to GDP or gross domestic product. How this changed India: Singh had intended to promote India as a major software development centre in the world. The introduction of this tax holiday to software export sector was followed by exceptional growth in Indian IT industry. At the same time, no industry can remain dependent on tax incentives in perpetuity. So while the credit for India emerging a major global software hub goes to Singh, Sinha, perhaps contributed a great deal to infusing confidence in it.

Did you know: In Budget 2001-02, Sinha introduced Transfer Pricing Regulations, which require transactions between associated enterprises to be at arm's length. The regulation played a big role in the prevention of erosion of the tax base in India.

Additional reporting by Manu Kaushik

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