On July 5, Finance Minister Nirmala Sitharaman in her first Budget levied extra tax on the super-rich — raising the surcharge for those with taxable income between Rs 2 crore and Rs 5 crore from the existing 15 per cent to 25 per cent, and from 15 per cent to 37 per cent for those with income higher than Rs 5 crore. That may be good political messaging at a time of widening income inequality.
But when independent India’s first Finance Minister R K Shanmukham Chetty presented his first full Budget on February 28, 1948 (his first Budget was an interim Budget, which was unveiled after August 1947 and was in effect until March 1948), his second taxation proposal was to lower the rate of what was then called super tax. He was worried that the tax rate would hamper the growth of savings and retard industrial growth in a country which was yet to recover from Partition.
Chetty, who studied economics in the Madras Christian College and was a lawyer by training, raised the limit at which the super tax kicked in to Rs 3.5 lakh then and reworked the slabs too. He also reduced the tax on undistributed profits of companies by one anna taking into account the fact that in the 1946-47 Budget, the government had a complicated system of levying a super tax to deter the distribution of large dividends by firms and push them to plough the money back into business. The rationale was to woo industrialists to invest.
However, none of this meant that the first full Budget of Chetty, who came from a family with business interests in Tamil Nadu, was full of giveaways. Rather, the Finance Minister in Part B of the Budget which contains taxation proposals — a practice which has been followed since — said that despite criticism including from the Reserve Bank of India in its annual report regarding what was then known as excess profits tax, he had decided, after a great deal of thought, not to jettison it.
The Nehru-led Congress government’s taxation philosophy as articulated by the Finance Minister in his Budget speech that year was that it had to balance the need to stimulate production and to remove the fetters on industry while keeping tax rates reasonably high so that the wealthy were placed under an “equitable equilibrium for the common needs” of the State.
In 1948-49, and in the previous year too, the new Finance Minister and the government had to face up to an adverse balance or a deficit in the country’s balance of payments (BoP) owing to large imports of foodgrains. That was a reversal compared to the years before Independence when India had a favourable BoP. What this meant was major restrictions on imports except of foodgrains, raw materials and some essential consumer goods. The other big challenge was inflation. But in that Budget, Chetty also talked about what is now common currency — a counter-cyclical policy which aims at building a surplus during periods of growth, public spending during a downturn and running a deficit if needed to ensure growth is back on track.
What the first Finance Minister said in the interim Budget of 1947-48 on market borrowings echoes even now. The government’s borrowing programme would be such as to enable it to obtain funds as cheaply as possible without in any way impacting the flow of investment into industry. The government then had to appeal to people to subscribe to its borrowings — a target of Rs 150 crore in 1947-48 through loans as the securities market was hit because of communal disturbances. Chetty held out a promise that the government was responsible for the repayment of these loans as a measure of comfort.
Nirmala Sitharaman in her first Budget announced the government’s plan to borrow abroad — marking a first to help ease pressure on interest rates here and allow more private firms to borrow in India. India’s relatively low external debt was cited as one of the reasons for opting to borrow overseas with comparisons on cost of borrowing bound to arise. In November 1947, Chetty had said that India’s debt position was intrinsically sound and that its external debt for a country of its size was negligible considering the sterling balances — which were treated as foreign exchange reserves. Indeed, the Finance Minister made it clear that these reserves should not be frittered away in importing non-essential luxury goods or to finance deficits in the balance of payments.
On July 4 this year, the Economic Survey made a case for doing away with incentives after 10 years for small firms or dwarfs with less than 100 employees. That view may have run counter to that of the first Finance Minister. Chetty had flagged the dangers of concentration of too many businesses in the hands of large companies. The country, he felt, should encourage the growth of small companies to broad base the economy.
The interim Budget had targeted revenues of Rs 171.15 crore and revenue expenditure of Rs 197.39 crore with a net deficit of Rs 26.24 crore, which the government later managed to reduce to Rs 6.52 crore. Interestingly, prior to the first full Budget in 1948-49, Part A was the Railway Budget incorporating the speech of the railway and transport minister, and Part B was the Finance Minister’s speech which was presented in the Constituent Assembly. Part B, which contained revenue proposals and was considered to be sensitive information, was released only after 6 pm on February 28, 1948.
In the conclusion, Chetty had said, “In spite of all the trials to which our infant state has been subjected, we have the solid foundations on which we can confidently build the superstructure of our economic and social edifice. The pattern of that structure is entirely in our hand to draw.”