A brief history of Indian budgets as economic constraints shifted

News: India will complete 75 years as an independent nation in August 2022 and the Finance minister will present the annual budget against the backdrop of this anniversary.

This article analyses the budgets of the following years 1948, 1972, 1997, and explains the various reforms undertaken to overcome the constraints/challenges faced during those budgeted years.

What do 1948 budgetary episodes tell us?

Challenges faced 

Independent India began its development journey with a very weak fiscal capacity. The amount of tax collected was very low.

More than half of annual tax revenues came from direct taxation, and the tax base was narrow.

The government had very few financial resources due to the minimum budget deficit in 1948.

Economic policy was severely constrained by shortages in food grain supplies, domestic savings, and foreign exchange.

Reforms undertaken

The Nehruvian strategy of rapid industrialization required a fiscal base, and hence tax rates were increased.

Higher fiscal deficits were funded by new money created by the Reserve Bank of India.

Since domestic financial resources were not enough, there was a need for foreign aid.

What do 1972 budgetary episodes tell us?

Significant improvements between 1948-1972 budget years

The Green Revolution had helped in reducing the food shortage.

Nationalized banks mobilized higher deposits, Life Insurance Corp, and provident funds helped in facilitating market borrowings.

Challenges faced

During this period, much of the revenue came from indirect taxation. It meant that the Indian tax system was most regressive.

The major issue during that period was that very little money was left for the country’s private sector. Also, the money was not used efficiently. For example, many capital goods and intermediate goods sectors were operating below capacity.

There was still not enough foreign exchange to import goods that were in short supply. India had enough foreign exchange to cover only 2.9 months of imports.

What do 1997 budgetary episodes tell us?

Significant improvements between 1972-1990 budget years

The three old macro constraints on Indian economic policy i.e., inadequate domestic savings, shortages of wage goods such as food, and the unavailability of enough foreign exchange for imports were eased by the late 1990s.

Challenges faced

There were new constraints related to energy, infrastructure, and institutional quality. These were dealt with in 1997.

Reforms undertaken

The tax reforms of the 1990s also helped push up the contribution of direct taxes in total tax collections. In other words, the Indian tax system became more progressive.

What are the present challenges to the 2022 budget?

The budget will be presented at a time when the economy is recovering from the covid shock. The recovery in domestic demand is uneven.

Inflationary pressure is increasing further, crude oil prices are also increasing.

Indian economy continues to be underfunded. The tax/GDP ratio was barely increased over the past 30 years.

Hence, Budget 2022 should focus on these challenges along with fiscal consolidation.

What is the way forward?

The tax/GDP ratio needs to be increased so that the state’s growing infrastructure, development, subsidy, and welfare commitments are funded adequately.

Source: This post is based on the article “A brief history of Indian budgets as economic constraints shifted” published in Live Mint on 27^th Jan 2022.