He also decided to do away with the traditional practice of identifying expenditure for the army, navy and the air force under separate heads, citing national security concerns. He then profusely expressed his gratitude to the US and Britain for rushing to India’s assistance with military equipment and supply during the India-China conflict of 1962.
In his budget speech, Desai also invoked a sense of national duty to impose a “super profits tax” on companies, estimating that his move would mop up about Rs 25 crore, a sizable amount those days. He also increased customs duties, restricted foreign travel and unleashed a provision of mandatory savings for taxpayers, adding in unequivocal terms that the threat on the borders necessitated a higher order of taxation.
In the past, India’s budgets have navigated through and even triumphed over humungous crises — the Chinese aggression, the global oil turmoil of the early 1970s, bouts of economic slump in 1957-58, 1965-66, 1972-73 and 1979-80 and the balance of payments crisis of 1991.
As Finance Minister Nirmala Sitharaman rises to present Budget 2021— unarguably, the most crucial one in a generation — on February 1, she can take a few leaves out of the annals of such financial crisis-management. For India’s first post-Covid budget has to make sense of, lift and show a roadmap for the economy that has been wrecked by the pandemic, dragging it down to a recession after four decades.
“Imposing wealth tax on market values of all assets is conceptually an option to generate additional revenues. But this will deal a body blow to real estate as well as stock markets”
Years ago, while presenting the budget for 1958-59, prime minister Jawaharlal Nehru, who also held the finance portfolio then, called for a considerable measure of sacrifice on the part of citizens to bear more tax burden to tide over a turbulent phase — of drought, steep price rise, end of a stock market boom (1953-56) and a 43% fall in Reserve Bank’s foreign assets in just one year. Wealth tax and gift tax were, in fact, introduced to stem the crises of the late 1950s.
There were occasions when finance ministers pleasantly surprised citizens during grave situations and did not resort to raising tax and at times even lowered taxes instead. Manmohan Singh, for example, liberalised Indian economy in 1991 when the nation’s forex reserves plummeted to Rs 2,500 crore, sufficient to finance imports for just
“Being fiscally prudent at this juncture is a bad idea. The economy itself is the patient today. The budget can’t tap into this economy to save the economy”
Earlier, in 1974, the then finance minister YB Chavan resorted to an unusual method of tackling a crisis arising out of back-to-back inflationary pressure for two years, a bad monsoon and a huge global energy crisis.
Chavan lowered income-tax rate, arguing that this would control tax evasion and bring in more money to government coffers. Then the post-Emergency budget of the Janata government in 1977 was unique in the sense that the document emphasised both bread and liberty.
The big question is, what will Sitharaman do in her upcoming budget to power through the present spell of downturn? Economists such as Pronab Sen argue the FM must not try to find a solution within the economy. Instead, she should loosen the purse strings without caring much about fiscal prudence, at least temporarily.
“The economy itself is the patient today. The budget can’t tap into this economy to save the economy,” says Sen. That means, raising tax at this juncture could turn counter-productive.
However, there are others who argue that Sitharaman must impose some kind of a super-rich tax as was experimented by past finance ministers. But the problem with the idea is that the super-rich in India — those earning Rs 5 crore and above annually — already pay tax at an effective rate of 43%. Its increase to about 50% may not bring in a lot of additional revenue.
Also, should the FM reintroduce wealth tax, a measure that was introduced in 1957 and had prevailed in many avatars before being abolished in 2016? There are some who argue for a reversal of the recent slash in corporate tax rate as well, along the lines of US president-elect Joe Biden’s poll promise, which is likely to be implemented after he swears in.
“Imposing wealth tax on the market values of all assets is conceptually an option to generate additional revenues. But this will deal a body blow to real estate as well as stock markets,” says Sudhir Kapadia, national leader, tax, EY India.
At this juncture, it is not known how the FM will discover a middle path of taxing rich companies and individuals and simultaneously not spoiling the investment environment. Understandably, finance ministry officials are keeping the cards close to their chest.
But with more and more industries getting affected by the pandemic, demands for various concessions from the government as well as the central bank are only getting louder ahead of the budget. “The RBI must defer NPA (non-performing assets) rules for two years,” says G Sambasiva Rao, managing director of Vizag-based Sravan Shipping.
Amid this economic gloom, one must not ignore the fact that today India has an edge in certain economic parameters as compared with the turbulent phases which Sitharaman’s predecessors had once navigated.
India is sitting on massive $580.8 billion forex reserves as on December 25, 2020; there was a 20% drop in global oil prices during the year; and unlike in the past when many crises led to severe shortage of food grains — 1973-74 budget, for example, had to earmark Rs 160 crore in foreign exchange to import two million tonnes of food grains — India has stepped up its cereal exports.
“This fiscal, India’s rice export is likely to be an all-time high. Already, till November, exports of non-basmati rice registered a 123% rise year-on year,” says Vinod Kaul, executive director, All India Rice Exporters Association.
No doubt, FM’s triumph will depend on how well she utilises the economic positives.