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Budget Gyan: Some cult budgets from the archives

25 Jan 2023 , 02:48 PM

However, some budgets tend to become very unique and epochal. This can either be due to the unique positioning of the budget, or due to the announcements or due to the criticality of the budget in the overall India macro narrative. Here is a retrospective of the nearly 8 decades since freedom.

Most epochal Indian budgets since Freedom at Midnight

There is always something very unique and memorable about the first budget, since that is distinction that can never be taken away. India’s first finance minister, RK Shanmukham Chetty, presented the first Union Budget in 1947 with total revenues of just about Rs171 crore, it looks tiny today. But the romance of the first budget can never really go away.
Between the 1947 budget and the post republic budget in 1950, India had the dubious distinction of having the shortest tenured finance minister. Kshitish Chandra Neogy resigned after just 35 days as finance minister to join the outgoing Shyama Prasad Mukherjee. The 1950 India Republic budget was presented by John Mathai. The first budget of the Indian republic set the tone for formation of the Planning Commission (now Niti Aayog), under the leadership of PC Mahalnobis.
Which was the first “Ease of Doing Budget”. It was not 1991 budget. The budget presented by Morarji Desai in 1968 was the first budget intended to make life easier for Indian businesses. For excise duty assessment, Desai marked the shift to self-assessment by manufacturers, rather than only relying on excise inspectors. That has remained the benchmark till date. It ended the rather unwieldy factory gate assessment practice.
What was so black about the Black Budget of 1973? In fact, a number of things were black. Y B Chavan presented a budget with fiscal deficit of Rs550 crore, something unheard of in those days. In the aftermath of the bank nationalization in 1969, Union Budget 1973 nationalized general insurance companies, Indian Copper and most of the coal mines. The idea was to ensure smooth coal availability to industry. Ironically, the exact opposite happened; a huge gap between precept and practice.
Vishwanath Pratap Singh (VP Singh) may have earned the dubious distinction for political reasons, but his impact as finance minister cannot be overlooked. As the finance minister in 1986, VP Singh addressed the cascading effect of excise duties (on inputs and output) by ushering in the concept of modified value-added tax (MODVAT). This has since been the basis for manufacturers getting input credit. The input tax credit (ITC) on GST introduced in the year 2017 is also based on the same principle. However, the budget also came down heavily on businesses operating in grey areas. As much as his budget earned accolades, it also earned the wrath of Indian business, which eventually led to VP Singh being dismissed from the Congress party by Rajiv Gandhi.
With VP Singh out of the Finance Ministry, the Congress veteran, R Venkataraman, presented the Union Budget 1987. The affable Venkataraman introduced minimum alternate tax (MAT) at a fundamental level to prevent companies from avoiding tax by resorting to capex. Under the new system, companies showing more than a reasonable gap between book profits and tax profits were subjected to MAT. It was the start of corporates contributing more to the direct tax kitty of the government.
By late 1990, India was down to just 21 days of forex reserves. India was forced to pledge gold to the Bank of England to get a line of credit from the IMF. In exchange, IMF set stringent terms that India must open up the economy. Open up they did, and that came through the Big Bang Budget of 1991. In a few swift moves, Dr. Manmohan Singh dismantled the license regime, cut customs and excise rates to competitive levels and opened the doors to FDI and FII investments. The budget of 1991 marked the epochal cut-off period for pre and post liberalization.
Budget 1994, presented again by Dr Manmohan Singh, brought in the concept of service tax for the first time. Services were already accounting for 50% of GDP but were not being taxed. Union Budget 1994 introduced 5% service tax. This was raised progressively to 15% and eventually subsumed into 18% GST in 2017. With robust service tax collections, India could transfer some of the gains towards lowering excise and customs with a view to making industry more competitive. It marked a new paradigm.
The 1997 budget “Dream Budget” presented by P Chidambaram was special in many ways. It proved that even coalition governments could be brave enough to be reformist and bold. The 1997 budget effected sharp cuts in the peak rates of income tax, customs and excise, freeing up crores of rupees as purchasing power. It set in motion the consumer economy. The controversial Voluntary Disclosure of Income Scheme (VDIS), may have raised ethical questions, but still collected Rs10,000 crore.
Under the Vajpayee government, Yashwant Sinha presented the Millennial Budget of year 2000. The most important shift was the scrapping of perpetual tax incentives for IT companies, which had started as a temporary measure in 1991 and continued since then. The move opened up Indian IT companies to the forces of global competition but at the same time, it also made them competitive. The result was the creation of a slew of billion dollar IT companies in India, including TCS, Infosys, Wipro, HCL Tech, TECHM, L&T Infotech, Mindtree, Mphasis etc.
Budget 2003, presented by Jaswant Singh and is best remembered for the big bang infrastructure spending. The budget announced Rs75,000 crore outlay for the Golden Quadrilateral project. Eventually, it set the tone for high quality national highways across India and easy connectivity. This had a multiplier effect in enhancing speed of business and reducing cost of business. It set the tone for the bull market that extended for five years till 2008.
Year 2004 saw the return of the Congress in power with coalition support. The Budget 2004 presented by P Chidambaram was a “Blow Hot, Blow Cold” kind of budget. The budget announced the securitization transaction tax (STT) on equity, equity funds and F&O, which has stayed on since. Despite early protests, market volumes have grown manifold under STT, so nobody is really complaining. Budget 2004 also introduced the FRBM Act with the idea of containing fiscal deficit to 3% of GDP. It made the Indian economic managers a big hit among FPIs and rating agencies.
Budget 2018, presented by Arun Jaitley, is best remembered for 2 things. It introduced flat 10% flat LTCG tax on equities above the Rs1 lakh threshold. Budget 2018 was significant for agriculture sector in that it assured farmers minimum selling price (MSP) at 150% of the cost of producing Kharif and Rabi crops. This gave a big boost to farm incomes and pushed foodgrain production to record levels. Agri growth stabilized at 3.5% to 4.0%.
Budgets 2020 and 2021 were presented in the shadow of COVID-19 and will be remembered for huge fiscal deficit targets of 9.5% and 6.8% respectively. Budget 2020 also made dividends fully taxable in the hands of investors. On the positive side, Budget 2020 will be remembered for the innovative Production linked Incentives (PLI) scheme to promote domestic manufacturing. One of the eloquent manifestations of this is that India has exported $1 billion of Apple iPhones this year.
The latest Budget 2022 was more of a budget reflecting the changing times. Corporate surcharge was reduced from 12% to 7%, while digital assets and cryptos were to be taxed at 30%. Budget 2022 saw a shift in the spending from revenue allocations to capital allocations. It also announced the Digital Rupee, although its impact is yet to be felt. Budget 2022 also earmarked 68% of capital procurement in defence to Indian companies, opening up a huge re-rating of defence stocks. But the big takeaway were the ESG announcements in Budget 2022. The budget initiated issue of Sovereign Green Bonds, allocated Rs19,500 crore to boost solar power capacity, circular action plan to reduce waste and enhance recycling, use of biomass pellets in thermal plants, Vande Bharat trains for energy efficiency, EV batteries on SAAS type model etc. In addition, the ESG focus also targeted 8 million affordable homes, making buildings environment friendly etc. Most experts agree that Budget 2022 was the first budget to get close to a Perfect 10 on ESG initiatives.