Monday, February 11, 2008

Rambling notes on Union Budget 2008

Ramon Magasasay once said: "Those who have less in life should have more in law."

Era Sezhiyan, A former Member of the Lok Sabha says, "While the Budgets are growing richer and richer, the poor are growing poorer and poorer without having any worthwhile share in the benefits of budgeting and the government expenditures.
In India, those who have less in life have much less in law. "

How long will it take, for the fury of the long-suffering masses to explode?

The Finance Ministers of India: First row: R.K. Shanmukham Chetti, John Maththai, C.D. Deshmukh, T.T. Krishnamachari, Jawaharlal Nehru and Morarji Desai. Second row: Sachindra Chaudhuri, Indira Gandhi, Y.B. Chavan, C. Subramaniam and H.M. Patel. Third row: Charan Singh, R. Venkatraman, Pranab Mukherjee, V.P. Singh, and Rajiv Gandhi. Fourth row: N.D. Tiwari, S.B. Chavan, Madhu Dandavate, Yashwant Sinha, Manmohan Singh and P. Chidambaram.

Union Budget 2008 will be announced on 29th February 2008. "The Budget for 2008-09 will be the least taxing (no pun intended!) for the Finance Minister, P. Chidambaram, in several respects and for various reasons." The budget document is not only a statement of its accounts but also a charter of the government’s economic policies. These policies are reflected at the macro-level in instances like allowing of 51% foreign direct investment in certain sectors in 1999 by Manmohan Singh to the micro level in 1962 when Morarji Desai specified the number of matchsticks(50 in each packet) that a matchbox could contain in order to get excise exemptions.

Given the fact that the Finance Minister is formulating his last budget in the backdrop of a good economic performance of nine percent growth and the upcoming parliamentary elections, he is expected to announce seemingly socialist programmes. These would include token measures in the field of education, health and water concerns.

Hospitals and doctors must be brought in the service tax net. Also the Minister must not cave in to pressure from Bar Associations and to his own bias towards his and his wife's profession by imposing service tax on advocates in this Budget and treat them at par with the other professionals in the country.

Indeed any doctor and advocate who earns more than Rs 800,000 in a year, can definitely afford to pay the service tax.

The Telegraph talked of how Budget can go Nano:

2008 is the year of the Nano, and by now, Nano has come to stand for anything that is small — small in size and small in means. In keeping with the trend, this year’s budget is going to be a Nano budget. Lest readers misunderstand, one must quickly add that there has been no official proposal to curtail the lengthy budget speech. But when budget-minister P Chidambaram went to meet his party colleagues at 24 Akbar Road, the message was loud and clear: aam aadmi is passé, zero in on the garib aadmi. The latter, Chidambaram was told, was not getting the benefits of the 9 per cent growth rate of the GDP. Here’s what the Nano-budget might contain: a Nano loan-waiver programme for small farmers, and a Nano housing scheme (with Rs 1 lakh houses, silly!). So what happens to the aam aadmi, and aurat for that matter? He and she must Nano-ize their aspirations, what else? And hope that the GDP growth rate doesn’t go the Nano way.

The Economic Times carried a piece Men who shaped up India's economy

India had as many as 30 finance ministers after it secured independence from imperialist British rule in 1947. And, these gentlemen shaped up India’s economy which has grown in size to about US$ 800 billion. India has also emerged as the fastest growing economy after China and become a major provider of services and goods to the world.

The story of India’s evolution as a major economic power is an interesting saga intertwined with political happenings. While three Prime Ministers held the coveted portfolio of Finance, only four ministers presented more than five budgets. A brief profile of these men is given below.

Nawabzada Liaquat Ali Khan (1896 - 1951) was an Indian Muslim politician and a leading member of the All India Muslim League (AIML). He played an influential role in the partition of India and the creation of Pakistan. He was closely involved in the negotiations over the form of independence to be granted to India after World War II.

When the Indian political leadership asked the Muslim League to send its nominees for representation in the interim government, Liaquat Ali was asked to lead the League group in the Union Cabinet. He was assigned the finance portfolio by the first Indian Prime Minister Pandit Jawahar Lal Nehru. Acknowledged as Jinnah's "right hand" and as such Liaquat was the obvious choice to become prime minister of independent Pakistan in 1947. He went on to become the country's senior most leader after Jinnah's death in 1948.

India’s First FM R K Shanmukham Chetty
(1947-1948): Independent India's first Budget was presented by the country's first finance minister, R K Shanmukham Chetty, on November 26, 1947. And, that was an interim Budget. It was a review of the economy and no new taxes were proposed as the budget day for 1948-49 was just 95 days away. He resigned shortly. It is believed that he was asked to resign by Jawaharlal Nehru, the Prime Minister of India due to a minor dereliction of duty by a subordinate official, so as to ensure probity.

K C Neogy
: 1948 K C Neogy then took charge. He was the second Finance Minister of free India. He held office for just 35 days and didn't get an opportunity to present a Budget.

John Mathai (1948-1950): John Mathai was an economist who served as India's first Railway Minister and subsequently as Finance Minister, taking office shortly after the presentation of India's first Budget, in 1948. He presented two budgets for 1949-50 and 1950-51. He resigned after presenting the 1950 Budget following protests against vesting large powers with the Planning Commission and P C Mahalanobis.

C D Deshmukh (1950-1956): C D Deshmukh was also the first Indian Governor of the Reserve Bank of India. He presented an interim budget for 1951-52. The first general elections in post-independence era were held between December - February 1952. Deshmukh was given the Finance portfolio after the new ministry assumed office. He felt honoured to present the first budget to the first-time elected members of Lok Sabha. Hindi crept into the budget documents beginning 1955-56. His stewardship of the country's finances was marked by prudence and humane perspective. He provided the much desired vision to deal with the changing financial needs of a young, independent and under-developed country like India.

He made significant contributions to the formulation and implementation of the country's First and Second Five Year Plans that provided strong base for the years ahead. He was responsible for ensuring social control of the financial structure such as the enactment of a new Companies Act, and nationalisation of the Imperial Bank of India and life insurance companies. He resigned from the Union Cabinet after protesting separation of Mumbai from Maharastra.

T T Krishnamachari
(1957-1958): T T Krishnamachari took over from him. He found that the calculations made in the budget for 1955-56 had gone awry. So, on November 30, 1956 in a five-thousand-word speech he described the changed economic situation and underlined the need to levy fresh taxes even before the next budget was presented. The Second General Elections were held in February-March 1957 and he presented an interim budget for 1957-58 on March 14, 1957 and the full budget subsequently. He was instrumental in setting up the country's three major steel plants and financial institutions like IDBI, ICICI and UTI. He introduced path-breaking tax reforms during his stint as Finance Minister. Krishnamachari had to resign in Feburary 1958 when one man Justice Chagla Commission found him guilty of corruption.

Jawaharlal Nehru
(1958-1959): Following Krishnamachari's resignation, the then Prime Minister, Jawaharlal Nehru, himself took charge of the Finance portfolio and presented the budget for 1958-59. In the opening para of his budget speech Nehru had said ... "According to custom, the budget statement for the coming year has to be presented today (February 28, 1958). By an unexpected and unhappy chain of circumstances the Finance Minister, who would normally have made this statement this afternoon is no longer with us. This heavy duty has fallen upon me almost at the last moment."

Morarji Desai (1959-1964): Morarji Desai became the next Finance Minister and he presented the maximum number of budgets so far- ten. They included five annual and one interim budget during his first stint. In his second tenure, he presented three full budgets and one interim as Finance Minister and Deputy Prime Minister. His annual budgets were for the years from 1959-60 to 1963-64 and the interim budget for 1962-63.

T T Krishnamachari
(1964-1966): After the first stint of Morarji Desai, Krishnamachari once again became the Finance Minister for the second time. He presented the budgets for 1964-65 and 1965-66. Embarking upon measures needed for providing social security, Krishnamachari expanded the pension scheme to cover family members of the deceased government servants by introducing a new Family Pension Scheme in 1964. He planned schemes like the Rajasthan Canal Schemes, Dandakaranya and Damodar Valley Projects. The Neyveli Lignite Projects owe their existence to the fillip given by Krishnamachari. He resigned in late 1966.

Sachindra Choudhuri
(1966-1967): Sachindra Choudhuri presented the budget for 1966-67 after the resignation of T T Krishnamachari. It was an interim arrangement.

Morarji Desai (1967-1969): After the fourth General Elections in 1967, Morarji Desai once again became the Finance Minister. This was his second stint. The annual budgets for three years 1967-68 to 1969-70 and the interim budget for 1967-68 were also presented by him. The interim budget for 1967-68 was on account of the General Elections in March 1967. He was the only Finance Minister to have had the opportunity to present two budgets on his birthday - in 1964 and 1968. He was born on February 29. Desai resigned in July 1969 in protest against the nationalisation of major banks by an ordinance on a Saturday evening. He felt social control of banks would regulate their functioning and make them accountable.

Indira Gandhi (1969-71): After Morarji Desai's resignation, Indira Gandhi, the then Prime Minister assumed the Finance portfolio. So far, she has been the only woman Finance Minister.

Y B Chavan (1971-1975): Following the Fifth General Elections in March, 1971, Y B Chavan became the Finance Minister. He presented the interim budget for 1971-72 and the final budgets for four years - 1971-72 to 1974-75.

C Subramaniam (1975-1977): C Subramaniam presented the budgets between 1975-76 and 1976-77. He cast the widest net to increase revenue through excise.

H M Patel (1977-1979): After the Seventh General Elections in March 1977, the first non-Congress Ministry under the then Janata Party assumed office at the centre. Morarji Desai was elected as the Prime Minister. H M Patel held the Finance portfolio. He presented the interim budget for 1977-78. He also presented the annual budget for 1978-79.

Chaudhary Charan Singh
(1979-1980): The budget for 1979-80 was presented by Chaudhary Charan Singh who was also Deputy Prime Minister.

Ramaswamy Venkataraman
(1980-1982): After the seventh General Elections in January, 1980, the Congress Party returned to power. Venkataraman presented the interim and final budgets for 1980-81 and the annual budget for 1981-82. Later he rose to become the country's Vice President and President.

Pranab Mukherjee
(1982-1984): Pranab Mukherjee presented the annual budgets for 1982-83, 1983-84 and 1984-85. He was the first Rajya Sabha member to hold the Finance portfolio.

V P Singh (1985-1987): After the Eighth General Elections in 1984, V P Singh presented the annual budgets for 1985-86 and 1986-87. There was no interim budget since the elections were held in December 1984. He was part of the ministry headed by Rajiv Gandhi.

He oversaw the gradual relaxation of the license raj that Rajiv had in mind. He also gave extra power to the Enforcement Directorate of the Finance Ministry, that was given charge of tracking down tax evaders. Following a number of high-profile raids on suspected evaders - including Dhirubhai Ambani - Rajiv Gandhi was forced to sack him as Finance Minister, possibly because many of the raids were conducted on industrialists who had supported the Congress financially in the past.

Rajiv Gandhi (1987-1988): Rajiv Gandhi presented the budget for 1987-88. He was the third Prime Minister to present a budget after his mother, and grand father. The exercise in zero-based budget began in 1987-88. The zero-based budgeting is a process of review, analysis and evolution for each budget request in order to justify its inclusion or exclusion from the integrated whole budget before it is finally approved. In India, the zero-based budgeting was implemented in three phases - one third in the first year, two thirds in the second year and fully from the third year. It is a continuous process.

N D Tiwari (1988-1989): N D Tiwari presented the budget for the year 1988-1989.

S B Chavan
(1989-1990): S.B. Chavan did the budget exercise for 1989-90. He also served twice as the Chief Minister of Maharashtra.

Madhu Dandavate (1990-1991): After the General Elections in November 1989, the then Janata Dal Government's Finance Minister Madhu Dandavate presented the annual budget for 1990-91.

Yashwant Sinha (1991-1992): Following subsequent political developments, Yashwant Sinha became the Finance Minister and presented the interim budget for 1991-92.

Manmohan Singh
(1991-1996): Manmohan Singh served as the governor of the Reserve Bank of India in the late 1980s, and was given the portfoilo of finance in 1991 by Prime Minister Narasimha Rao. He presented the final budget for 1991-92 in July 1991. This was the first occasion when the interim and final budgets were presented by two ministers of two different political parties. The next four annual budgets of Manmohan Singh had an orientation different from the one followed till then.

The economic liberalisation package pushed by Singh and Rao opened the nation to foreign direct investment and reduced the red tape that had previously impeded business growth. The liberalisation was prompted by an acute balance-of-payments crisis whereby the Indian government was left without sufficient reserves to meet its obligations, and had begun preparations to mortgage its gold reserves to the Bank of England in order to obtain the cash reserves needed to run the country. As such, he was instrumental in making of an opened economy. He reduced the peak import duty from 300 plus to 50 per cent. He will be remembered best for making the rupee convertible in current account in just two phases. Introducing the concept of 'service tax' was his idea.

Jaswant Singh (1996): He served as Finance minister in the short-lived government of Atal Bihari Vajpayee, which lasted just from May 16, 1996, to June 1, 1996.

P Chidambaram
(1996-1998): The general elections held in 1996, paved way for a coalition government supported by the left parties. This came as a big break for Chidambaram, who was given the key cabinet portfolio of Finance; this put him in the limelight. The final budget for 1996-97 was presented by P Chidambaram of the then Tamil Maanila Congress.

It was the second time that interim and final budgets were presented by two ministers of different political parties. Following a constitutional crisis, the I.K. Gujral Ministry was on its way out and a special session of Parliament was convened only to pass Shri Chidambaram's 1997-98 budget. It was passed without a debate. Although the coalition government was a short-lived one (it fell in 1998), it showed Chidambaram's competence as Finance Minister, a factor which was to lead to his re-appointment to the same key portfolio under Prime Minister Manmohan Singh in 2004.

Yashwant Sinha (1998-2002): After the General Elections in March 1998, Yashwant Sinha got the Finance portfolio in the first ever BJP-led Atal Bihari Vajpayee Government. He presented the interim and final budgets for 1998-99. After the 13th General Elections in 1999, he became the Finance Minister once again. He had presented four annual budgets - from 1999-2000 to 2002-2003. Yashwant Sinha presented the budget for 1999-2000 in the forenoon. Earlier, the budgets used to be presented at five in the evening as a pre-independence custom introduced by British establishment. While Manmohan Singh concentrated on making imports flexible, Sinha paid great attention to rationalization of excise and reduced the slabs from 11 to one.

Jaswant Singh (2002-2004): In July 2002 he became Finance Minister again, switching posts with Yashwant Sinha. He served as Finance Minister until the defeat of the Vajpayee government in May 2004 and was instrumental in defining and pushing through the market-friendly reforms of the government.

P Chidambaram: Incumbent Chidambaram became Minister of Finance again in the congress party-led United Progressive Alliance government on May 24, 2004.

In 2004, A K Bhattacharya wrote a historical piece about "All about interim Budgets ":

Independent India's first Budget was presented by India's first finance minister, R K Shanmukham Chetty, on November 26, 1947. And that was an interim Budget!

So when Finance Minister Jaswant Singh presents the interim Budget for 2004-05 on Tuesday, he won't be doing something unique. In fact, between him and Chetty, the Indian Parliament has seen the presentation of 10 interim Budgets.

Five of these interim Budgets were presented by finance ministers of newly elected governments that did not have sufficient time to prepare a full Budget before March 31.

And five of them were presented by governments that had decided to go for general elections immediately after or before the end of the financial year.

An interim Budget or a vote-on-account becomes a necessity because every year, Parliament's approval for drawing funds from the Consolidated Fund of India (CFI) for expenditure is usually obtained by March 31, the last day of the financial year.

If a regular Budget is not presented before March 31, and further approval for drawing funds for expenditure beyond March 31 is not obtained, the government can come to a halt.

So, all the interim Budgets so far have been presented primarily to enable the governments to continue incurring their obligatory expenditure until a regular Budget is passed by Parliament.

The exception was the first interim Budget on November 26, 1947. When he presented it, Chetty did not describe his Budget as an interim exercise.

But in the second Budget he presented to Parliament on February 28, 1948, he said his first exercise was an interim Budget. Under normal circumstances, there was no need for the Indian government to present a Budget so soon � less than four months after independence.

But as Chetty explained in his speech: "With the division of the country and the emergence of two independent governments in place of the old central government, the Budget for the current year 1947-48 passed by the legislature last March ceased to be operative. Although, under the transitional provisions of the Constitution, the government could authorise the expenditure necessary for the rest of the financial year, it was felt that it will be in accordance with the public wish that a Budget should be placed before the representatives of the people at the earliest possible moment."

Chetty's first Budget speech also contained a detailed assessment of the state of the Indian economy. He hoped to end the financial year with a deficit of Rs 25 crore, but only after he had proposed an increase in export duty on cotton cloth and yarn to fetch an additional annual revenue of Rs 8 crore.

That was the only new tax proposal in the first interim Budget. But then, that was an indirect tax proposal that could be enforced through a notification and did not require Parliament's sanction.

The next interim Budgets were all presented before general elections. That was quite understandable. The Congress was the ruling party and there was hardly any opposition to its return to power. All these interim Budgets were presented with Jawahar Lal Nehru as prime minister.

On February 29, 1952, C D Deshmukh presented the second interim Budget and set a new trend. Along with the revised estimates for 1951-52 and the Budget estimates for 1952-53, Deshmukh presented a "white paper" on the state of the economy.

But Deshmukh's interim Budget would be remembered for his claim of how he had converted a Budget deficit projected earlier into a Budget surplus by the time the year was coming to a close.

Equally significant was his bold announcement that food subsidies would have to be abolished to relieve the exchequer of this growing burden.

When he returned to Parliament with a regular Budget, Deshmukh proposed no new taxes, although he had to leave a deficit of about Rs 75 crore uncovered.

Instead of looking for more revenue, Deshmukh had initiated an exercise to identify areas where government expenditure could be cut.

T T Krishnamachari (TTK) also presented his interim Budget for 1957-58, just before the general elections. The highlight of his interim Budget speech was his reference to a growing foreign exchange shortage and the need to mobilise adequate resources to fund the second Five-year Plan that was then being finalised.

TTK's interim Budget showed for the first time the finance ministry's scant regard for the sanctity of the revenue and expenditure numbers presented to Parliament.

The interim Budget brought down the revised estimates for the deficit in 1956-57 to Rs 216 crore. But after the elections, the regular Budget presented a few weeks later showed that the actual deficit was Rs 368 crore.

Morarji Desai presented two interim Budgets � one for 1962-63 and the other for 1967-68. The first one was presented in his capacity as finance minister under Nehru's prime ministership, while the latter was as finance minister and deputy prime minister in Indira Gandhi's government. Both interim Budgets were significant for different reasons.

The interim Budget for 1962-63 was presented before the 1962 general elections. In it, Desai presented a full-scale economic survey along with his speech that dwelt on the critical issue of foreign aid from developed countries and the World Bank.

He justified the need for loans to developing countries at concessional terms, paving the way for the setting up of the Aid India Club.

The revised estimates for 1961-62 showed a surplus instead of a deficit projected in the Budget estimates. That was clearly aimed at wooing the electorate. Another attempt at pleasing the voters was to outline the details of expenditure allocation for different sectors for 1962-63. This was the first time that an interim Budget indicated expenditure outlay for the coming financial year.

Desai's second interim Budget was even more significant. This was soon after India's currency devaluation in 1966. Indira Gandhi was the newly elected Congress leader and prime minister, having returned to power after a well-fought general election. Also, this was the first interim Budget of a government at the start of a new five-year tenure.

Not surprisingly, Desai used the speech to outline quite a grim picture for the economy. He touched on the need for more foreign aid, the deteriorating foreign exchange reserves, the need for import restrictions and declining exports. But there was no indication of a Budget deficit. Indeed, Desai's regular Budget presented some weeks later balanced the revenue with expenditure.

The interim Budget presented by Y B Chavan for 1971-72 had no special features. It reviewed the economy, but gave sufficient indication of the need for new taxation in the regular Budget that he would present a few weeks later.

There was a longish section in his speech where Chavan waxed eloquent on the positive impact of the government's policy of nationalising 14 banks in July 1969.

H M Patel's interim Budget had many firsts. This was the first interim Budget to be presented by a former bureaucrat and also a finance secretary. No wonder his speech was the shortest of all interim Budget speeches delivered so far.

Although he had the opportunity to rubbish the Congress government's claims of an economic miracle during the Emergency (1975-77), Patel avoided all such temptations.

Instead, he let the figures do the talking. The Budget deficit in 1976-77, he said, increased from the earlier estimate of Rs 328 crore to Rs 425 crore in the revised estimate.

Patel's interim Budget also clearly hinted at the need to raise revenue through non-inflationary methods and for economy measures.

In sharp contrast to Patel's restraint, R Venkataraman converted his interim Budget speech for 1980-81 into a political statement aimed at attacking the Janata government's economic policies. And like Desai and Chavan, Venkataraman presented a long speech of over 40 paragraphs.

Yashwant Sinha's debut as finance minister was with an interim Budget, caused by the fall of the Chandra Shekhar government requiring a general election in May 1990.

This was at the height of India's economic crisis. Sinha's interim Budget will be remembered for his announcement that the government would disinvest equity in public sector undertakings.

In comparison, Sinha's second interim Budget was sober and mildly critical of his predecessor P Chidambaram's failure to meet the various revenue and expenditure targets.

Sinha also announced the government's decision to accept the Tenth Finance Commission's new formula for sharing of tax revenue among the Centre and the states through an amendment to the Constitution.

That leaves Manmohan Singh with his only interim Budget. He made it into a full-fledged election speech, outlining the Narasimha Rao government's achievements in economic policy.

He also announced a series of policy imperatives that the government ought to pursue, apart from presenting a sector-wise break-up of his expenditure plan for 1996-97.

He projected a fiscal deficit of only 5 per cent of gross domestic product, much lower than the 5.9 per cent achieved in the revised estimates for 1995-96. Singh ended his interim Budget speech with a virtual call to the voters to return the Congress party to power.

Like Manmohan Singh, Jaswant Singh also presents an interim Budget before the elections. The key question is: Will Jaswant Singh restrict himself to an election speech or set a new trend by announcing some new tax proposals too?

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