THE ECONOMIC IMPLICATIONS OF THE UNION BUDGET, 1969-70

By Professor Russi Jal Taraporevala

Summary

Professor Russi Jal Taraporevala, writing in this Forum of Free Enterprise pamphlet (reproducing an article from the Economic Times followed by a separate analysis of taxation proposals), reads the Union Budget for 1969-70 as an instrument whose macroeconomic posture is broadly defensible but whose strategy toward the private sector is timid. He opens by setting the budget against the recent record: National Income fell 5.7 per cent in 1965-66, recovered slowly through 1966-67, and jumped 8.9 per cent in 1967-68; food-grain output rebounded from 72 million tons in 1965-66 to an estimated 96 million tons in 1968-69; and, most remarkably, the general price index actually fell one per cent in 1968 — the first such decline since 1955 — even though the Centre ran a Rs. 260 crore deficit. From this he draws his most heterodox claim of the pamphlet: that large-scale deficit financing does not invariably feed inflation when real output is rising faster than money supply.

The central diagnosis is fiscal strain on the Centre, driven by rising transfers to the States and runaway defence spending — Rs. 1,110 crores in 1969-70, more than one-fifth of the entire Central Budget. Taraporevala accepts the priority of defence but calls for a continuous review of how the outlay is spent. His sharpest criticism is reserved for the public sector: Central investment of over Rs. 3,500 crores in more than 80 industrial and commercial enterprises produced a net loss of Rs. 35 crores in the past year, with 55 running concerns absorbing Rs. 3,200 crores of that capital. He argues that this ‘vast sector of public investment’ is dragging on national income and on the exchequer, and that the Memorandum on the public sector circulated with the budget papers is unlikely to deliver the surpluses needed for national development. New loans of Rs. 296 crores and capital contributions to such enterprises in 1969-70 will, in his view, deepen the problem unless profitability is forced.

On agriculture, he reads the Finance Minister’s move to tax the rural sector as overdue in principle but mishandled in execution. The ad valorem duties of 10 per cent on fertilisers (Rs. 22 crores) and 20 per cent on power-driven pumps (Rs. 2 crores) he calls ‘relatively modest’. But the proposed wealth tax on agricultural land, projected to yield only Rs. 5 crores, is a ‘gross underestimate’ and constitutionally inappropriate: direct taxation of agriculture, he argues, is properly a State responsibility, and the Centre’s intervention will cause administrative chaos. The correct path was to force the States to raise their agricultural income-tax rates substantially to fund the coming Fourth Plan.

The second part of the pamphlet — ‘Taxation Proposals Analysed’ — works through the indirect and direct tax changes item by item: cuts in export duty on jute (Rs. 12 crore sacrifice), excise hikes on superfine textiles, a 23 per cent ad valorem duty on sugar that he expects to be absorbed by manufacturers rather than passed to consumers, modest cigarette and motor-spirit increases, and an ad valorem duty of 10 per cent on processed foods that he treats as premature given the need to encourage the food-processing industry. He calls the increased income-tax burden on middle-class earners in the Rs. 10,000–20,000 slabs ‘unjustified’, simplifies-and-praises the new definition of widely-held companies (any firm listed on a recognised stock exchange now qualifies), and welcomes the Rs. 1,000 dividend exemption as an inducement to popularise equity investment. He condemns as ‘unfortunate and unjustified’ the new advance-tax regime that will penalise small and medium firms unable to estimate their incomes precisely before the financial year closes, and the drastically enhanced Wealth Tax Act penalties — half a per cent per month, capped at 100 per cent rather than 50 per cent — which he calls ‘excessively harsh’ and a recipe for ‘total confiscation’ given normal valuation disputes. Throughout, the pamphlet’s polemical centre is consistent with its Forum of Free Enterprise imprint: the Budget should be judged by how much room it makes for private capital to grow, and a one per cent cut in the Bank Rate is the immediate follow-up step Taraporevala demands.

Key points

• Frames the 1969-70 Budget as a ‘challenge to the private sector’ in line with the Forum of Free Enterprise’s outlook, opening with a Eugene Black epigraph that private enterprise should be accepted ‘not as a necessary evil, but as an affirmative good’.

• Argues from 1968 data — Rs. 260 crore deficit alongside a one per cent fall in the price index, the first decline since 1955 — that large-scale deficit financing does not invariably cause inflation when real output growth outpaces money-supply growth.

• Catalogues fiscal strain on the Centre: transfers to States rising to Rs. 596 crore in 1969-70 (up Rs. 118 crore over the previous year’s Budget) and defence expenditure reaching Rs. 1,110 crore, more than one-fifth of the Central Budget.

• Mounts a sustained critique of the public sector: Central investment of over Rs. 3,500 crore in 80+ enterprises produced a net loss of Rs. 35 crore in the past year, yet the Budget extends a further Rs. 296 crore in capital contributions and Rs. 383 crore in loans to such firms.

• Calls the Finance Minister’s attempt to tax agriculture directly — through ad valorem duties on fertilisers and pumps plus a wealth tax on farmland — overdue in principle but constitutionally misplaced; agricultural direct tax, he insists, belongs to the States.

• Reads the indirect-tax package (Rs. 127 crore in new taxation, of which Rs. 100 crore accrues to the Centre) as modest and well spread, with excise increases on cigarettes, motor spirit, kerosene and superfine textiles likely to be passed to consumers without major inflationary impact.

• Condemns the new advance-tax regime — penalties on assessees whose final income exceeds their estimate by more than 33 1/3 per cent — as ‘tremendous hardship’ for small and medium firms that lack the accounting machinery to project profits in advance.

• Demands an immediate one per cent cut in the Bank Rate as the most useful follow-up step, arguing that 1968 already demonstrated that monetary easing need not be inflationary.

• Welcomes the simplified definition of widely-held companies (stock-exchange listing as the test) and the Rs. 1,000 dividend-income exemption as ways to channel middle-class savings into the corporate sector.

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