The Economic Implications of the Union Budget, 1974-75

By Professor Russi Jal Taraporevala

Summary

Professor Russi Jal Taraporevala’s lecture, delivered in Bombay on 4 March 1974 under the auspices of the Forum of Free Enterprise and other organisations, walks the reader systematically through the macroeconomic setting in which Finance Minister Y. B. Chavan’s Union Budget for 1974-75 was framed. Taraporevala opens by sketching the strain that the failure of the 1972 kharif monsoon imposed on agriculture and industry, the partial revival after October 1973, and the sub-target rates of growth that left the Fourth Plan limping along — national income growth unlikely to exceed 3.5 per cent against the 5.7 per cent target, agricultural output in 1973-74 little better than four years earlier, and industrial production running at roughly half its postulated 8-10 per cent rate.

The core of the booklet is a sectoral diagnosis of inflation, fiscal indiscipline, and a swollen but unprofitable public sector. Wholesale prices rose 19.2 per cent in 1973 and food prices by 24 per cent; central budgets ran cumulative deficits of nearly Rs. 2,100 crores across the Fourth Plan years; the 101 public-sector undertakings together earned only Rs. 18.1 crores of profit in 1972-73 on thousands of crores of invested public funds; the railways ran deep deficits with deteriorating efficiency; and the Reserve Bank’s tight-money posture was undercut by the fact that practically all the credit expansion went to the government, not the private sector.

Turning to the budget proper, Taraporevala welcomes the one-year pause in plan outlays as an opportunity for consolidation and praises the Wanchoo-Committee-inspired reduction of the top marginal income-tax rate from 97.75 per cent to 77 per cent, the higher exemption limit, the extension of the development rebate, and the lower tax on partnership firms as steps that should restore incentives to save, invest, and bear industrial risk. He is sharply critical, however, of the offsetting increase in wealth tax, of the heavy reliance on indirect taxes — Rs. 212 crores of excise changes spread across 49 items, higher railway freight, postal and customs levies — which he reckons will push prices up by at least 15 per cent, and of the persistent underestimation of the real budgetary deficit, which he forecasts will land between Rs. 300 and Rs. 500 crores rather than the Rs. 125 crores claimed.

The booklet closes with a sober conclusion: industrial recovery depends on power and idle-capacity utilisation, the balance of payments remains tight on account of the oil crisis, and while the courage shown on direct taxation deserves credit, the government must follow through with practical policies that spur industrial growth and rein in the inflationary impulse built into its own fiscal habits.

Key points

• Fourth Plan growth of national income unlikely to exceed 3.5 per cent against a 5.7 per cent target, and agricultural output in 1973-74 was no higher than four years earlier despite a 40-million increase in population.

• Industrial production grew at roughly half the postulated 8-10 per cent target through the Fourth Plan and actually fell 2.5 per cent in April-June 1973, with the post-1972 power crisis compounding the slowdown.

• Wholesale prices rose 19.2 per cent in 1973 and food prices 24 per cent between December 1972 and December 1973, with deficit financing of Rs. 738, 680 and 650 crores in successive years identified as a chief inflationary driver.

• Public sector enterprises returned Rs. 18.1 crores of profit on thousands of crores of public investment; railways ran heavy deficits; and net bank credit expansion went almost entirely to government, not the private sector, making RBI’s tight-money policy ‘misconceived and irrelevant’.

• Taraporevala welcomes the one-year pause in plan outlays as a chance for consolidation, and applauds the Wanchoo-driven reduction of the top marginal income-tax rate from 97.75 per cent to 77 per cent and the raised exemption limit as steps that should curb evasion and revive incentives to save and invest.

• He is sharply critical of higher wealth-tax slabs (2 to 3 per cent and 3 to 4 per cent), the Rs. 212 crores of additional excise duties spread over 49 items, and increases in railway, postal and customs charges, which together he reckons will push prices up by at least 15 per cent in 1974-75.

• He charges the Finance Minister with continuing the ‘unhealthy fiscal habit’ of underestimating the real deficit — projecting a net deficit of Rs. 125 crores when the true figure is likely to be Rs. 300-500 crores — and warns that the balance of payments will remain tight on account of the oil-import bill.

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