THE ECONOMIC IMPLICATIONS OF THE UNION BUDGET, 1974-75

By Professor Russi Jal Taraporevala

Summary

Delivered as a Forum of Free Enterprise public lecture in Bombay on 4 March 1974 and published shortly after, Professor Russi Jal Taraporevala’s pamphlet reads the Union Budget for 1974-75 against the backdrop of a battered economy: the 1972 monsoon failure had pushed agriculture into crisis, industrial output had collapsed to a 2.5% decline in 1973-74, wholesale prices had risen by 24% in 1973, and foreign exchange reserves were under pressure from the oil shock. Taraporevala walks systematically through national income, agricultural and industrial production, employment, investment, prices, monetary aggregates, the balance of payments and the deficit, arguing throughout that successive Central Government deficits ran far in excess of estimate and were the principal engine of inflation.

On the budget itself, Taraporevala is sceptical of the Finance Minister’s arithmetic. The official 1974-75 deficit of Rs. 125 crores is, in his view, an underestimate: realistic assumptions about food subsidies, dearness allowance and State assistance suggest a true deficit between Rs. 300 and Rs. 500 crores. He notes that the Plan outlay of Rs. 4,769 crores amounts in real terms to a one-year “plan holiday,” and that the government has relied almost entirely on indirect taxation — excise hikes on 49 items, higher customs and auxiliary duties, postal, telegraph and rail freight rises — which will be passed on to consumers and lift prices by at least 15% in the coming year.

The one element he welcomes is the acceptance of the Wanchoo Committee’s recommendations on direct taxation: the cut in the maximum marginal income tax rate from 97.75% to 77%, the higher exemption limit, and the simplification of personal income-tax. He calls this “an act of great political courage” that should reduce evasion, encourage saving and investment in shares, and ease capital gains taxation — though he regrets that the simultaneous increase in wealth tax slabs partly nullifies the relief. He concludes that the budget has taken a courageous step on direct taxation but, by leaning so heavily on deficit financing and indirect levies, will deliver another inflationary jolt, with prices likely to rise by considerably more than 15% in 1974-75.

Key points

• Frames the 1974-75 budget against a battered economy: 1972 monsoon failure, industrial output declining 2.5% in 1973-74, wholesale prices up 24% in 1973, and oil-shock pressure on the balance of payments.

• Argues that the Fourth Plan’s headline targets — 5.7% growth in national income and 5.6% in foodgrains — were missed by wide margins, with actual growth closer to 3.5% and foodgrain growth around 3% or less.

• Identifies chronic Central Government deficits well in excess of budget estimates as the principal driver of inflation; the 1973-74 deficit ballooned from an estimated Rs. 87 crores to Rs. 650 crores.

• Reads the Rs. 4,769 crore Plan outlay for 1974-75 as effectively a one-year ‘plan holiday’ once price rises are factored in, raising doubts about implementation of the Fifth Five-Year Plan.

• Estimates the realistic 1974-75 deficit at Rs. 300-500 crores, well above the official figure of Rs. 125 crores, given understated provisions for food subsidy, dearness allowance and State assistance.

• Criticises the budget for relying almost entirely on indirect taxation (Rs. 212 crores from excise, customs, postal and railway charges) which will be passed on to consumers and raise prices by at least 15%.

• Praises the acceptance of the Wanchoo Committee recommendations — cutting the maximum marginal income tax rate from 97.75% to 77% and raising the exemption limit — as an incentive to save, invest and reduce evasion.

• Notes that the rise in wealth-tax slabs partially nullifies the income-tax relief, and that the public sector continues to generate negligible surplus (Rs. 18.1 crores profit across 101 undertakings in 1972-73).

• Concludes that the budget will provide a further inflationary stimulant and that the balance of payments will remain tight under the oil crisis.

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