THE ECONOMIC IMPLICATIONS OF THE UNION BUDGET, 1971-72

By PROFESSOR RUSSI JAL TARAPOREVALA

Summary

Professor Russi Jal Taraporevala, delivering a Forum of Free Enterprise lecture in Bombay on 31st May 1971, dissects the Union Budget for 1971-72 against the macroeconomic backdrop of the Fourth Five Year Plan. He argues that national income growth at 5.3-5.5% is barely keeping pace with the Plan target, that industry is stagnating with a growth rate of only 4.7% against an envisaged 8-10%, and that the Economy Survey itself admits public sector enterprises returned just Rs. 7.2 crores on Rs. 4,000 crores of investment. Inflation is resurgent, employment additions of 400,000 are pitifully inadequate, and the budget responds with doles for the unemployed instead of measures to expand productive jobs.

The heart of the lecture is a withering attack on what Taraporevala calls a “draconian tax effort.” He calculates that new levies will eventually exceed Rupees 400 crores annually, making this the heaviest taxation burden India has seen in twenty years. He walks the audience through the inflationary excise duties on cigarettes, motor spirit, soap, glass, cameras and readymade garments; the 20% foreign travel tax; the surcharge on incomes above Rs. 15,000 that pushes the marginal rate on incomes over Rs. 2 lakhs to 97.75%; and a wealth tax regime that, combined with income tax, amounts to “confiscation of personal wealth” and “a capital levy.”

The second half catalogues structural assaults on private investment: the inclusion of jewellery in wealth tax in defiance of the Supreme Court’s Arundhati Balkrishna judgement; retrospective amendment to 1963 to override that ruling; the reversal of the Goli Easwariah gift-tax judgement; the announced abolition of the development rebate after 1974; the narrowing of the Section 80J concession for new industrial undertakings; and the withdrawal of wealth-tax exemption on shares of new industrial companies. Taraporevala reads these as a coordinated policy that will dampen entrepreneurial spirit, protect entrenched large groups from new entrants, and “mop up corporate savings” precisely when industrial expansion is most urgently needed.

Key points

• National income growth (5.3-5.5%) is barely meeting the Fourth Plan target of 5% per annum; industrial growth at 4.7% is well short of the 8-10% envisaged.

• The Economy Survey itself concedes the public sector returned only Rs. 7.2 crores on Rs. 4,000 crores of investment in 1969-70, so “savage tax burdens were partially the result of the inefficiency and failure of the public sector.”

• The only Fourth Plan target already exceeded is the taxation target of Rs. 2,100 crores; production and industrial-growth targets have been largely ignored.

• New levies yield Rs. 220 crores this year, rising to roughly Rs. 350-400 crores annually around 1975 — the heaviest taxation burden in twenty years.

• Excise duties on cigarettes, motor spirit, soap, glass, fans, cameras and readymade garments, plus a 20% foreign-travel tax and higher posts, telegraphs and railway charges, will release “a massive dose of inflationary pressure.”

• The income-tax surcharge above Rs. 15,000 pushes the marginal rate on the second lakh of income to 92% and on income over Rs. 2 lakhs to 97.75%, effectively capping income around Rs. 60,000.

• Combined wealth and income tax above Rs. 15 lakhs amounts to virtual confiscation — “tantamount to a capital levy” — and jewellery is taxed retrospectively from 1963 in defiance of the Supreme Court’s Arundhati Balkrishna ruling.

• Abolition of the development rebate after 1974, narrowing of Section 80J relief, and the end of wealth-tax exemption on shares of new industrial undertakings will deter new floatations and shield existing large groups from competition.

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