Lessons from 1948 to 2018

In 70 years India has actually had only half a dozen growth budgets. The rest have been about redistribution of incomes

All finance ministers, everywhere, have very difficult jobs which comprise mutually inconsistent and conflicting objectives. Thus they have to raise money and also be able to say ‘no’ to ministerial colleagues asking for money. This is because good finance ministers also have to ensure that public finances remain healthy.

However, politics often determines the pattern of government expenditure. That is why the experience of the last seventy years shows that just when a finance minister thinks he's got it all under control, the Sisyphian rock rolls right down again. Politics, external shocks, disasters, droughts etc all contribute.

This is what has happened to Arun Jaitley in the last four years. Everything was going fine till the shock of demonetisation laid waste the informal economy and the poor implementation of GST led to slow revenue growth.  

So the fiscal target is going to be hard to meet this year. It will slip -- not by much perhaps if the fudging is good -- but slip it will. The target was 3.2 per cent of GDP.

But Mr Jaitley is not the first finance minister who has been brought up short by what Shakespeare called the “slings and arrows of outrageous fortune”. India’s first finance minister, Sir R K Shanmugam Chetty, a businessman from Madras with no particular expertise in running government finances, was the first to get his oats when he presented his first, interim budget on November 26, 1947. Interim because like Mr Jaitley’s first budget in July 2014, it also covered only a part of the year: seven-and-a-half months.

And there was very little room for manoeuvre. India had just been partitioned, which meant a huge fiscal load from paying off Pakistan and paying for the millions of refugees it sent. The Second World War had ended two years earlier and the world economy was in shambles. And because of demobilisation, the defence services were gobbling up the bulk of the government's revenues.

Sir Shanmugam told the Lok Sabha – as Mr Jaitley might well do on February 1 -- that in spite of the government’s best efforts, the gap between expenditure and revenue it simply would not go away.

That might have been fine except that this would become a permanent refrain of all finance ministers over the coming years.

Sir Shanmugam also talked about the high levels of taxation and the cheap borrowing by the government. What else can I do, he asked.

So while he didn't raise taxes, he did leave the deficit -- Rs 25 crores, yes, only 25 crores -- uncovered, thus deciding to persist with the policy of cheap government borrowing on the grounds that it was in the national interest. That pretty much set the tone for all future governments.

Nationalism had been introduced into budgeting for the first time. This too would become the signature tune of successor governments.

Sir Shanmugam also divided imports into three categories: free, restricted and prohibited. In less than a decade the first category almost vanished while the latter two continued to grow. Thus, was import licensing born.

The bureaucracy simply loved it and continued to do so for 70 years. Now, hopefully, the GST will end their love affair with such controls. But as the E-way bills show, we must never underestimate the bureaucracy.

In his first full Budget for 1948-49 Sir Shanmugam started another practice -- of raiding the railways surplus. Yes, folks, those days the railways used to have surpluses.

He also did something else which everyone is hoping Mr Jaitley will do: he reduces taxes to, he said, increase the rate of savings which was a paltry 4 per cent of GDP then and to increase private investment which, as now, was very low.

But nothing happened: the rate of savings didn't pick up and nor did private investment. It would happen to other finance ministers too as P Chidambaram discovered in 1997. He had cut taxes dramatically in the hope that savings and investment would revive. They didn’t.

Mr Jaswant Singh also discovered this in 2003. He had done everything that traditional economics required of a Budget but alas to no avail.

The question now is if this could happen to Mr Jaitley too. Don't be surprised if it does.