An Analysis of Union Budget 1965-66

Summary

A. D. Shroff, President of the Forum of Free Enterprise, delivers a clause-by-clause critique of the Union Budget 1965-66 (originally a talk of 9 March 1965). He opens by praising Finance Minister T. T. Krishnamachari for being unusually transparent — for the first time the budget papers, especially the Economic Survey, allow the tax-payer to see the country’s true position — and for the welcome simplification of the tax structure (the folding of surcharges into a unified income-tax). But his approval ends there. The compilers, he argues, habitually underestimate revenue and overestimate expenditure; the upshot is an unnecessary additional tax burden on a country whose statistical machinery is itself decades behind the times.

The core of the pamphlet is a sustained attack on the rising burden of indirect taxes — customs and especially excise — which have climbed from Rs. 157 crores in 1950-51 to Rs. 827 crores by 1965, falling hardest on items of daily necessity like kerosene, matches and sugar consumed by 62 percent of villagers. Shroff calls for the abolition of the Annuity Deposit Scheme, the Estate Duty and the Dividend Tax, which between them destroy the investor’s incentive and starve the capital market; he urges India to learn the “Kennedy philosophy of taxation” that lower rates yield higher revenue and shrink the black-money economy.

On public expenditure he is scathing: a total investment of Rs. 1,500 crores in public undertakings yields the Government a “magnificent” return of Rs. 2 crores 85 lakhs. He invokes the post-First-World-War Inchcape Committee as a model for a powerful expenditure-scrutiny body, arguing that at least Rs. 150–200 crores a year could be saved on an outlay of over Rs. 2,000 crores. On the foreign-exchange front he commends the Finance Minister’s frank admission that the position has deteriorated every year through the Plan periods, but warns that the new 10 percent regulatory import duty will inflate costs, defeat export promotion and worsen idle industrial capacity. Throughout, the underlying plea is that economic policy be “informed by basic and inexorable laws of economics” rather than ideology — the standing Forum of Free Enterprise refrain.

Key points

• Welcomes the Finance Minister’s Economic Survey and the simplification of the income-tax structure (merging surcharges into a unified rate) as the first genuinely informative Budget in years.

• Charges that compilers systematically underestimate revenue and overestimate expenditure, imposing an unnecessary additional tax burden — non-Plan expenditure that was to fall by Rs. 70 crores has instead risen by Rs. 117 crores.

• Attacks the runaway growth of indirect taxes: Excise Duty climbed from Rs. 157 crores in 1950-51 to Rs. 827 crores in 1965-66, with regressive incidence on kerosene (45% of the price), matches (62%) and sugar.

• Calls for abolition of the Annuity Deposit Scheme (a Rs. 65-crore drain on investors), the Estate Duty (destroys the saver’s natural desire to provide for his family) and the Dividend Tax on the corporate sector.

• Endorses the Kennedy lesson that lower tax rates expand the economy and shrink black money; punitive Indian rates leave “no incentive to earn as much as he likes”.

• Indicts the public sector: Rs. 1,500 crores invested in Government undertakings returned only Rs. 2 crores 85 lakhs in 1965-66 — a “magnificent” yield that hides cross-subsidy by the tax-payer.

• Proposes a powerful expenditure-scrutiny committee modelled on the post-WWI Inchcape Committee, arguing Rs. 150–200 crores could be saved annually on an outlay of over Rs. 2,000 crores.

• Warns that the new 10% regulatory import duty will inflate costs, leave industrial capacity idle, and defeat export promotion; foreign-exchange situation has worsened with every Plan.