Arun Jaitley used to be a carefree man till May 2014, never losing his sleep over anything. Then in May 2014 he became finance minister and his troubles started. At his third foray in budgetting last month the worst nightmare of any finance minister came to pass: he had to roll back a Budget proposal. He tried to introduce some economic sense into the taxation of savings via the tax on exit from the provident fund. But he reckoned without the middle class’s preference for irrationality. Ten days after proposing, he had to admit defeat and take it back.
This episode, around the 70th Doordarshan’s Budget serial, shows how few jobs are more exacting than that of a finance minister. The man — there has been no female finance minister even after 69 years — has to ensure the continuing good health of public finances. That’s easier said than done because there are the pulls and pressures of a genuine pluralist democracy to contend with as well. Reconciling the two is a Sisyphean task. Just when a finance minister thinks he’s got there, the rock rolls right down again.
Rising expenditure and falling revenues are staple diet for all finance ministers, not just in India but the world over. As Aurangzeb once said when he got disgusted by the constant demands for jagirs from his loyalists, ek anaar, sau bimaar meaning there is one pomegrenate and a hundred sick people asking for a share. Imagine if even he felt that way, how much worse a democratically elected government seeking re-election must feel.
In India, governments have been trying to squeeze water from stone since 1957. That was the year when Pandit Nehru launched the country on the road to ‘planned development.’ That was fine except that while the plans were big, the money was tiny. To meet the needs of the Second Plan, therefore, the Budget of 1957 imposed huge new taxes. The stock market, mean and selfish as ever, crashed and the people were unhappy. But the foundations of heavy taxation had been laid.
The decade of the 1960s was like a horror serial. First we got walloped by China in 1962. Then Pandit Nehru died in 1964. Then Pakistan attacked, twice, in 1965. In January 1966, the new Prime Minister, Lal Bahadur Shastri died. To make it all even worse, 1965 was a drought year; so was 1966. The two back-to-back droughts almost broke India’s economic back. So great was the stress, that in 1969, Indira Gandhi did the unthinkable: she split the Congress into two. The last time it had split was in 1907.
In 1970, for the first time since Independence, the Budget became an instrument of politics. Bolstered by Communist support for her minority government, Indira Gandhi decided to squeeze the rich. The marginal rate of taxation was raised to 97 per cent and the basic rates were at 60 per cent.
In February 1979, Charan Singh, a Jat farmer from Western UP, presented a Budget that sought to placate the farmers. The method was an old one: increase the taxes on everything that urban dwellers use. A miffed urban India derided his Budget as a ‘Kulak Budget!’ As if to indicate their displeasure, the gods made sure that the rains didn’t come that summer. The monsoon failed. Prices started to shoot up. By 1981, inflation had shot up to 22 per cent.
That, as it happens, was the last year when the government overplayed its socialist, pro-poor hand. For the next 25 years, the proportion of income that was being taken over by the government kept coming down. The man who took over from Manmohan Singh after the Congress was defeated in 1996 was Palaniappan Chidambaram. A committed reformer, he had to work with 12 other parties, including, as his luck would have it, the Communists. As such, he had very little elbow room.
But he understood what the economy needed and bravely brought down the maximum rate of income tax to 30 per cent, cut the corporation tax to 40 per cent and reduced the average level of tariffs to just a shade over 25 per cent. Still, all good things must come to an end and in 2004 came the new avatar of Indira Gandhi and Charan Singh called the United Progressive Alliance. Since then, there has been a steady increase in the proportion of income taken over by the government. The irony is that the man who started the reversal was none other than P Chidambaram. He defends his policies of higher taxation now as stoutly as he defended his policies of lower taxation in 1997.
The result: today, your average honest taxpayer hands over around half of his income to the government in the form of income tax, VAT, service tax and the latest horror, the cess. Incredible India, indeed.