India’s Finance Minister will present an “interim” Union Budget for the remainder of this electoral cycle on 1st February. This short budget will be the last to be announced before the current Lok Sabha elections.
Here’s a look at the history of our budget.
Every year, just before the close of the financial year, the Finance Minister presents the year’s Union Budget before the Parliament. It is perhaps the biggest event on India’s economic calendar.
The union budget is, in a sense, a financial statement of the Indian government. It details what the government has earned and spent previously, and what it intends to earn or spend in the coming year.
Why is it important?
Money is the lifeblood of the government, and so, the budget is not merely a financial presentation. It is also a presentation on policy. It highlights precisely what the Government intends to do in the coming year. It sets the country’s economic agenda for the year, and foreshadows the central government’s concerns and priorities, going ahead.
All of this affects you in a very real way. See, it is you that the government takes money from. And it is you that it spends on. The schemes and taxes discussed in the budget presentation will touch you directly.
What is an interim budget?
The budget that will be presented on February 1 shall be an “interim budget”. An interim budget is a temporary budget.
This is because the current government may not be in power after the Lok Sabha elections this year. Even if they win again, the new Lok Sabha may have different people—including a different finance minister. It would be unfair if the current Lok Sabha could bind the next one with its own budgetary decisions.
This is why, instead of a full budget for the entire upcoming financial year, this interim budget will only provide for a few months, until the next Lok Sabha comes in.
History of budgets
Historically, monarchs controlled their kingdom’s finances. There was no distinction between their personal and administrative funds, and the money was often poorly managed. When the first European legislatures began their fight to wrest control from the monarchs, this was one of the key powers they went after.
With modernity, European kingdoms became engaged in prolonged, costly wars. The need for organized finances and higher taxes grew. So the monarchs began to organize treasuries and developed something resembling a financial bureaucracy for better management of finances.
The legislatures of that era, after claiming authority over the kingdom’s spending, cramped down on funds monarchs had for wars. So instead of making random demands, the monarchs sought to convince the legislatures by presenting a budget and telling them exactly how much money they needed and how they would spend it, ensuring accountability for the funds they sanctioned.
In the early 18th century, the people of England had lost confidence in the English government after it sparked the South Sea Bubble and took on massive war debts. To regain public trust, the government started presenting account statements before the parliament every year, becoming the first country with a modern annual budget.
India’s first budget
In 1858, following the First War of Independence, the British government took control of India from the East India Company. The EIC’s mismanagement had ensured that British finances were in disarray. Scottish businessman and founder of The Economist and Standard Chartered Bank, James Wilson, introduced India’s first official budget in 1860, hoping to bring reform.
Here are some historical budgets that shaped the Indian economy and some interesting facts about the budget.
1947
Independent India’s first budget was presented by RK Shanmukham Chetty on November 26, 1947.
This budget came at a difficult time. The Indian government had just taken charge of an economy that was low on resources, with little experience, amidst the unrest following the partition.
This first budget was focused on stabilising the dire situation of the country. The biggest expenditures from the budget were reserved for strengthening the country’s defence, rehabilitating refugees, and improving basic services. This budget set the Indian economy on its path to becoming a ‘mixed economy’ - which would have active participation from both the private and public sectors.
1950*
This was the first budget after the new constitution was adopted. This first budget of the ‘Republic of India’ was presented by John Mathai.
This budget laid down the foundation of the Nehruvian economic model. It created the Planning Commission, which would report directly to the Prime Minister, and direct economic policy in a top-down fashion.
The Planning Commission was tasked with setting out ‘Five Year Plans’ for the economy. These plans would evaluate the country’s resources, decide the sectors to prioritise, monitor their progress, and suggest any policy adjustments necessary, among other things.
The Planning Commission would remain in place until 2015, when it was replaced by NITI (National Institution for Transforming India) Aayog.
1957
India faced its first economic crisis early on in its second five-year plan, with the Suez crisis inflating import costs and depleting India’s foreign exchange reserves. To deal with this, the Finance Minister, TT Krishnamachari introduced the 1957 budget, imposing a wealth tax and an expenditure tax to increase savings and investment. Strict import controls were enforced to manage the balance-of-payments crisis, alongside export-boosting schemes.
These measures marked the beginning of an economic approach which lasted until a major shift in 1991.
1991
In 1991, India was in the worst economic crisis it had ever seen. Excessive government spending, costly oil imports due to the Gulf War and collapse of the Soviet Union had severely strained the economy. On top of that, the government failed to pass a full budget in February 1991.
The budget presented by then Finance Minister Dr. Manmohan Singh later that year marked an epochal change in Indian history. Instead of further restricting the economy, this budget introduced sweeping reforms.
License requirements were scrapped for most industries, large divestments were planned to reduce the government’s financial load, capital controls were relaxed and the Indian Rupee was allowed to fall in value. These changes started a new era for the Indian economy, attracting foreign investments and increasing competitiveness of Indian industries.
1997
The political uncertainty of 1996 casted doubts on the reforms project that started in the 1991 budget, which had changed the country’s economic trajectory. In 1997, however, P. Chidambaram delivered a ‘dream budget’, signalling that reforms would continue.
Income tax was slashed by 10% for individuals and 5% for corporations. License requirements were reduced further and foreign institutions were given more space to invest. A voluntary disclosure regime was created, under which people who had been evading taxes could re-enter the tax net.
These changes signalled continuity with the 1991 reforms and brought India’s tax regime in line with various advanced global economies.
Some interesting facts about the budget
Why is the budget presented on 1st February?
Until 2016, the union budget was presented on the last working day of February, a tradition followed since the British era. However, the government presents various changes on the day of the budget, many of which kick in from April 1, when the new financial year begins. For instance, it may suggest an entirely new way in which tax is collected. The Government would only have a single month to reorient, update its systems and train its personnel to accommodate the change.
Breaking from the 92-year-old tradition, former finance minister Arun Jaitley moved the date of the budget to February 1, to give the government more breathing room to implement its changes.
The importance of the halwa ceremony
The halwa ceremony, hosted five days before the presentation of the budget in the Parliament for Finance Ministry staff, marks the beginning of the printing of budget-related documents.
It also signifies the start of the “lock-in” period for officials and support staff involved in the budget. To maintain the secrecy of the budget details, the personnel engaged in budget preparation are required to stay in the North Block of the Secretariat Building, isolated from the outside world until the budget is presented in the parliament.