Economic maladjustments

But these were not the only calamities that the finance minister had to contend with. The world, after six years of total war that was finally ended by two nuclear bombs, was an impoverished place. (He called the situation the “economic maladjustments, which are the inevitable aftermath of total war”). Even the United Kingdom, still the Imperial Power, said Chetty, was “making a heroic effort to rehabilitate her war torn economy and shattered trade”.

Since 1939, Chetty noted, food production had fallen by 7 per cent. And runaway printing of money during the war had resulted in inflation. In addition to all this, the monsoon had failed in the then Madras Presidency and, he said, “the food position still continues to cause anxiety”. Then, there was inflation and the fact people were in replacement mode, buying everything from personal clothing to industrial machinery, that had been in short supply, or unavailable, during the war.

Chetty was a cautious man. In such conditions, he aimed for a surplus, “if possible by increasing revenue and curtailing expenditure.” That’s a goal that Sitharaman pretty certainly won’t be able to achieve in our current circumstances as she seeks to dig India out of its worst downturn in years.

Taxes relatively low

Taxation rates were relatively low in those days. Taxes started for people who earned over Rs 1,500 per annum and people who earned between Rs 1,500 and Rs 5,000 paid only one anna in the rupee (there were 16 annas to a rupee). That’s about 12.5 per cent. The top rate for people who earned more than Rs 15,001 and above was five annas in the rupee – slightly under 33 per cent.

Chetty was not a believer in high taxation. He said: “It will obviously be unwise to pitch the direct taxes to high in a country in the process of development as the inevitable effect of high direct taxation is to retard the formation of capital without which industrial development is not possible.” But he did believe that indirect taxation was good during that particular era because: “During a period of shortage of goods and inflation, it may be necessary to raise the level of indirect taxation to secure a reduction in consumption.” The finance minister also pointed out that in 1937-38 taxes had brought in Rs 75.8 crore. But only 21 per cent of that came from direct taxes. By 1948, however, that figure had risen to 61 per cent.

Still, the finance minister had managed to balance the books far more than anyone had expected. Total revenue, he said, was estimated to be Rs 256.28 crore, and total expenditure Rs 257.37 crore. That left an uncovered deficit of just Rs 1.09 crore. He did warn that, for a variety of reasons, in the future there might be greater deficits.

He excused himself for not presenting a balanced budget, saying: “Although I have not been able to present a balanced or a surplus budget, much as I wish to, the size of the deficit next year, which I propose to leave uncovered, is very small in relation to the total expenditure.”

Shanmukham Chetty even sounded a note of optimism, saying: “In my interim Budget I ventured to express the view that the financial position of the country was intrinsically sound and that we were not living beyond our means or head towards bankruptcy. The budget that I am now presenting fully supports this view.”

He added: “I feel that we can face the future in a spirit of sober confidence.”

Whether he was right on that score is a story still playing out.

Military’s large chunk

Then, as now, the military claimed a large chunk of Chetty’s budget. Fighting in Kashmir had begun just before the interim budget delivered in November 1947, and it was in full swing in February 1948. Total expenditure in the first budget – it was still a paltry amount by our standards, even keeping in mind inflation – was Rs 257.37 crore. Out of that, the defence services claimed a whopping Rs 121.08.

That was a huge chunk of the budget but don’t forget independent India had outsize challenges. First, there was the fighting in Kashmir. Then, the fact that India had almost no navy and hardly any air force to talk about. A team went to Britain soon afterwards to buy four ships. In addition, many British officers had signed up to stay on for a year, but the Indian government was finding it too expensive to pay the salaries of the King’s commissioned officers and had been forced to give them three-months notice in October 1947. That meant it had to scramble to promote and train Indian officers to fill these posts. The army had also been doing police duty as the caravans of people trekked back and forth during the Partition.

Relief and rehabilitation

Chetty put aside Rs 10.04 crore for immediate relief and rehabilitation of refugees and another Rs 15 crore for long-term relief projects. Totally, he explained, he was setting aside Rs 29.95 for refugees and subsidies for food grains. That left him with Rs 106.34 crore for “normal expenditure” out of which Rs 43.86 crore would be needed for interest and debt repayments and pensions. Rs 30 crore went to the provincial governments and an additional Rs 34 crore for them to “repay loans.” He did consider slicing down the payments to the provinces but decided against it, saying, “It would be unwise to do so, particularly as the provinces have framed their plans on the assumption that the promised assistance would be forthcoming.”

All this spending left the finance minister with a deficit of Rs 26. 85 crore. But since the railways were in profit and giving around Rs 4 crore to the government, the deficit came down to Rs 22.35 crore.

The times couldn’t have been grimmer when the first finance minister Shanmukham Chetty rose to deliver Independent India’s first full budget in February 1948. The fizzing joy of independence had been bloodied by the massacres of the Partition. And, barely a month before the Budget presented on February 28, “the light had gone out” of Indians’ lives with the assassination of Mahatma Gandhi.

Luckily, Chetty was an astute financial manager and also a man of considerable eloquence who had a poetic way with words for such moments. About the interim budget in November 1947, he said: “Our crying concern then was to dress the wounds of uprooted humanity, and mobilise all our financial resources to set aright an unhinged economy.”

Chetty said that as the months went by, he had almost begun to think India had weathered the storm and, “I could see a silver lining around the cloud. Then, suddenly, like a thunderbolt that rends the sky and spins the globe, calamity struck us once more and orphaned our infant state.” This was, of course, the assassination of Mahatma Gandhi.

Indian Minister of Finance R. K. Shanmukham Chetty on 6 November 1947 Wikimedia Commons