What will Nirmalaji do on February 1?

If Nirmala Sitharaman does indeed present a 'never-before' like Budget on February 1, going by her promise, she would create a new benchmark for post-contraction Budgets, observes A K Bhattacharya.

A contraction of 7.7 per cent is what the Indian economy is expected to experience during 2020-2021, according to the National Statistical Office (NSO) of the Union government.

For the Union Budget for 2021-2022, to be presented on February 1, the implications are significant as it will have an impact on government finances.

According to the NSO's estimate, the nominal size of India’s gross domestic product in the current year would be Rs 195 trillion, about 4 per cent less than the Rs 203 trillion achieved in 2019-2020.

More importantly, the estimate of Rs 195 trillion for the current year would be short of the originally projected GDP size of Rs 225 trillion by as much as over 13 per cent.

Remember that a projected rise of 20 per cent in the government's net revenue in the current year was premised on an 11 per cent increase in nominal GDP during the year.

If, instead of growing, the economy has shrunk, then obviously the revenue projections would go haywire. But the ongoing pandemic requires the government to spend more money.

Hence, a squeeze in expenditure is extremely unlikely, though the government has kept a tight leash on its spending so far.

In the April-November 2020 period, total expenditure grew by less than 5 per cent, compared to the budgeted target of 13 per cent.

Nevertheless, thanks to the revenue shortfall, the fiscal deficit in 2020-2021 is set to exceed the target of 3.5 per cent of GDP by a huge margin.

By the end of November 2020, the government had already borrowed about Rs 10 trillion. It now has a cushion of borrowing another Rs 2 trillion in the remaining four months.

If the total borrowing by the Centre stays in the region of Rs 12 trillion, the fiscal deficit for the current year would not be less than 6.1 per cent of GDP.

But what about the coming year?

The NSO figure now establishes that Finance Minister Nirmala Sitharaman's forthcoming Budget would be presented in the wake of a year when the economy had contracted.

Only on three occasions in India since the 1960s, a finance minister had to present a Budget against the backdrop of a contraction. These were the Budgets for 1966-1967, 1973-74 and 1980-81.

In the years prior to these three Budgets, the Indian economy had shrunk by 3.7 per cent (1965-1966), 0.3 per cent (1972-1973) and by 5.2 per cent (1979-1980).

A quick look at these three budgets and the economic backdrop in which these had been prepared could be instructive.

India was engaged in a war with Pakistan in August-September 1965. There was a pause in foreign aid to India.

The monsoon failed leading to a drop in agricultural output and inflation based on the wholesale price index (WPI) rose by 7.6 per cent.

In his Budget for 1966-1967, Finance Minister Sachindra Chaudhuri announced marginal increases in excise duties, provided income-tax relief for individual taxpayers by raising the exemption limit and abolished the controversial expenditure tax his predecessor had imposed.

His big move was to levy a flat special surcharge of 10 per cent on all non-corporate income-tax payers and raise the income-tax on companies by 10 percentage points.

However, his biggest move as finance minister was not contained in the Budget. On June 6, 1966, just 14 weeks after he presented the Budget, the Indian rupee was devalued by 57 per cent to Rs 7.50 against a US dollar.

The second contraction of the Indian economy was marginal -- only 0.3 per cent in 1972-1973.

Once again, a fortnight-long war with Pakistan in December 1971, preceded by a huge refugee influx on its eastern borders, had played havoc with the economy.

The monsoon failed again in 1972, causing a severe drought in the country and pushing WPI-based inflation to over 10 per cent in 1972-1973.

What did Finance Minister Yashwantrao Chavan do in his Budget for 1973-1974? Surprisingly, not much. His efforts in the area of direct taxes were modest, the most significant being the acceptance of the K N Raj Committee's recommendation to combine the agricultural income of individual taxpayers in their non-agricultural income for calculating their tax liability.

He raised excise duty on luxury items and effected a steep increase in Customs duty on many imported items.

In 1979-1980, the economy contracted by 5.2 per cent. That was the last year of the faction-ridden Janata Party government.

Agricultural output also fell, in the wake of poor rains leading to a drought. Infrastructure constraints got more severe.

The Congress government under Indira Gandhi was formed after the elections in January 1980 and its first Budget was presented by Finance Minister Ramaswamy Venkataraman five months later in June.

Venkataraman's Budget for 1980-1981 offered relief to individual income-tax payers by raising the exemption limit and reducing the surcharge on them by half.

For companies, he tweaked the depreciation norms and tax holiday scheme for new undertakings to boost investment.

On indirect taxes, the Budget extended the coverage of special excise duty to include more items, raised Customs duty on a wide range of items to offer protection to indigenous industries and steeply increased the duty on passenger baggage above the permissible limits.

A quick review of the three Budgets leaves us with a few takeaways. One, a steep drop in agricultural output was a common factor in all the three years.

This was understandable as the Indian economy was crucially dependent on agriculture in those years. In contrast, the contraction in 2020-2021 will take place even as agriculture will record growth.

Two, on two of the three occasions, India was engaged in a war with Pakistan. On the third occasion, there was political instability.

Three, none of the three finance ministers came out with any major fiscal proposals to counter the adverse effects of an economic contraction of the previous year.

The only big move that was initiated in the wake of the 1965-1966 contraction was the devaluation, but that was not part of the Budget.

While the finance minister was engaged with his team on giving final touches to the decision on devaluation, it was announced only about three months later.

And four, all the three finance ministers offered relief in many areas on the direct taxes front and raised Customs duty.

So, what do these three Budgets in response to an economic contraction tell us about what Finance Minister Nirmala Sitharaman may unveil on February 1?

The economic contraction of 2020-2021 was caused primarily by the lockdown imposed in the wake of the Covid pandemic. The situation in those three years of past contraction is not comparable with what prevails now.

Yet, it would be reasonable to conclude from the past three post-contraction Budgets that, barring some income-tax reliefs, finance ministers in those years were not excessively exercised over the need for taking major and bold moves through their Budget proposals to bring growth back into the economy.

If Sitharaman does indeed present a 'never-before' like Budget on February 1, going by her promise, she would create a new benchmark for post-contraction Budgets.

Or would she follow the Chaudhuri model and present something major outside the Budget a few weeks later?

• Budget 2021

Feature Presentation: Rajesh Alva/Rediff.com