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The days leading to the Union budget are dominated by discussions about what to expect in the future. There are also some attempts to look at past budgets. This thread is about a budget speech that is not usually given its due -- by H. M. Patel in 1977.
1977 is known for its political importance as the Janata Party won power after the Emergency. What is less well known is that it also saw important shifts in economic thinking. H.M. Patel was in the old ICS, an associate of Vallabhbhai Patel and a member of the Swatantra Party.
Patel began his speech with a big statement: "Even after 25 years of planning, we are unable to sustain an average growth rate of 5 percent. Clearly, a fresh examination of our planning priorities and techniques is called for."
And later: "The fact that the proportion of people living below the poverty line is higher than in 1960-61 strengthens me in my belief that there is a need for a fundamental change in our economic policies and programmes." This was not a call for incrementalism.
Patel also spoke about a problem that continues to trouble our country. He described regional inequality as "a phenomenon that has disturbing implications for the successful functioning of our federal polity". His unit of comparison was the district rather than the state.
Patel then moved on to the heart of the policy failures he began with. "Both because of inadequate growth rate and growing capital intensity of industry, India’s industrial structure has been unable to provide a fast enough expansion of employment opportunities."
Though not a votary of export led growth (more on that later), he called for less protectionism: "In order to create greater cost consciousness in Indian industry, it is our intention to introduce, gradually, more competition by way of a more liberal import policy."
A committee headed by P. C. Alexander submitted a report in 1978 on how to rethink trade policy. At the same time, the Vadilal Dagli committee gave its report on controls/subsidies. The L.K. Jha committee looked at the reform of economic administration.
Patel also spoke about the home market problem. "A high cost industrial structure catering to a highly sheltered domestic market must necessarily find it increasingly difficult to expand in the face of the constraint of a limited home market.”
He did not see exports as a way out of the home market problem, despite what was happening in the rest of Asia, but was clear that higher exports were "essential for acquiring greater manoeuvrability with regard to economic management" -- essentially easing the BoP constraint.
Patel favoured deepening the home market through higher farm productivity -- to generate employment, beat inflation and strengthen the domestic market for industrial products.
The Janata Party had a strong Gandhian influence, with people such as JP and Morarji Desai. Patel echoed these beliefs: "Gandhiji’s idea of self-reliant rural communities will have to be given concrete shape if an effective solution is to be found to the problem of unemployment".
There was also a strong discomfort with scale, which was later reflected in the 1978 industrial policy: "The government will not favour large scale industry merely for demonstration of sophisticated skills or as monuments of irrelevant foreign technology".
In the budget speech, about SSI: "Such industry should not be a scaled-down version of large industry but should be one which used technology which is appropriate to our conditions of surplus labour and scarce capital."
Patel also took the first steps to what eventually became GST. In 1978, based on the report of another committee headed by L.K. Jha, he spoke of "introducing a value added tax so as to avoid the cascading effect of taxes on raw materials and components of finished products"
The Janata experiment was short-lived. Patel himself moved out of the finance ministry to become home minister. It is worth speculating what could have happened if he had remained as FM for five years, in a govt led by Morarji Desai. His 1977 speech offer tantalising glimpses.
Isher Judge Ahluwalia once described the 1970s as a decade of introspection on economic policy, and which laid the ground for what followed in the 1980s and 1990s. The short tenure of H.M. Patel is an important landmark on that road, and one that IMO is not adequately recognised.
