Feb 24, 2007

Indian Budgets: State Planning to Market Reforms

Indian stock market is going through a pre-budget sell off. It might make sense to review what the budgeting process has looked like in the past.

After India's independence in 1947, the budget process has been through remarkable changes. In 1950s, the budgets were based on the priorities set by planning commissions which formulated five year plans. The idea of a five year plan was inspired by Soviet Union. This continued through Indira Gandhi's era.

Rajiv Gandhi introduced the concept of zero based budgeting in 1987 to curb wasteful expenditure. Zero based budgeting set all budgets to zero at the beginning of the fiscal financial period. The departments justify all their expenses and money is allocated based on the merit and not based on previous year's budget.

Manmohan Singh under prime minister P V Narasimha Rao was the initiator of radical economic reforms. In 1991, he devalued the Rupee and virtually abolished the industrial licensing raj. The budget also began a macroeconomic adjustment program under IMF supervision to cut fiscal deficit. The program had been started in response to the foreign exchange shortage and a balance of payments crisis.

In 1992-93 Rupee was made partially convertible in the current account covering merchandise goods and services. This meant that the value of the Rupee was determined by free market trading.

In 1994-95 Manmohan Singh added service tax on three services -- telephones, stock brokers, and non-life insurance.