A Historic Moment in Indian Financial History
On November 26, 1947, India's first Finance Minister, R. K. Shanmukham Chetty, rose to present the first budget of a free and independent India. Describing it as a rare privilege, he acknowledged the historic weight of the occasion and the grave responsibilities that came with steering India's finances at a time of significant transition and national trauma.
The Backdrop of Partition and Its Economic Consequences
The budget was drafted amidst the backdrop of India's partition, which had drastically altered the political, economic, and cultural landscape. The division severed centuries-old economic and social ties, creating two new Dominions—India and Pakistan with disrupted supply chains and severed industrial and agricultural linkages.
While India inherited a stronger industrial base and mineral resources, Pakistan held an advantage in agricultural output, especially food production. Despite political separation, the Finance Minister stressed the importance of economic cooperation between the two nations to ensure the welfare of the ordinary citizen.
Period Covered by the Budget
This budget spanned from August 15, 1947, to March 31, 1948, necessitated by the political reorganization and the dissolution of the pre-partition Central Government structure. Though transitional constitutional provisions allowed interim expenditures, it was felt that a proper budget must be placed before the people's representatives at the earliest.
Immediate Outcomes of Partition
The Partition Council, consisting of representatives from both new governments, along with a series of expert committees, tackled a multitude of issues: division of assets, coinage, currency, trade relations, and the management of armed forces. However, many complex matters, such as debt allocation, pension liabilities, and division of military resources, were left unresolved and referred to an Arbitral Tribunal.
The Joint Defence Council was established to manage the reconstitution of the armed forces. Operational and administrative control transitioned to respective dominion governments, with final arrangements expected by April 1948.
Economic Cooperation Between the Two Dominions
To maintain economic stability, a status quo agreement was put in place for the rest of the fiscal year. Taxes and duties were to remain unchanged, trade was to flow freely without internal tariffs, and currency management was unified under the Reserve Bank of India until September 1948.Refugee Crisis and Communal Disturbances
The budget acknowledged the catastrophic human and economic cost of communal violence, particularly in Punjab and the North-West Frontier Province. The mass migration of refugees had unprecedented scale and consequences, disrupting administrative focus and burdening the central exchequer. The government prioritized both immediate relief and long-term rehabilitation, though the full fiscal impact remained unpredictable.
Food Crisis and Agricultural Strain
The food situation was critical, worsened by the failure of the “Grow More Food” campaign. From 1944 to 1947, India imported 43.8 lakh tons of foodgrains costing over ₹127 crore. By September 1947, an additional 10.62 lakh tons were imported. This reliance severely strained foreign exchange reserves and diverted resources from essential imports.
Efforts to address the crisis included wheat imports from Australia and an interim report by a committee under Sir Purushottamdas Thakurdas, focusing on national food self-sufficiency.
Inflation and Declining Production
A sharp increase in prices was recorded, with the Bombay cost of living index rising significantly between 1945 and 1947. This was driven by a decline in both agricultural and industrial production, widespread labor unrest, and the reactivation of unspent inflationary wartime savings.
Production statistics revealed sharp drops in cloth, steel, cement, and coal, further aggravating supply-side inflation. Labor cooperation was emphasized as essential for reversing these trends and stabilizing prices through increased output.
Revenue and Expenditure Estimates
For the months covered, revenue was estimated at ₹171.15 crore, while expenditure was estimated at ₹197.39 crore, resulting in a deficit of ₹26.24 crore. However, this was considered provisional due to uncertainties surrounding refugee rehabilitation and fiscal adjustments with Pakistan.The primary revenue sources included:
- ₹50.5 crore from customs (affected by import restrictions)
- ₹118 crore from income tax and excess profits tax
- ₹15.9 crore from Posts and Telegraphs
No revenue was expected from Railways due to ongoing disruptions.
Defence Expenditure Post-Partition
Defense accounted for ₹92.74 crore, the largest budgeted item. The reconstitution of the Armed Forces was a major task, involving:
- Halting demobilization to divide troops between India and Pakistan
- Maintaining a standing army of 260,000 for India
- Withdrawing British troops and managing British officer transitions
The expenditure included costs related to internal disturbances, troop movements, and increased pay based on Post-War Pay Committee recommendations.
Civil Expenditure and Nation-Building
Civil expenditure totaled ₹104.5 crore, with ₹44.5 crore earmarked for food subsidies and refugee relief. The remaining ₹60 crore included:
- ₹5 crore for tax collection
- ₹22 crores for interest payments, pensions, and debt redemption
- ₹12 crore for education, health, scientific research, broadcasting, and aviation
- ₹18.5 crore for general administration
Additionally, ₹20.39 crore was allocated as grants to provinces and ₹15 crore as loans.
Borrowing and the Need for Public Cooperation
The original borrowing target of ₹150 crore was not achieved due to political instability. A new ₹40 crore loan at 2.75% interest was introduced. The public's hesitation was addressed by reaffirming that the Indian government bore full responsibility for repaying existing debts.
A call was made for the rich and middle classes to support small savings schemes, essential for both long-term development and containing inflation by absorbing surplus purchasing power.
Sterling Balances and Import Policy
India's sterling balances peaked at ₹1,733 crore in April 1946 but fell due to rising imports. A restrictive import policy was introduced, categorizing goods as free, restricted or prohibited, to conserve foreign exchange and prevent capital outflows.
The agreement with the UK divided sterling into a "deposit" and a "current" account, enabling spending from the current account in any currency, including dollars.
Despite a global dollar crisis, India's agreement remained intact, though the government committed to reducing dollar imports.
Empire Dollar Pool Contributions
From 1939 to 1947, India contributed significantly to the Empire Dollar Pool, with a net surplus of ₹92 crore in hard currencies. However, post-1946, India became a net dollar importer. Thanks to stringent foreign exchange policies, the government expected to close the fiscal year with a stable external position.
Development and Public Investment
The original ₹100 crore development budget was revised to reflect the partition. Grants and loans to Indian provinces were maintained proportionately. Major national projects included:
- Damodar Valley Authority
- Hirakud Dam in Orissa (₹48 crore, expected to irrigate 1 million acres and generate 350,000 kW)
- Bhakra Dam in East Punjab
Development schemes were encouraged at both central and provincial levels despite reduced revenue expectations. The Finance Minister urged resource conservation and a strict economy in all spending.
Taxation and Deficit Management
To reduce the deficit without burdening common people, the Finance Minister revised export duties on cotton cloth and yarn, raising expected revenues by ₹1.65 crore. The final deficit stood at ₹24.59 crore, which was considered manageable given the abnormal circumstances.
Overall Financial Position
This was India's eighth consecutive deficit budget, but the Finance Minister assured that the country's financial foundations remained strong. With minimal external debt and substantial sterling reserves, India had the economic bandwidth to recover.
Once normalcy returned and reliance on food imports was reduced, the government expected to balance the budget by 1949-50.
Encouragement for Industrial Growth
Concerns were raised over heavy taxation stifling investment. The Finance Minister reassured the business community, emphasizing the importance of private enterprise in industrial development. He committed to reviewing taxation policies to promote industrialization and savings for investment.
Final Appeal to the Nation
In his conclusion, R. K. Shanmukham Chetty reminded the nation that India was now its own master, accountable to its people. He called for unity, discipline, and cooperation across all sections of society to maintain peace, improve production, and resolve internal conflicts.
He appealed for collective effort to lay a strong foundation for a democratic and economically stable India, capable of leading Asia and securing a dignified place in the global community.