After independence, the National Government realised that before industrial development could be initiated in a planned manner, it was necessary to recast and reshape the discriminating fiscal policy which was unsuitable for quick and balanced development of defense and key industries.
Accordingly, under the chairmanship of V.T. Krishnamachari, a new Fiscal Commission was appointed in 1949 which submitted its report in 1950. The main features of the New Fiscal Policy were:
(i) The second Fiscal Commission (1949) took a much wider view of the concept of protection. It sufficiently broadened its horizon and advocated a policy of development protection instead of the “safeguarding” type of protection policy of the first Fiscal Commission.
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The Krishnamachari Commission emphasised the important role of basic and key industries in a programme of general economic development and was careful enough to formulate a reoriented fiscal policy which could easily fit into the scheme of planned economic development.
Thus the second Fiscal Commission’s approach to the concept of protection and development of industries was radical enough for removing the shortcomings of the policy of the first Fiscal Commission which had caused considerable harm and produced a lopsided industrial development in the country.
The rigid Triple Formula of the first Fiscal Commission was criticised by the Krishnamachari Commission which boldly suggested that national interest should be the sole criterion for granting protection to an industry.
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The second Fiscal Commission also laid down a set of general principles described hereunder, to be followed by the Tariff Commission.
(a) If the industry possesses economic advantages like internal market, labour supply etc., protection should not be denied merely on the ground that adequate amounts of raw materials are not available within the country;
(b) Not only the existing home market but a potential export market should also be taken into account;
(c) The industry protected is not expected to satisfy the needs of the entire domestic market;
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(d) The case of new industries, requiring heavy capital investment, should be specially considered and protection should be granted wherever possible;
(e) Compensatory protection may be granted to industries using the products of protected industries;
(f) During the period of protection, industries should not be burdened with excise duties;
(g) Agricultural products may also be protected, if necessary, in national interest but the period of protection should never be for more than five years at a time. These general principles endeavor to remedy the shortcomings of the discriminating fiscal policy enunciated during the British rule.
The principles laid down by the second Fiscal Commission would give sufficient powers to the Tariff Board which should be a permanent body, in deciding the claim of each industry for protection, in the context of national interests and the requirements.
(iii) Though developmental planning was not started when the Krishnamachari Commission was appointed, the recommendations of the Commission were made in such a manner that it fulfilled the needs of a planned economy. Industries in the planned sector were divided into three broad categories:
(a) Defense and strategic industries were placed in the first category and the development of these industries was considered to be essential for the preservation of newly attained Independence. Therefore, it was emphasised that government should grant protection to these industries irrespective of costs;
(b) Basic and key industries were placed in the second category; the Tariff Commission should decide the terms and the extent of protection for these industries and should also review from time to time their progress; no rigid conditions were laid down which would put restrictions on the powers of the Tariff Commission for granting protection to these industries;
(c) Other industries constituted the third group; for this group the Tariff Commission would decide whether protection should be granted or not; the decision of the Tariff Commission, however, would be’ influenced by the economic advantages of the industry, the probable cost of protection and its necessity from the point of view of national interest.
(iv) The Krishnamachari Commission also proposed that a Development Fund should be created with contributions from the customs revenue obtained from protective duties.
Subsidies could be given from this fund to the needy and deserving industries and under certain circumstances; subsidies may be preferable to tariff protection.
We are of the opinion that instead of a general Development Fund, as proposed by the second Fiscal Commission, separate Development Funds for each type of industry should be created and tagged to the Development Council for that industry.
This procedure would no doubt put greater responsibility and strain on the Development Council but would be immensely helpful for creating a proper atmosphere for the expansion and development of private enterprise.
(v) The second Fiscal Commission proposed the setting up of a permanent Tariff Commission, constituted on a statutory basis which would act as the agency for implementing the new fiscal policy. This is a definite improvement on the system of ad hoc Tariff Boards which were set up previously for the implementation of discriminating protection policy.
An ad hoc Board used to be formed each time a particular industry claimed protection and was dissolved after its verdict was given.
Due to this procedure, the working of protected industries could not be periodically reviewed and suitable measures for the development of this industry subsequent to the grant of protection could not be adopted.
The Krishnamachari Commission proposed to remedy this defect by setting up a permanent body whose duty was not only to decide the question of protection but also to conduct systematic enquiries into the working of protected industries and to recommend variations of protective duties.
It was also suggested by the Krishnamachari Commission that the permanent Tariff Commission should consist of a permanent staff including a technical staff for economic research.
The Krishnamachari Commission also recommended that the government should take quick decisions on the report relating to protection submitted by the Tariff Commission.
Ordinarily the government should not take more than two months in arriving at a decision. The second Fiscal Commission specially stressed the point regarding quick decision because in the past unusual delays, made by the Government in coming to a decision on the report of the Tariff Board, caused considerable hardship to the newly started industrial undertakings.
It is gratifying to note that the government appreciated the new angle of vision and the new principles of protection lay down by the Krishnamachari Commission and accepted almost all its recommendations.
For the implementation of the new fiscal policy, the Government appointed a permanent Tariff Commission in January, 1952. This Tariff Commission was given wide powers and a review of its working so far shows that it has successfully lived up to its assigned task.
Some of the industries, which had grown up during the post-war period and had been given protection since 1951, developed well under the shelter of protective tariff.
They were de-protected after a relatively shorter spell of five to ten years. In the majority of cases this was done after it was ascertained that the prevailing level of revenue duties on imports in the changed circumstances of the growth of the industry, would be adequate to offset any cost disadvantage.
In fact, the working of the Tariff Commission, revealed a definite advance upon that of the ad hoc Tariff Boards of the past. After rendering valuable service for a period of 25 years, the Indian Tariff Commission was wounded up.