How to Understand the Budget

Five things to keep in mind to separate the noise from the substance

For business editors, corporate titans and economists, the great Budget circus is an annual national event second only to, perhaps, IPL. The build up starts almost a month before the actual Budget when the worthies give their opinion on what this Budget should do, business associations draw up a wish list that would shame a three-year old’s list for Santa, and corporate titans shoot off pre-Budget quotes. Even television channels which don’t normally touch business issues with a bargepole suddenly discover the merits of the economy. Come the day when the Union Finance Minister will actually table the Budget, TV channels start discussing what can happen at the crack of dawn hours before the Parliament even convenes.

During the Budget speech, panellists in television studios get into animated discussions about the various proposals announcement by the Finance Minister.  Once the speech is over, the television media continues to hold analyse the FM’s many proposals and even the body language to death, corporate titans sitting in association chambers praise the Budget in public while cursing tax proposals in private. Columnists churn out reams of analysis on every sector and programme and newspapers try to outdo each other with smart headlines and infographics.

For the general public, these are all quite bewildering. They don’t actually need to worry. Here’s a primer on how to understand the Budget while ignoring all the noise surrounding it.

Ignore the Speech, Focus on the Papers: There was a time, in the 1990s, when the Budget speech was used to make major policy announcements. These days most Budget speeches are exercises in masterly misdirection. Finance Ministers fill the first part of their speech reciting poetry and give lots of micro details about impressive sounding programmes that have actually been allocated fairly meagre funding. They also get into a great deal of irrelevant detail until listeners lose track of what is being said.

The part two of the speech often talks about tax reforms that are proposed – but omit the fine print so that anyone can actually judge whether it is good or bad.

Most experts wait for the actual Budget papers to be uploaded on the website instead of obsessing over the FM’s speech. The Budget documents are the real deal and provide a great deal of insight – into the government’s assumptions on GDP growth, tax and non-tax revenues, the fine print and conditions attached to any new proposal as well as the government’s expenditure priorities.

One needs to be prepared to pore columns of dense figures. Luckily, most people can avoid the task and wait till the next morning for their daily newspaper. Business newspapers and even general interest publications deploy an army of reporters and editors to do all the heavy lifting of Budget analysis so you can pretty well avoid the hard work and read about it in your paper over the next few days.

Revenue assumptions are just that – assumptions: Finance Ministers rarely manage to get their tax revenue predictions right and lately this has become even worse. Finance ministers are always very optimistic and tend to overestimate revenues that will come in, especially when it comes to tax revenues. If they are very lucky, they miss their targets by only a small margin. Often, they actually miss it by a wide margin. Sometimes, the non-tax revenue targets – like spectrum allocations or disinvestment comes to their aid. Not always. But the revenue assumptions often give a clue to how optimistic or realistic the Finance Minister is. For example, if the economy has been going downhill and the minister projects a big rise in tax revenue, there are only two conclusions. Either the optimism is completely unfounded. Or worse, there is a tax that is going to be tagged on later as a nasty surprise.

The Expenditure Budget hides the interesting tales: The boring columns of each chapter of the expenditure budget crammed with numbers is what gives you the real picture on what the government thinks is important – provided you are willing to sit and spend a few hours on them. The FM might wax eloquently on farmers but if the agricultural budget does not show a significant increase, then it is not at the top of the government’s priorities. In the only Budget Piyush Goyal presented, the speech talked about the importance of artificial intelligence, among many other things. But there was simply no mention of any funds allocated to Artificial Intelligence in the expenditure document.

The expenditure budget of each ministry gives four columns – the first one was the actual spend of the previous financial year, the next two give details of the original budget earmarked for it and then the revised allocation of the current financial year. The fourth column gives the budgeted allocation for the coming financial year.

The column on revised allocation gives a good sense of how things changed through the year. A revised allocation higher than the original allocation means the government found it necessary to put more money than it had originally planned. A lower revised allocation, on the other hand, means either revenues fell short to spend that much or simply that the government later decided to postpone the expenditure till another year. Sometimes it just means that a project that was budgeted never got off the ground.

Of course, the most interesting column – about how much the actual spending for the current year differs not only from the budget allocation but also the revised allocation is not available in the documents because the financial year has not closed. It shows up only much later.

This is not the final Budget for the year: Though the Finance Minister tables the Finance Bill after the Budget speech, quite a lot of changes can take place before the Bill is actually passed. There is a fair amount of lobbying, especially on fresh tax proposals as well as tax increases that starts once the Budget documents have been made public. So modifications and revisions continue till the end of the Budget session when the Bill is finally passed.

So to understand the implications of any new tax proposal or tax change announced in the Budget, it is best to wait until the fineprint is out as a Gazette notification. This may come out a month or more later.

The real Policy Announcements are made by the PM, not the FM: There was a time when the Finance Minister when significant policy announcements were made through the Budget speech. In the past four or five years, the most important announcements are not made in any Budget speech unless there is an election slated to take place shortly afterwards. They are instead made by the Prime Minister in the course of the year. The big schemes, programmes, innovations and sometimes even major tax proposals for corporations are announced by the Prime Minister. This of course robs the Finance Minister of much thunder but this is how things are.

Finally, the Budget impacts your income taxes and therefore what you get in hand. It also gives some clue about big ticket items that can get expensive or cheaper because of the import duty hikes or reductions. For most things though, the real cost that impacts your day to day expenses is the Goods and Services Tax (GST) – and that is now not announced in the Budget but after every GST council meeting.