As a statement of income and expenditure, the national budget is a routine exercise in most countries but successive governments in India have used it as a vehicle for articulating their strategic intent. Budget-making largely involved tinkering with taxes until VP Singh’s budget of 1985-86 that revealed the first signs of opening doors for decontrol, freedom for market forces, and stable tax rate regime. Fortunately, after the epoch-making budget of Manmohan Singh’s in 1991, when India liberalised, the approach has changed. From the socialist era of shortages, the so-called Hindu growth rate and an accountant mindset, budget-making today factors in the liberalised environment marked by rising incomes, low taxes, higher tax base and growth rates. A young manager, even if not an economist or an MBA, should develop an analytical mindset towards this annual exercise.
Economic survey
Rather than just relying on the Budget speech and expert comments, one would urge young managers to first study the Economic Survey published ahead of the Budget, to get a feel of the environment. In business, strategy formulation is usually against the backdrop of external factors encompassing political, economic, social, technological, legal and physical environment (PESTLE). The Economic Survey is a data-based “as is” analysis of PESTLE that provides the basis for the government’s projections. For instance, the Economic Survey 1991 stated that foreign currency reserves plunged below $1 billion, leading to import compression threatening widespread loss of production and employment.
It indicated a balance of payments crisis and possible default on payments. This, in turn, triggered devaluation and structural reforms like de-licensing. In 2018-19, the Survey emphasised economic — private investment for growth, jobs and export; social — progression from cleanliness (Swachh Bharat) to health (Swasth Bharat); and technological factors — inclusive growth through renewable energy and technology for welfare schemes.
Analysing the Budget
Traditionally, budgets included the GDP or gross domestic product value; but in recent years, the GDP is imputed based on the growth rate assumed, and revenue and fiscal deficits are expressed as per cent of GDP. Managers should first compute the projected GDP. For instance, the 2020-21 Budget stated the revenue (ongoing) expenditure as ₹26.30 lakh crore, revenue receipts as ₹20.21 lakh crore, revenue deficit of ₹6.09 lakh crore at 2.7 per cent of GDP. This implies a GDP of ₹225.55 lakh crore (6.09* 100/2.7), equivalent to $3.13 trillion (at $1= ₹72) — indicative of the size of the economy. Further, the pattern of revenue inflows and their utilisation was:
(a) Income tax, corporate tax and GST were comparable — 26 to 28 per cent of gross receipts;
(b) About 32.3 per cent of gross receipts was allocated to states, leaving about two-thirds to GoI;
(c) After adding non-tax revenues, mainly dividends and profits from PSUs and capital (one-time/ long-term) receipts largely from disinvestment, the total projected receipts were about ₹22.5 lakh crore. The projected expenditure of ₹30.4 lakh crore necessitated borrowings of ₹7.9 lakh crore, representing a fiscal deficit of 3.5 per cent. Besides, the borrowings were 35 per cent of the net receipts; thus only about two-third of government expenditure is financed by receipts and the balance by borrowings.
Parameters such as surplus/ deficit are expressed as percentage of GDP akin to gross profit/loss to sales revenue. GDP aggregates consumption (C), private investment (I), government investment and government spending (G), and the net difference of exports (X) and imports (M). Hence, increase in C, I, G, X and decrease in M contributes to GDP growth. However, the GDP does not reflect factors like income disparity, environment and human development that impede sustainable development. Hence, economists like Joseph Stiglitz have proposed alternative measures.
Aggregate demand
Business sentiment is influenced by the monetary policy regulated by the RBI through interest rates and open market operations and by the government’s fiscal policy. Aggregate demand is boosted by lower corporate and personal taxes and higher government spending. A critical analysis of the fiscal policy is therefore merited. Aggregate demand induces the demand-pull inflation that businesses dream of, which connotes that the economy is thriving, people have surpluses, leading to greater demand and concomitant higher costs to augment capacity/production. High employment leads to demand-pull inflation. Thus, a modest inflation is good for the economy; the US targets a two per cent inflation and India four per cent +/-2 per cent.
Fiscal deficit
India has always had a fiscal deficit but countries such as Denmark, Singapore, Norway, Germany have a budget surplus, stemming from large current account surpluses. Interestingly, USA France, UK, and Japan have a fiscal deficit. Fiscal deficit need not always indicate unsatisfactory financial health if spending is for spurring economic growth towards infrastructure, employment and welfare schemes. Post 1991, India has controlled fiscal deficit between 3.5 per cent and 6 per cent. However, several leading economists say that fiscal deficit reflects the state of the economy and should not be judged on the basis of an arbitrary target number.
Disinvestment, a partial dilution of government control, can generate capital and attract FDI. In 2020-21, the disinvestment target was ₹2.10 lakh crore, or 0.93 per cent of GDP. Not attaining disinvestment targets will therefore adversely impact GDP.
Sectoral impact
To gain a competitive edge at the workplace, young managers should watch out for provisions relating to: (a) interest rates and taxes that impact their sector/industry (b) incentives for particular sectors (c) employment generation proposals (d) allocation for social sector. To illustrate: An operations/ sourcing manager can make strategic decisions regarding imports by analysing the trend in global prices, customs duties and special free trade agreements.
A finance professional should analyse the impact of domestic interest rates vis-à-vis global rates, the market sentiment for equity, debentures to arrive at the desirable financial mix; (b) dividends and stock price impacts on future earnings and (c) impact on treasury earnings.
A marketing executive should analyse the impact on buying power. Entrepreneurs should look out for sectoral incentives..
It is not enough for young managers to just read the budget or listen to the Finance Minister’s speech but go beyond and analyse it in the backdrop of the Economic Survey, do some basic quantitative and qualitative analysis to arrive at the forecasted GDP value, the breakdown of revenue inflows and deficit computations, the key sensitive factors, and how the Budget would fulfil its overarching theme, to develop a competitive edge in the workplace.