Do it yourself

 When the Finance Minister Ms. Nirmala Sitharaman rises to present the final Union Budget for the fiscal year 2024-25 today at 11 AM, she will be creating a unique record. She will become the first finance minister of India to present six consecutive union budgets (2019-2024, in addition to an interim budget presented in February 2024. Prior to this, the record was held by the former prime minister Morarji Desai, who presented five consecutive union budgets (1959-1963). He had presented two interim budgets (1962 and 1967) also.

Ms. Sitharaman’s record is impressive, in my view, because she has survived the worst economic slowdown and fiscal slippage (FY21 GDP Growth -5.8% and Fiscal deficit of 9.17% of GDP) in the history of Independent India caused by the worst pandemic since 1917 Spanish Flu; a below par election performance of her party in 2024 general elections, apparently due to sub-optimal performance on inflation and employment generation fronts; sharp criticism on GST management from businesses and states; rumors of lack of support from her own party members and family; and persistent calls for her removal from the market participants.

Now coming to the budget to be presented today.

In the post liberalization (1991) days, budget presentations used to be an event of interest to a large section of urban India (Rural India did not have much TV in those days).

Changes in excise duty rates had immediate impact on businesses and household budgets. Introduction of new trains and changes in train fares affected a large number of people. Tax rates were consistently reduced; tax slabs rationalized; tax incentives on investments and savings increased; and basic exemptions increased resulting in many taxpayers getting out of the tax net or their tax liability lowered.

A large number of changes in tax laws would keep students (CA, CS, LLB etc.) also hooked to the budget. Many people would fill fuel tanks of their vehicles to make some savings on likely higher fuel prices, and buy one month of liquor and cigarette stocks a day before the budget presentation.

But nowadays nothing of this sort happens.

Goods and Services Tax and excise duty is now not part of the finance bill. Most of it is managed by the GST Council; through notifications issued from time to time, or by the respective state budgets. New trains are not announced in the budget and fares hikes are also announced outside the budget. Income tax rates have mostly stabilized. Only minor changes in the return filing and assessment procedures are announced in annual budgets.

Presently, the emphasis of the government is on bringing more people into the tax net and increasing the effective tax rates. In the past decade Tax Collection at Source (TCS) for a variety of transactions has been implemented. A variety of cess have been imposed to augment the tax collection. Incentives on investment and savings are being withdrawn gradually.

The budget documents are more like colorful corporate presentations. These omit much more information than these include. The budget speeches sound like the election manifesto of the ruling party. The finance ministers frequently announce “intent” to launch random programs in future, with no money provided in the current year’s budget.

For electronic media it is a major marketing event to enhance their TRPs and revenue. In essence, the format of their election coverage and budget coverage is the same. There is absolutely no correlation between the pre-election & pre-budget analysis, and forecasts to the actual outcome. Also, it is difficult to make any sense from the post-election and post-budget analysis and commentary.

Hours of airtime have already been spent on the pre-budget analysis this year also. Besides, hundreds of reports have been printed to guide investors about the investment themes that may emerge from the budget. What I gather from various sources is that the  five most common points of the pre-budget speculations this year are:

What will the finance minister do with the bounty (Rs2.11trn) it received from the RBI as dividend? Whether the excess funds will be used to reduce the fiscal deficit; or these will be used to fund some populist programs to win forthcoming assembly elections; or these will be granted to the key NDA allies (JDU and TDP) to meet their demand for additional resources for their respective states.

Will allocation for Capex be increased materially or focus will shift to consumption and social programs? It is basically a speculation on the impact of the latest Lok Sabha elections on policy making.

Will the impetus to private capex be enhanced? The speculations are broadening the scope of PLI schemes; relaxation in FDI norms for certain sectors; etc.

Will the finance minister afford more cash in the hands of households to support consumption growth – the missing piece in India’s growth in the past few years? The speculations are tax relief for salaried classes; disincentive for 80C savings; increase in cash payout for farmers etc.

Will there be any change in the Long-Term Capital Gains tax regime? There are speculations of more uniformity in LTCG rules for various asset classes.

A majority of the market participants watch the budget speech to take advantage of swing trade opportunities that may arise from uttering some specific jargon by the finance minister. The empirical evidence shows some gain and most lose money in this joyride.

I am taking my daughters shopping today at 11AM and will be reading the Finance Bill and other budget documents in the evening.

What about you?

 Being the finance minister of India is arguably one of the most challenging jobs in the world. The incumbent has to deal with 28 Federal States and 8 Union territories, each having a distinct socio-economic and fiscal profile. Unlike some developed countries like the USA, the Federal States in India are not autonomous and/or self-reliant in fiscal matters. These states rely on the Union Government for financial resources. Besides, the finance minister of India is limited by the constitutional mandate of being “socialist”. To make things more complicated, implementation of GST; acceptance of the recommendations of 15^th Finance Commission; and abolition of the planning commission have materially curtailed the powers of the union finance minister.

Technically speaking, all the policies formulated and proposed to be implemented by the union finance ministry must pass the test of “socialism”, since the Constitution of India overrides all the legal provisions and policy directives. This makes it very hard for the finance minister to pursue the goal of faster growth through promoting capital investments in the private sector that are likely to eventually result in more socio-economic inequalities.

Even when the finance minister tries to extend fiscal and other support to large businesses to stimulate economic growth, these efforts are invariably met with strong opposition from the politicians belonging to the ruling party & opposition; civil society and common people.

To mitigate the political damage that may be caused by such criticism, the finance ministers have often supported the larger public sector; contrary to the stated policy of minimizing the role of the government in business. Also, the finance ministers in India have often taken the path of ‘crony socialism”.

They often pursue fiscal policies targeted to benefit a specific set of voters and/or specific regions; inviting criticism from the businesses and capital market participants. The finance minister is often criticized for inaction in terms of economic policy and reforms; fiscal imprudence in pursuing profligate social policies and programs; incoherent foreign policy; failure of monetary policy in controlling consumer prices; impeding critical infrastructure projects; incongruent taxation policies; and corruption in financial institutions etc.

The socio-economic condition (especially the fast waning demographic dividend) of the country warrants that the governments vigorously pursue the course of faster and sustainable growth over the next couple of decades. However, the pursuit of this goal would inevitably result in widening and deepening inequalities of income and wealth.

The experience of western developed economies indicates that faster growth ultimately results in 10:90 division of the society – 10% people owning most of the wealth and accounting for most of the savings; while the rest 90% just survive. Of course, the standard of life for the underprivileged 90% in developed countries is much better than the corresponding 90% population in India.

 Expectation is a strange animal. More you beat it, the stronger it rises. Consistent underachievement is perhaps the only way to kill it.

As per media reports, the finance ministry officials shall start exercise for preparation of Union Budget for FY22 from 16 October 2020. The exercise usually starts with the finance ministry official and the finance minister meeting with various stakeholders, especially the business representatives; representatives of professional bodies like ICAI; officials from other administrative ministries; officials from state finance ministries; and policy making and statistical bodies etc. The suggestions made in these meetings are then considered in the preparation of final draft the budget documents.

Budget making is normally a very complex exercise that requires special skills to strike an optimum balance between the expectations of various stakeholders. These expectations are invariable at odds with each other. Therefore pleasing most of the stakeholders is almost an impossible task. In past many finance ministers have used some Big Bang announcement to overwhelm the stakeholders so that they are motivated to ignore their parochial interests for a promising bigger picture. The instant reaction of financial markets to all such big bang announcements is usually “ebullient celebration”. The euphoria however subsides in few weeks and markets usually return to their normal trajectory.

The budget making exercise for FY21 would be particularly complex for a myriad of reasons.

Firstly, the government has already announced multiple fiscal and monetary packages during the course of FY2 in the wake of the socio-economic lockdown announced as preventive measure for COVID-19 pandemic. There may not be much scope for giving any further relaxations in the budget; even though the stress in most sectors of the economy is still elevated and almost everyone is looking for a further, stronger dose of stimulus.

Secondly, the shortfall in revenue collection during FY21 is unlikely to be completely made up in FY22. The fiscal balance of the government thus remains precarious. The 2HFY21 borrowing schedule announced by the government is a clear indication that the government (i) does not want any significant deterioration in the head line fiscal deficit number; (ii) may encourage PSUs, Railway and States to raise resources on their own account; (iii) may accelerate the effort to disinvest its stake in PSUs like LIC, BPCL, etc.

This essentially means that both debt and equity markets will remain adequately supplied for most of next 12-15 months. The profile of the sovereign and quasi sovereign debt available in the market will deteriorate significantly with PSU corporate debt and state debt dominating the fresh supply. There could be a paradoxical situation where the benchmark yields are sustained at lower level by the maneuvering by RBI, while the spreads of center-state debt and 10yr-PSU bonds spread rise materially. The situation may worsen further if the business activity picks up sharply, leading to compression of credit-deposit gap, thus leaving banks with lesser resources to absorb the excess supply of sovereign and quasi sovereign paper.

Failure to implement agenda for disinvestment of strategic assets like BPCL, Air India etc, may force the government to dilute holdings in profitable PSUs like Coal India, NTPC, BEL and LIC. This will keep the equity markets well supplied throughout the year, capping any material upside due to liquidity.

Thirdly, the government would be constrained to raise fresh revenue through taxes and additional cess; especially when the dividend from PSUs is likely to dwindle further and elections to key states of UP and West Bengal would require continuous additional social sector spending. This will be the trickiest situation. Obviously, rich would be burdened with additional taxes and stocks markets usually do not like the rich people to be bothered much; and the government would like stock markets to be happy so that it can sell whatever it wants to. It would be interesting to watch how the finance minister manages to get out of this loop. The best place to watch this opera would be from the top gallery which is farthest from the arena.