Reading Financial Budget

Reading Financial Budget

Financial Budget more popularly known as Budget is gradually acquiring more followings and more scrutiny with the passage of time. The reason rests with the subtle message of relevance that the Industry, household, Public Sector, Investor both domestic and International institution find in it.

But for sure it is not easy to decipher the conceived meaning of Budget so easily. The complexity further gets embolden when you listen to the circulating noise, conflicting interpretation by expert and screaming anchors of TV studio.

I am attempting to simplify few contours of narrative, which empower you to identify those minimum messages, allow you to examine them and interpret them with minimum of confusion and conflict.

Each Financial budget is a statement of Central Government Revenue and Expenditure for the given financial year. Given our Federal nature of Governance, central Budget is kept separate from the State Budget. Thus we can safely state, the Central Budget outlay is the source of all genuine interpretation of massive number that it unfolds.

Plan outlay which is proposed estimate of expenditure for entire financial year, Revenue the corresponding estimated to meet the expenditure and difference between the two called fiscal deficits are the first important numbers to be understood. These numbers though appear simple but have layers of hidden message when it is further examined. The actual interpretation of the merit of Budget rest with these curves and contours, and hence one should examine the factors of these three carefully.

Higher plan outlay is good for an economy as it largely transfer into augmented aggregate demand and rise in GDP number in following years. But one should carefully examine the resource which is revenue before Government. It is universal practice worldwide following the Great Keyensian experiment of 1930 in US, which accepted the convention of Government spending beyond its source of revenue. This difference is fiscal deficits and is basically borrowings from domestic or international lenders. We too have deficit fiscal but largely domestic.

So one should look at the trend of Fiscal deficit as % of GDP but certainly not in absolute amount. Anything less than 4% is acceptable for growing economy like India, most important it should be a receding number. Expert have different take here, but all are unanimous on the merit of a controlled/modest fiscal deficit with receding trend. Higher deficit is worse and worst scenario. It leads to poor fiscal discipline, inflation, poor liquidity, decline in real rate of return, debt on the Government and future imbalance on the financial sovereignty of state. Some of the worst economy of today known by acronym PIIGS have their origin of financial instability seeded at this fiscal indiscipline.

Beyond the above three, one should look at the composition of plan expenditure. Whether, it is meant to encourage capital expenditure or revenue expenditure. The expense like Interest of previous borrowing, Salary, Pension, Defense outlay, Subsidy and social expenditure are revenue in nature. They are desired and necessary but do not directly contribute to the augmentation in general demand. The capital expenditure directly impacts consumption, investment, expenditure, export and import. The proportion of capital expenditure should be increasing and that is good for all the stakeholder of the economy.

Another area is proposed focus of Government. Government do state some ambitious program on infrastructure/energy/Transport/ urban and rural development/port development etc. Though the allocations under the program are normally modest, but these are part of bigger expenditure to follow in year ahead. These signals you story to unfold in year ahead.  These are specially examined by investor in Economy both domestic and international.

And in the end, one should examine the government guidance on various macro economic variables. Fiscal plan outlay have significant bearing on the macro variables like, Inflation, Interest, liquidity, Exchange rate, Current account, employment etc. The statement in Budget impacts these variables through series of direct and indirect action.

If the Budget speech comforts you on these parameters, one should be prejudiced to call it better or else worse. Upon forming your view, listen to the expert, who will debate insightfully often diplomatically but more often dogmatically as being ideological imprisoned unlike you who is free from all the intellectual shackles. 

Good Luck.