Budgets can no longer make or break Indian businesses. Then why all the fuss?

The month of February is about to end and that means it’s time for yet another Union budget. On February 29, Union Finance Minister Arun Jaitley will present the 68th annual budget to the Indian Parliament, and by convention, the budget will come into effect the next day, on March 1.

Article 112 of the Indian Constitution clearly says what is required in a budget: “The President shall in respect of every financial year cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year, and referred to as the annual financial statement”.

The budget then is simply a ways and means statement – the ways in which the government plans to incur expenditures and the ways in which it plans to provide for the proposed expenditures. When the budget is passed, it becomes law and the government is bound to fulfil all its provisions. But the government seldom does, and yet it’s never called out for its performance. One, because a statement of accounts comes months later and by that time it is too late to judge. Second, because newspaper editors and TV news anchors have no stomach for it.

Make-or-break moment

All democratically-elected governments and most other regimes have a budget, a plan for the year ahead. But few of them see the kind of hoopla around the budget as India. In the United States, for instance, the president is required to submit the budget request to the Congress every year between the first Monday of January and the first Monday of February. The Congress deliberates over it, haggles for changes (if it so wishes), for it to become law on the following October 1.

In India, the budget comes into effect on what is also referred to as All Fools Day. There is little time for serious deliberation, though the government’s survival depends on its passage. Last year, for instance, the Houses of Parliament spent a fraction of the time allocated for the Finance Bill. And yet every year, there is great interest in the budget all around. Perhaps because it’s rooted in our tradition.

There was a time when the budget was of considerable importance to businessmen and politicians. Those were the days of a tightly-controlled centrally planned economy where the caprices of the budget-makers determined the fates of businesses.

In the 1980s, the two warring textile majors, Bombay Dyeing and Reliance Industries, chose two different routes to make polyester. Bombay Dyeing chose dimethyl terephthalate and Reliance preferred purified terephthalic acid. The DMT process was somewhat more expensive and the tax regime imposed on it almost broke Bombay Dyeing’s back. In 2010, in a somewhat filmy ending, Reliance bought Bombay Dyeing’s polyester business.

There are many stories like this. Budgets were a make or break event for many, if not most.

The steady shift

But with the Industrial Licensing Policy of 1951 getting dismantled in 1991, and with the increasing resort to long-term tax regimes, the ability of the Central government to make or break businesses transferred to the market place. These changes took time in happening.

Till 1975 central excise was mostly used to tax raw materials and intermediate goods, and not final consumer goods. In 1975 it was extended to cover all goods. This structure gave the government even more arbitrary powers to favour or harm industries. Customs duty was still a relatively small source of revenue and the government relied more on excise duties to raise revenues. The consequence of this was a maze of taxes and tariffs. In 1985-’86 the then Finance Minister VP Singh introduced the Long Term Fiscal Policy, stressing the need to reduce tariffs, have fewer rates, and to eventually reduce quantitative restrictions on imports.

Till then it was the heyday of the liaison officers. Every company, big or small, retained the services of a lobbyist to push its case or impede a competitor’s story in the corridors of power. Much money also passed hands. The budget therefore was a time when the results of their efforts and expenditures would be seen. It was a big day for companies, their politician patrons and the business sections of the newspapers and pink papers.

In those days, as we still sometimes do, there used to be a profusion of large advertisements in the newspapers pleading for customs and excise duty concessions or protections. Newspapers loved this season. But then television came along and built this occasion into a media mega-event and promised advertisers lots of eyeballs.

These days, beyond the media spectacle, the budgets achieve little. They don’t make or break fortunes anymore.

Holding government accountable

Caught in the excitement we miss one essential reality. There is little scope in a budget to offer substantial directional change, unless it is an administrative policy change, like the scrapping of the Industrial Licensing Act that ended the Central government’s powers to micromanage all economic activity in the country. The budget is pretty well set each year by the acts of the previous years. The tax revenues are limited by the projected nominal gross domestic product growth since the rates do allow much tinkering.

Since the plans are usually cast well ahead, money has to be set aside for them. Governments try to keep plan commitments or otherwise growth suffers. Plan expenditures are usually about a third of total expenditures.

Non-plan expenditure patterns are a bit more fixed. They are mostly commitments you cannot run away from.

Interest is always the biggest expenditure, accounting for about a third of the budget. Defence is the next biggest item, taking away about 18% of the budget. Subsidies take about 15%, grants to state governments 7%, pensions 6%, police 4%, and so on. Clearly, there is little scope for any major directional changes.

The debate then mostly hinges on the quality of assumptions made. Governments tend to be generous with assumptions knowing very well that they will not be required to report on the achievement of the budget to Parliament. For instance, last year, the Finance Minister indicated that nominal GDP, which is the currency of the real world, would be 12.3%. The actual performance during the year undershot that figure by more than half to achieve only 5.2%. So tax revenues are short of target. Which means that expenditures had to be cut.

In 2014-’15, the first year of the Modi government, the mismatch of budget estimates and revised estimates was over Rs.1.10 lakh crore. The plan expenditure proposed was Rs. 5.75 lakh crore, but the government actually ended up spending Rs 4.68 lakh crore. Instead of the upward spiral promised we caught a downdraught, and consequently growth suffered. It will almost certainly be in the same ballpark range this year. But we won’t know that for some time. And by then it will be past the expiry date for political bashing. It’s more likely that by then we would have moved to something else. As we are doing in the opening days of the budget session.