A quick guide to make sense of budget numbers

Given all the hype and hoopla around this annual ritual, how does one make sense of what the budget actually stands for, and how it will impact the economy?

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It turns out there are a few basic thumb rules that can help you cut through the noise around the budget. To decipher what the budget is actually signalling, you need to pay more attention to the budget numbers than to the speech itself. That’s the first rule. The speech is important to decipher the political signals the government wants to send out. But to gauge its economic signals, look at the data. The finance minister has the unenviable task of pleasing all constituents. Since this is impossible, finance ministers try to wrap the bad news in shiny packaging and deflect attention from under-funded sectors or ministries by deploying heavy rhetoric.

An analysis of the 2019-20 budget speech by Sriharsha Devulapalli for this newspaper showed that there was a significant mismatch between budget rhetoric and budget expenditure. In almost all cases, the themes spoken about the most were allocated relatively less money (see ‘Budget 2019-20 speech: Rhetoric and reality’, Mint, 15 July 2019). The disconnect between funding and rhetoric was true of past speeches as well. And it is likely to be true of future speeches.

To be sure, the entire speech is not propaganda. There are usually some meaningful announcements. Some may be policy changes which could impact the economy significantly. There could also be a few big announcements regarding new schemes or hikes in allocations for existing ones. These numbers need to be contextualised. So you may need to deflate or normalize all the numbers that the finance minister throws at you. That’s the second rule.

One of the usual budget tricks is to state big hikes in percentage terms—say, a 25% hike in the rural development ministry outlay—and to state small hikes in absolute terms, such as, say, an increase of ₹5,000 crore in the allocation for the department of health and family welfare. The ₹5,000 crore increase would reflect a 7% increase in nominal terms over the next year. And if inflation is expected to run at 6% for the next fiscal year, then the real (inflation-adjusted) increase is just 1%. Yet, the announcement of ₹5,000 crore increase may get parliamentarians thumping their desks in approval. By the time anyone figures out what this increase means in percentage or real terms, the finance minister would have moved on to the next announcement. There’s another simple way to contextualize these numbers. If overall government spending (sum of spending on all ministries) is going up by 10%, then any ministry or scheme that gets a hike of less than 10% has effectively been de-prioritized. In other words, that ministry’s share in the overall government pie has shrunk.

The third rule is to focus more on the ‘truth-deficit’ ratio than the fiscal deficit ratio. The fiscal deficit represents the addition to public debt in a particular year, and this is something all analysts track closely and obsessively. If deficits are rising, this means the government is borrowing more, and hence it will have to allot a larger share of future budgets for interest payments, leaving less money for new developmental expenditures. But the experience of the past few years suggests that the reported deficit numbers can be manipulated in many ways.

In recent years, one of the government’s favourite accounting tricks was to delay payments to government firms such as the Food Corporation of India (FCI). Since deferred payments are not considered as expenses under the government’s cash accounting system, it does not show up in the reported deficit figure. There are other such ways of kicking the can down the road—such as getting extra-budgetary resources (often loans taken by government-owned enterprises) to fund budgeted expenditures.

Last year’s budget represented a rare attempt to clean up such hidden liabilities and come clean on the true deficit numbers. We need to wait for this year’s budget to figure out if last year’s clean-up act was an aberration or the beginning of a new era. If the government’s fiscal math has gaping holes— if it is relying too far on extra-budgetary resources, or if the assumptions behind the government’s fiscal math are unrealistic— there will be trouble ahead.

For instance, if the budget’s assumption of nominal gross domestic product (GDP) growth seems a bit too high, you should be wary of all projections made by the budget, especially its estimates of government revenues. Such unrealistic revenue estimates can prod overzealous taxmen to harass high-growth businesses to meet their year-end targets, ultimately undermining private-investment sentiment and growth. Honest budgeting can prevent such mishaps. So if you find that the budget projections remain unquestioned even after a few weeks, it may be safe to conclude that the budget has been a decent one.

Pramit Bhattacharya is a Chennai-based journalist. His Twitter handle is pramit_b