It is that time of the year when the Finance Minister presents the annual Union Budget in Parliament. Come 29th February and all eyes will be glued to the television sets during the Budget speech.
Analyzing the speech, however, may not be an easy task. The key points may be hidden beneath the numerous announcements.
Of course, understanding how the speech will be structured can help you remain alert. Here's what you should look out for:
1. Where to look: If you take any of the past Budget speeches, you will realize that the speech can be divided into two parts. The first half of the speech contains detailed information about multiple policy initiatives and economic developments. The second part covers all the tax proposals and details about the government’s finances, its expenditure plan, etc. If you want to get a sense of the government’s welfare policy as well as the state of the economy, look closely at the first half. It is the other part, however, that holds important information that has the potential to affect you as well as the markets directly.
2. Understand the Tone: Before you look at the nitty gritties, understand the tone of the Budget, which sets precedent for the government’s activities in the whole year. The speech contains explanations on the government’s expenditure plans and economic policies. Look out for key words like fiscal consolidation, development, capital expenditure, subsidies, etc. These can help you understand the government’s plan for the year.
3. State of the Economy: The FM usually starts his speech with a detailed look at the state of the economy - its past developments, current situation and future challenges. This could give you an idea of what lies ahead for the economy. The state of the economy plays a big role in the government’s policymaking. This part of the speech could also contain a report on the state of the country’s infrastructure, which is essential for growth. These announcements could lay the groundwork for possible investments in infrastructure. This is called capital expenditure (capex). Markets usually cheer a rise in capex.
4. Government subsidies, welfare policies: India has a welfare government - it takes the responsibility to provide for its people to help them progress. To do so, it conducts many welfare projects and provides subsidies. All of these are funded by the taxpayers own money. At the same time, the government also has to invest for economic development. The challenge for the government is to balance the two without increasing its expenditure. This is more important at a time when the government is trying to cut its fiscal deficit, which is bad for economic growth. Details for such an analysis lie in the policy announcements.
5. Tax Proposals: The government earns a big portion of its income through direct and indirect taxes. Any change in either of these taxes has the potential to affect you directly. This is either through a change in your Income Tax payments or by the rise/fall in prices of goods and services. Moreover, it also affects the government’s own revenue stream. A fall in revenue could mean higher borrowing. This is why this portion is often considered the most important by individuals, companies and the stock market alike.
6. The Big Figure: Fiscal Deficit is the reigning king of all the Budget-related topics that dominate news. This is the amount by which the government exceeds its income. To fund this extra expenditure, the government borrows money from the market. This is the big figure that the stock market eyes closely. The Finance Minister announces this in the last leg of the speech - Budget estimates. This is where he talks about the government’s estimated expenditure, revenue and borrowing in the new fiscal year. He also gives a report card of the finances in the current fiscal. Compare these with the previous Budget’s estimates to find out if the government overshot its finances.
7. What’s in it for you: The biggest question everyone asks after the Budget is how it will affect them. For this, look at the tax related announcements. More specifically, look for concessions on income tax, tax exemptions on housing loans or changes in how your investments will be taxed. Alternatively, the government may also announce a new scheme to provide more benefits through investments. It could be like the Equity Linked Savings Schemes (ELSS).
8. Government spending on you: You may also want to check out how the government is spending on you - this affects you directly or indirectly too. This means checking out the expenditure on rural and urban welfare schemes like MGNREGA and the Indira Awaas Yojana as well as development schemes like infrastructure projects. Taking into account the budget arithmetic, the government can allocate 0.3% of gross domestic product for development spending. Considering the poor monsoon in the last two years, the government could announce a rise in spending for the rural areas to fuel demand. This is more important considering that state governments have limited bandwidth to spend on welfare schemes.
The Union Budget is a very important event that affects one and all. It’s important that you listen to the speech closely and pay attention to the details. These could have a big effect on your money.