financial scene
Budget must avoid bloated expectations
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The way stock prices react in ‘real time’ even as the Finance Minister reads his text is interpreted as a vote for or against the budget
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A noteworthy impact of the Central budget has been the stock markets’ extremely negative reaction to its proposals. The Sensex fell by 869 points last Monday, its biggest ever fall on a budget day, and the Nifty by 259 points.
Recovering partially on Tuesday, the markets again stumbled on Wednesday. By then however other factors, notably weak global cues including adverse economic reports from the U.S., had become additional factors depressing the prices.
There is a widespread tendency to see a correlation between important policy announcements and stock market behaviour. The budget has come to be the most important economic policy announcement. The way stock prices react — in ‘real time’ even as the Finance Minister reads his prepared text — is interpreted as a vote for or against the budget.
It passes one’s comprehension how market operators can understand and react to the Finance Minister’s proposals almost instantaneously. After all, the budget documents are complex and even experts will take a while to study them and give their considered opinions.
The point has been made many times before that no official policy document can be classified so quickly into such neat categories as ‘good’, ‘bad’ or ‘indifferent’. Shorn of the hype, the budget is basically a statement of government income and expenses. Even if it has, over the years, been embellished with various policy statements including the more recent ones on economic reforms, its original purpose ought not to be forgotten.
Need to demystify
A long pending task that may never be completed is to demystify the budget process. Only then can exaggerated expectations, of the type seen this time, be minimised. Simultaneously, there is a strong case for the government to improve its communication strategy. It must educate the markets and lay people that the budget need not necessarily be the forum for announcing public policies such as those relating to economic reform.
This time the Finance Minister did try to present a realistic picture of what a budget can possibly achieve. But the process of conditioning expectations should have begun earlier.
Monetary policy
The RBI’s monetary and credit policy statements may not be the most appropriate examples but they come closest to what official communication strategies should embody. Those are addressed to bankers in the first instance and are full of relatively complex jargon such as CRR, SLR and repo rates. The RBI conducts its monetary policy by varying these and it is the announcement of these measures rather than the central bank’s considered views on the economy that creates all the excitement.
More recently, the central bank took the decision to delink these announcements (on monetary measures) from the policy announcements proper (which incidentally are now made every quarter instead of half-yearly as earlier). Very often the changes in CRR or repo rates are announced in between the scheduled announcements. This has automatically toned down expectations from the monetary policy announcements. A balanced view of the monetary policy then becomes possible.
Expectations build-up
Will a similar strategy work for the Union Budget? Of the lessons to be learnt from the latest budget, a few are important. One is to reset expectations beforehand by announcing policy moves — however small — pertaining to, say, public sector disinvestment or even foreign direct investment. Expectations from these areas will then be realistic. The absence of significant announcements in the budget in these two areas allegedly pulled down the market.
Markets and many others had come to believe that the Finance Minister will announce some big bang reform measures.
They probably had some reasons to expect those. The present UPA government is better placed in a political sense than its predecessor, with fewer allies opposing reform.
Second, no arm of the government or related policy document should even unwittingly set unrealistic targets for the budget.
This year’s Economic Survey raised expectations sky high: it recommended for instance an annual target of Rs. 25,000 crore under disinvestment proceeds and increasing the FDI cap in insurance from 25 per cent to 49 per cent.
Although the Survey is intended to be the report of the Prime Minister’s Chief Economic Advisor on the economy, its timing along with its ambitious agenda for reform complicated the budget exercise. If the recommendations are to be part of a vision document, they must be mentioned as such.
Key role of education
Three, educating the common man on the intricacies of the fiscal policy will go a long way in moderating expectations. This, of course, is relevant to all economic policies — monetary, foreign trade policy as well as the budget exercise. In fact, educating the common man on the budget may be easier as there is already plenty of public interest in what the Finance Minister will do.
Education will also help in understanding certain critical issues in their proper perspective. For instance, the key concerns in the budget such as fiscal deficit and absence of a speedy reforms agenda need not look so daunting if there is greater awareness.
Disinvestment, a key reform agenda, can only be a slow process, even if there is a political will. Years ago the Disinvestment Commission had talked of corporatisation of the public sector enterprises (PSEs) as a prelude to divestment.
All PSEs whose shares are proposed to be divested must get approvals — from shareholders and regulators. Finally, the timing has to be right for any divestment to be successful.
If the above difficulties are made known, there would be far less fixation on the targets, large or small.
In other words, the stock markets will have fewer reasons to be disillusioned after a budget.
C. R. L. NARASIMHAN
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