Harvard Business Review

The Costs of India’s Annual Budget Guessing Game

06 April 2016 | Source: Harvard Business Review

Every February, businesses in India wait with bated breath for the country’s finance minister to announce the Union Budget. All major decisions – investment, expansion, diversification – come to a standstill as business leaders play the budget guessing game. Will taxes go up or down? Will new concessions be announced? Will doors open further to foreign investment or competition? In the hype that surrounds the moment each year, newspapers dedicate dozens of articles to this guessing game. Cartoonists shift their gaze from politics to the budget circus and TV channels gather all the “experts” to pontificate.

This year was no different. Financial analysts had dubbed it a “make or break” budget. And then, budget day came and budget day went. Nothing was made or broken. Everybody went back to work, and the government announcements made little to no impact on business plans.

To the outsider, it’s the great Indian spectacle. “One of the great things about India is its ability to over-celebrate everything from weddings to rain to the latest Rajinikanth film. The annual unveiling of the government budget is no exception,” writes Sean McLain of The Wall Street Journal’s Delhi bureau.

But as someone who has been watching it with growing impatience for years – as a student of business, as a CEO in a fast-moving industry, as a mentor to young entrepreneurs – I believe it’s high time these annual budget jamborees are laid to rest, as they are anchoring the country to the past and slowing its growth. It’s time to treat the budget more like a business and make the kind of decisions that will further propel India to become a leader in the global economy. Here are three reasons why:

Real-time strategic planning

Strategy used to be an annual exercise in many businesses, and some still treat it that way today. In these organizations, the last few months of the year are spent waiting to set new strategic directions, followed by more months of understanding the new direction. Fortunately, this isn’t how most modern businesses handle strategy any longer. Companies have to respond to strategic shifts in real-time and continuously adapt to fast-changing consumer expectations and global events.

Financial planning is no longer a once-a-year event in modern business, so it shouldn’t be in government either. For example, China dumping steel in India puts the entire industry in stress, leading to a large problem on loan defaults to government-owned public sector banks. This needs an immediate response. Similarly, the alarming situation around rising youth unemployment could benefit from limited investment in job-creating industries. An economic problem like that cannot wait for the yearly budget — it needs a response now. And when promised budget implementations get delayed, that leads to huge disappointment as a spoke in the wheels of competitive business.

The overriding importance bestowed on the budget in India dates back to the central role played by the munim in traditional Indian businesses, a trusted person who kept accounts, managed the purse strings, and ensured a balanced budget. His views on strategy were final. To me, the budget still appears to be an exercise in strategy based on balancing numbers. The problem is that the world has moved on. Strategy today is not about balancing the budgets. It is about making timely sharp turns, planned and executed with reason.

This real-time nature of business today must be reflected in the government’s choice of tools. In the case of youth unemployment, for instance, it would be far more powerful to launch a nationwide debate on the big opportunity around bolstering globally competitive yet job friendly sectors like education, health care, or organic farming — rather than consider relative spend to last year.

Making and breaking regulations

The need for change is also precipitated by the growing digitalization of business, which has accelerated the pace of change exponentially. Consider the massive shifts caused by the entry of digital competitors such as Amazon in retail, iTunes or Spotify in music, Airbnb in hospitality, Expedia in travel, or Uber in taxis. Before legacy business leaders could blink, they transformed the entire landscape of their industry.

How can annual measures possibly be effective in protecting or catalyzing such industries? Doing business in the digital economy requires quick and responsive fiscal steps by government to consider and regulate new players that fall outside traditional sector brackets — and ensure fair rules of the game for all.

Working across borders

This is the age of competing across borders and “best sourcing.” Companies are often wooed by multiple countries with tempting incentives. Therefore, country-specific tariffs focused on tweaking relative tax percentages are not necessarily the best catalysts in the government tool kit. Initiatives focused on enhancing ease of doing business, investments in innovation, a focus on infrastructure, and bilateral partnership agreements with other nations are effective tools being used by governments across the world.

So rather than join the hoopla around the budget’s closed doors and stilted public dialogue, I’m looking for a platform where we can stop this national waiting game and proactively engage in a dialogue on making India more competitive and increasing our share of wallet in the global economy. Where each leader articulates a strategy on where we are compared to where we should be.

India’s not alone in this. The call to drop the budget as a tradition that underserves strategic visions is echoed in the UK as well. Earlier this month, Damian Hind and Jonathan Dupont at Policy Exchangecribbed that the budget seemed “like a vestigial relic of a different time Treasury.” Among their points: “When so many changes are made at a single point of time, the individual impact of various tax increases, exemptions, and other wheezes are pretty opaque.”

The reasons are endless; the inference, the same. It’s time to let go of our old ways of thinking about budgeting and stop the waiting game.

Originally posted on Vineet Nayar’s Blog site on Harvard Business Review: https://hbr.org/2016/04/the-costs-of-indias-annual-budget-guessing-game