Understanding union budget part-1

The Union Budget of India, also referred to as the Annual Financial Statement in the Article 112 of the Constitution of India, is the annual budget of the Republic of India. The Government presents it on the first day of February so that it could be materialised before the beginning of new financial year in April. Until 2016 it was presented on the last working day of February by the Finance Minister in Parliament. The budget, which is presented by means of the Finance bill and the Appropriation bill has to be passed by Lok Sabha before it can come into effect on 1 April, the start of India’s financial year.

  • Vote on Account is a grant in advance to enable the government to carry on until the voting of demands for grants and the passing of the Appropriation Bill and Finance Bill.An interim budget is not the same as a ‘Vote on Account’. While a ‘Vote on Account’ deals only with the expenditure side of the government’s budget. An interim budget is a complete set of accounts, including both expenditure and receipts. An interim budget gives the complete financial statement, very similar to a full budget.
  • The first Union Budget of Independent India was presented by RK Shanmukham Chetty on November 26, 1947. It was a review of the economy and no new taxes were proposed.
  • Morarji Desai has presented 10 budgets which is the highest count.
  • Halwa Ceremony and Budget briefcase:The printing of budget documents starts roughly one week ahead of presenting in the Parliament with a customary ‘Halwa ceremony’ in which halwa (a sweet dish) is prepared in large quantities and served to the officers and support staff involved. They remain isolated and stay in the North Block office until the Budget is presented. The Halwa is served by the Finance Minister. This ceremony is performed as a part of the Indian tradition of having something sweet before starting an important work
  • In Parliament, the Budget goes through six stages:
  • Presentation of Budget.
  • General discussion.
  • Scrutiny by Departmental Committees.
  • Voting on Demands for Grants.
  • Passing of Appropriation Bill.
  • Passing of Finance Bill.
  • The Budget Division of the Department of Economic Affairs in the Finance Ministry is the nodal body responsible for preparing the Budget.

Changes Introduced in 2017

  • Advancement of Budget presentation to February 1 (earlier presented on the last working day of February),
  • Merger of Railway Budget with the General Budget, and
  • Doing away with plan and non-plan expenditure.

IMPORTANT TERMS

  • Receipts: It indicates the money received by the government. This includes:the money earned by the government, the money it receives in the form of borrowings or repayment of loans by states.
  • Plan Expenditure: All expenditures done in the name of planning (i.e. Five Year Plans) were called plan expenditures. For example expenditure on electricity generation, irrigation and rural developments, construction of roads, bridges, canals, etc.
  • Non-plan Expenditure: All expenditures other than plan expenditure were known as non-plan expenditure. For example interest payments, pensions, statutory transfers to States and Union Territories governments, etc.

Components of budget

Revenue Budget– It consists of the Revenue Expenditure and Revenue Receipts.

  • Revenue Receipts are receipts which do not have a direct impact on the assets and liabilities of the government. It consists of the money earned by the government through tax (such as excise duty, income tax) and non-tax sources (such as dividend income, profits, interest receipts).

Non Tax Revenue: Tax revenue is charged on income earned by an individual or an entity (direct tax) and on the value of transaction of goods and services (indirect tax). On the other hand, non-tax revenue is charged against services provided by the government. It also includes interest charged on loans advanced by the government for various purposes.

  • Revenue Expenditure is the expenditure by the government which does not impact its assets or liabilities. For example, salaries, interest payments, pension ETC.

Capital Budget– It includes the Capital Receipts and Capital Expenditure.

  • Capital Receipts indicate the receipts which lead to a decrease in assets or an increase in liabilities of the government. It consists of: (i) the money earned by selling assets (or disinvestment) such as shares of public enterprises, and (ii) the money received in the form of borrowings or repayment of loans
  • Capital expenditure is used to create assets or to reduce liabilities. It consists of: (i) the long-term investments by the government on creating assets such as roads and (ii) the money given by the government in the form of loans or repayment of its borrowings.

Direct and Indirect Tax

Direct taxes are non-transferable taxes paid by the tax payer to the government and indirect taxes are transferable taxes where the liability to pay can be shifted to others. Income Tax is a direct tax while Value Added Tax (VAT) is an indirect tax.

WHAT ARE AUTOMATIC STABILIZERS?

Automatic stabilizers are mechanisms built into government budgets, that increase spending or decrease taxes when the economy slows. During a recession, automatic stabilizers can ease households’ financialstress by decreasing their tax bills or by boosting cash and in-kind benefits, all without changes in the tax code or any other new legislation. For example, when a household’s income declines, it generally owes less in taxes, which helps cushion the blow.

Balanced, Surplus and Deficit Budget

  • Balanced Budget – A government Budget is assumed to be balanced if the expected expenditure is equal to the anticipated receipts for a fiscal year.
  • Surplus Budget – A Budget is said to be surplus when the expected revenues surpass the estimated expenditure for a particular business year.
  • Deficit Budget- A Budget is in deficit if the expenditure surpasses the revenue for a designated year.

Measures of Government Deficit

Revenue Deficit: It refers to the excess of government’s revenue expenditure over revenue receipts.The revenue Deficit includes only such transactions that affect the current income and expenditure of the government.
Revenue Deficit = Revenue expenditure – Revenue receipts

  • Fiscal Deficit: It is the gap between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year. A surplus arises if receipts are more than expenditure.It indicates the total borrowing requirements of the government from all sources.
    Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad

  • Primary Deficit: Primary deficit equals fiscal deficit minus interest payments. This indicates the gap between the government’s expenditure requirements and its receipts, not taking into account the expenditure incurred on interest payments on loans taken during the previous years.
    Primary deficit = Fiscal deficit – Interest payments
  • Effective Revenue Deficit: Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. In other words, the Effective Revenue Deficit excludes those revenue expenditures which were done in the form of grants for creation of capital assets.

Types of budgeting

  • Zero Based Budgeting: Zero-based budgeting is a method of budgeting in which all expenses are evaluated each time a Budget is made and expenses must be justified for each new period.Zero budgeting starts from the zero base and every function of the government is analysed for its needs and cost. Budget is then made based on the needs
  • Outcome Budget: Outcome Budget analyses the progress of each ministry and department and what the respected ministry has done with its Budget outlay. It measures the development outcomes of all government programs. It was first introduced in the year 2005.
  • Gender Budgeting: The gender-budgeting is defined as “gender-based assessment of Budgets, incorporating a gender perspective at all levels of the budgetary process and restructuring revenues and expenditures in order to promote gender equality”. It is actually budgeting for gender equity.

Deficit Financing in India

  • Deficit financing is defined as “borrowings from the Reserve Bank of India against the issue of Treasury Bills and running down of accumulated cash balances”.
  • When the government borrows from the Reserve Bank of India, it merely transfers its securities to the Bank. On the basis of these securities the bank issues more currency and puts them into circulation on behalf of the government. This amounts to the creation of money.
  • Crowding Out: Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity. This leads to an increase in interest rates. Increased interest rates affect private investment decisions. This reduction in private investment due to increased government spending is called crowding out.
  • Fiscal consolidation is a reduction in the underlying fiscal deficit. Fiscal Consolidation refers to the policies undertaken by Governments (national and sub-national levels) to reduce their deficits and accumulation of debt stock. It is not aimed at eliminating fiscal debt.

In India, fiscal consolidation or the fiscal roadmap for the centre is expressed in terms of the budgetary targets (fiscal deficit and revenue deficit) to be realized in successive budgets.The Fiscal Responsibility and Budget Management (FRBM) Act gives the targets for fiscal consolidation in India.