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The BudgetThe Budget Prof.M.GuruprasadProf.M.Guruprasad UNIVERSAL BUSINESS SCHOOLUNIVERSAL BUSINESS SCHOOL

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CONTENTSCONTENTS1.Union Budget: Revenue Budget, Capital Budget1.Union Budget: Revenue Budget, Capital Budget2. Revenue Receipts, 2. Revenue Receipts, Revenue Expenditure, Revenue DeficitRevenue Expenditure, Revenue Deficit 3. Capital Budget, Capital receipts, Capital Payments3. Capital Budget, Capital receipts, Capital Payments4. 4. Taxes: Direct Taxes, Indirect Taxes5. 5. Two components of expenditure, Plan and Non-Plan 6. Fiscal Policy, Fiscal Policy, Fiscal DeficIt,Fiscal DeficIt, Finance BillFinance Bill7. 7. The Budget process stagesThe Budget process stagesSTAGE 1: Estimates. Part A – ExpenditureSTAGE 1: Estimates. Part A – Expenditure8. 8. STAGE 1: Estimates. Part B - RevenueSTAGE 1: Estimates. Part B - Revenue 9.9. STAGE 2: First estimates of deficitSTAGE 2: First estimates of deficit 10. 10. STAGE 3: Narrowing of the deficitSTAGE 3: Narrowing of the deficit 11. 11. How India balances its booksHow India balances its books12. 12. Consolidated FundConsolidated Fund, , Contingency FundContingency Fund13. Public Account, Appropriation bills13. Public Account, Appropriation bills14.14. Budget deficit, Budget deficit, Fiscal deficit, Fiscal deficit, Primary deficitPrimary deficit

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The BudgetThe Budget : :

Union BudgetUnion Budget : : It contains the government of It contains the government of India's revenue and expenditure for the end of a India's revenue and expenditure for the end of a particular fiscal yearparticular fiscal year..

Revenue Budget: Revenue Budget: consists of revenue receipts of consists of revenue receipts of the government the government and its expenditure. and its expenditure.

Capital Budget: Capital Budget: consists of capital receipts and consists of capital receipts and paymentspayments..

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Revenue BudgetRevenue Budget

Revenue Receipts :Revenue Receipts :Divided into Tax and Non-Tax RevenueDivided into Tax and Non-Tax Revenue::

Tax Revenues: Income tax, corporate tax, excise, Tax Revenues: Income tax, corporate tax, excise, customs and other duties that the government customs and other duties that the government levies.levies.

Non-Tax Revenue: Non-Tax Revenue: The government's sources are The government's sources are interest on loans and dividend on investments like interest on loans and dividend on investments like PSUs, fees, and other receipts for services that it PSUs, fees, and other receipts for services that it renders. renders.

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Revenue Expenditure :Revenue Expenditure :The payment incurred The payment incurred for the normal day-to-day running of government for the normal day-to-day running of government departments and various services that it offers to departments and various services that it offers to its citizens. its citizens.

Revenue Deficit :Revenue Deficit :This means that the This means that the government spends more than it earns. This government spends more than it earns. This difference is called the revenue deficit. difference is called the revenue deficit.

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Capital Budget:Capital Budget:

It is It is different from the revenue budget as its different from the revenue budget as its components are of a long-term nature.components are of a long-term nature.

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Consists of Capital receipts and PaymentsConsists of Capital receipts and Payments::

Capital receipts:Capital receipts: Are Are government loans raised government loans raised from the public, government borrowings from the from the public, government borrowings from the Reserve Bank and treasury bills, loans received from Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against holding in public sector enterprises, securities against small savings, state provident funds, and special small savings, state provident funds, and special depositsdeposits

Capital PaymentsCapital Payments: : Capital expenditures on Capital expenditures on acquisition of assets like land, buildings, machinery, and acquisition of assets like land, buildings, machinery, and equipment. Investments in shares, loans and advances equipment. Investments in shares, loans and advances granted by the central government to state and union granted by the central government to state and union territory governments, government companies, territory governments, government companies, corporations and other parties. corporations and other parties.

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Taxes:

Direct Taxes: Taxes that are levied on the income of individuals or organisations. Income tax, corporate tax, inheritance tax are some instances of direct taxation.

Indirect Taxes: The taxes paid by consumers when they buy goods and services. These include excise and customs duties.

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Two components of expenditure: Plan and Non-Plan :

Plan expenditures: are estimated after discussions between each of the ministries concerned and the Planning Commission.

Non-plan revenue expenditure: is accounted for by interest payments, subsidies wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services etc.

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Fiscal Policy: Fiscal Policy: change in government spending or change in government spending or taxing designed to influence economic activitytaxing designed to influence economic activity..

Fiscal DeficItFiscal DeficIt : : It represents the total amount of It represents the total amount of borrowed funds required by the economyborrowed funds required by the economy . .

Finance BillFinance Bill : : The government proposals for the The government proposals for the levy of new taxes, alterations in the present tax levy of new taxes, alterations in the present tax structure or continuance of the current tax structure structure or continuance of the current tax structure beyond the period approved by the Parliament.beyond the period approved by the Parliament. The The Parliament approves the Finance Bill for a period of Parliament approves the Finance Bill for a period of one year at a time, which becomes the Finance Actone year at a time, which becomes the Finance Act

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Plan expenditures are estimated after discussions Plan expenditures are estimated after discussions between each of the ministries concerned and the between each of the ministries concerned and the Planning Commission Planning Commission

Non-planNon-plan: expenditure for various ministries are : expenditure for various ministries are prepared by their financial advisorsprepared by their financial advisors

These are sent to the expenditure secretary who, These are sent to the expenditure secretary who, after exhaustive discussions with financial advisors, after exhaustive discussions with financial advisors, makes an assessment of the likely expenditures for makes an assessment of the likely expenditures for the ensuing fiscal year. the ensuing fiscal year.

Nearly 90 per cent of the non-plan expenditure is Nearly 90 per cent of the non-plan expenditure is accounted for by interest payments, subsidies (mainly accounted for by interest payments, subsidies (mainly on food and fertilisers) and wage payments to on food and fertilisers) and wage payments to employeesemployees

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The Budget process stagesThe Budget process stages: :

STAGE 1: Estimates. Part A – ExpenditureSTAGE 1: Estimates. Part A – Expenditure::

The Indian Constitution requires the government to The Indian Constitution requires the government to present to Parliament a statement that shows present to Parliament a statement that shows separately the expected revenues and expenditures, separately the expected revenues and expenditures, both current and capital by heads of account. both current and capital by heads of account.

The Budget-making process, in normal timesThe Budget-making process, in normal times set in set in third quarter of the financial yearthird quarter of the financial year (may be changes now (may be changes now since the Budget is presented during the first week of since the Budget is presented during the first week of February)February)

On the expenditure side, initial estimates are On the expenditure side, initial estimates are provided by the various ministries. provided by the various ministries.

There are two components of expenditure - plan and There are two components of expenditure - plan and non-plan. non-plan.

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STAGE 1: Estimates. Part B - RevenueSTAGE 1: Estimates. Part B - Revenue : : Parallel to the exercises on the expenditure side, an Parallel to the exercises on the expenditure side, an assessment is made of the revenues which are likely assessment is made of the revenues which are likely to flow into the government kittyto flow into the government kitty

Revenue receiptsRevenue receipts are of two types - capital and are of two types - capital and current receipts. current receipts.

Capital receipts include repayment of loans made Capital receipts include repayment of loans made by the federal government, receipts from divestment by the federal government, receipts from divestment of public-sector equity and borrowings - both domestic of public-sector equity and borrowings - both domestic and external. and external.

. . Current receipts, by and large, include tax Current receipts, by and large, include tax revenues, receipts by way of dividends from public-revenues, receipts by way of dividends from public-sector units and interest payments on loans given out sector units and interest payments on loans given out by the federal governmentby the federal government

All the estimates flow to the revenue secretary.All the estimates flow to the revenue secretary.

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STAGE 2: First estimates of deficitSTAGE 2: First estimates of deficit

Expenditure estimates are matched with revenue estimate Expenditure estimates are matched with revenue estimate to arrive at a first estimate of the shortfall in revenue to meet to arrive at a first estimate of the shortfall in revenue to meet projected expenditure.projected expenditure.

Following this the government, in tandem with its chief Following this the government, in tandem with its chief economic advisor, determines the optimum level of economic advisor, determines the optimum level of borrowings that the government can resort to. borrowings that the government can resort to.

The level of external borrowings is an easily estimated The level of external borrowings is an easily estimated figure because much of the external borrowing on figure because much of the external borrowing on government account consists of bilateral and multilateral government account consists of bilateral and multilateral assistance assistance

The level of domestic borrowing depends partly on the The level of domestic borrowing depends partly on the desired level of fiscal deficit that the government targets for desired level of fiscal deficit that the government targets for itself.itself.

This has been done to ensure that the issue of ad hoc This has been done to ensure that the issue of ad hoc treasury bills to fill revenue gaps does not lead to problems treasury bills to fill revenue gaps does not lead to problems of monetaryof monetary management. management.

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STAGE 3: Narrowing of the deficitSTAGE 3: Narrowing of the deficit : :

After the targets for the fiscal deficits and the overall After the targets for the fiscal deficits and the overall budget deficit have been decided by the governmentbudget deficit have been decided by the government any remaining shortfall is filled through a revision in tax any remaining shortfall is filled through a revision in tax rates Subsequently adjustments are made in rates Subsequently adjustments are made in expenditures, should it be required, to ensure that the expenditures, should it be required, to ensure that the fiscal and overall deficit remain at targeted levels. fiscal and overall deficit remain at targeted levels.

subsidies and administrative expenditure and the subsidies and administrative expenditure and the political sensitivities involved in reducing subsidies, political sensitivities involved in reducing subsidies, non-plan expenditure of the Indian government is non-plan expenditure of the Indian government is characterised by an extraordinary degree of rigidity. characterised by an extraordinary degree of rigidity.

Inevitably, therefore, plan expenditures are Inevitably, therefore, plan expenditures are determined as a residual after pre-emptions have determined as a residual after pre-emptions have already been made for non-plan expenditure. already been made for non-plan expenditure.

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How India balances its booksHow India balances its books::

The Budget is a huge fiscal exercise and it is The Budget is a huge fiscal exercise and it is interesting to find out how India goes about the budget interesting to find out how India goes about the budget process and how it balances its books.process and how it balances its books.

STAGE 1: Estimates. Part A - ExpenditureSTAGE 1: Estimates. Part A - Expenditure

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STAGE 1: Estimates. Part B - Revenue.STAGE 1: Estimates. Part B - Revenue.

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STAGE 2: First estimates of deficit.STAGE 2: First estimates of deficit.

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STAGE 3: Narrowing of the deficit.STAGE 3: Narrowing of the deficit.

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STAGE 4: The BudgetSTAGE 4: The Budget

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Consolidated FundConsolidated Fund: : All revenues received by All revenues received by government, loans raised by it, and also its receipts government, loans raised by it, and also its receipts from recoveries of loans granted by it, form the from recoveries of loans granted by it, form the consolidated fund. All expenditure of the government is consolidated fund. All expenditure of the government is incurred from the consolidated fund and no amount can incurred from the consolidated fund and no amount can be withdrawn from the fund without authorization from be withdrawn from the fund without authorization from ParliamentParliament

Contingency Fund: Contingency Fund: As the name suggests, this fund As the name suggests, this fund is placed at the disposal of the President to enable the is placed at the disposal of the President to enable the government to meet urgent unforeseen expenditure government to meet urgent unforeseen expenditure pending authorization from Parliament pending authorization from Parliament

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Public AccountPublic Account: Besides the normal receipts and : Besides the normal receipts and expenditure of the government which relates to the expenditure of the government which relates to the consolidated fund, certain other transactions enter consolidated fund, certain other transactions enter government accounts in respect of which government government accounts in respect of which government acts more as a banker, for example, transactions acts more as a banker, for example, transactions relating to provident funds, small savings collections, relating to provident funds, small savings collections, other deposits, etc. other deposits, etc.

Appropriation bills: Appropriation bills: After the demands for grants After the demands for grants are voted by the Lok Sabha, Parliament's approval to are voted by the Lok Sabha, Parliament's approval to the withdrawal from the consolidated fund of the the withdrawal from the consolidated fund of the amounts so voted and the amount to meet the amounts so voted and the amount to meet the expenditure charged on the consolidated fund, is sought expenditure charged on the consolidated fund, is sought through the Appropriation Bill.through the Appropriation Bill.

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Budget deficit:Budget deficit: The receipts minus total expenditure The receipts minus total expenditure on both revenue and capital accounts.on both revenue and capital accounts.

Fiscal deficit: Fiscal deficit: The difference between revenue The difference between revenue receipts plus non-debt capital receipts on one side and receipts plus non-debt capital receipts on one side and total expenditure including loans, net of repayments, on total expenditure including loans, net of repayments, on the other side. In other words, this is the budget deficit the other side. In other words, this is the budget deficit borrowings and other liabilities.borrowings and other liabilities. Primary deficit: Primary deficit: The fiscal deficit minus interest The fiscal deficit minus interest paymentspayments (A shrinking primary deficit indicates progress towards (A shrinking primary deficit indicates progress towards fiscal health. The Budget document also mentions deficit as a fiscal health. The Budget document also mentions deficit as a percentage of GDP. This is to facilitate comparison and also get a percentage of GDP. This is to facilitate comparison and also get a proper perspective. Prudent fiscal management requires that the proper perspective. Prudent fiscal management requires that the government does not borrow to consume in the normal course). government does not borrow to consume in the normal course).