Education Series

Union Budget: Simplified

Introduction
Budget can be easily defined as an estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, business, government, country, or just about anything else that makes and spends money. Thus the Union Budget of India, which is a yearly affair, is a comprehensive display of the Governments finances. It is the most significant economic and financial event in India. The Finance Minister puts down a report that contains Government of Indias revenue and expenditure for one fiscal year. The fiscal year runs from April 01 to March 31. The budget is usually presented on last day February each year, barring a few exceptions like elections, by the Finance Minister of the country. The budget has to be passed by the Lok Sabha before it can come into effect on April 01. The Budget comprises of two parts viz Revenue Budget Capital Budget

Revenue Budget
The revenue budget consists of revenue receipts of the government and the expenditure met from these revenues. Revenue receipts are divided into tax and non-tax revenue. Tax revenues can further be divided into Direct tax and Indirect Tax. Direct taxes are the taxes that are levied on the income of individuals or organizations. Income tax, corporate tax, inheritance tax are some examples of direct taxation. Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc. Corporate tax is the tax paid by companies or firms on the incomes they earn. Whereas Indirect Tax are the taxes paid by consumers when they buy goods and services. These include excise and customs duties.

Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by the manufacturer on items manufactured within the country. Non-tax revenue consists of interest and dividend on investments made by government, fees and other receipts for services rendered by Government. Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that it offers to its citizens. Revenue expenditure is of two types plan and non-plan. Plan revenue expenditure includes central plan, central assistance for State and Union territory plans. Non-plan revenue expenditure includes interest payments and pre-payment premium, defense services, subsidies, grants to state and union territory governments, pensions, police services, assistance to states from National Calamity Contingency Fund, economic services (including agriculture, industry, power, transport, communications, science and technology etc), other general services (education, health, broadcasting etc), postal deficit, expenditure of union territories without legislature, amount met for National Calamity Contingency fund, grants to foreign governments etc. The difference between revenue receipts and revenue expenditure is usually negative. This means that the government spends more than it earns. This difference is called the revenue deficit.

Capital Budget
Capital Budget consists of capital receipts and payments. Capital receipt includes non-debt receipts and debt receipts. Non-debt part comprises of recoveries of loans and advances granted by Central Government to State and Union Territory Governments and other parties and miscellaneous capital receipts Debt receipts include market loans, short-term borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, external assistance like loans received from foreign Governments, securities issued against small savings, state provident funds (net) and other receipts (net).

Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc. Like revenue expenditure, capital expenditure is also of two types plan and non-plan. Plan capital expenditure refers to expenses on central plan and central assistance for state and union territory. Non-plan part includes defense services, other non-plan capital outlay, loans to public enterprises, loans to state and union territory governments, loans to foreign governments and other non-plan capital expenditures. Fiscal deficit is the gap between the government`s total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the government to completely meet its expenditure. To sum up, one could understand a budget if it is presented in horizontal form as: SHORT TERM SOURCES OF FUND (Revenue receipt) +LONG TERM SOURCES OF FUNDS (Capital receipt) = SHORT TERM APPLICATIONS OF FUND (Revenue expenditure) + LONG TERM APPLICATIONS OF FUND (Capital expenditure). Like accounting equation, sources of fund have to be equal to application of fund. If this is not so, it is balanced from draw-down of cash balance.

Union Budget Of India

Revenue Budget Revenue Receipt Tax Revenue Direct Tax Non Tax Revenue Revenue Expenditure Plan Expenditure Non Plan Expenditure Debt Receipts Capital Receipts Non Debt Receipts Capital Budget Capital Payments Planned Non Planned

Indirect Tax

Budget Estimates
FY11RE Receipts
1 2 2a 2a1 2a2 2a3 2b 2b1 2b2 2b3 2c 2d 3 4 4a 4b 4c 4c1 5 Revenue Receipts (2d+3) Gross Tax Revenue (2a+2b) Direct Tax Corporate Tax Income Tax Other Taxes Indirect Tax Customs Duty Excise Duty Service Tax Transfers to States and Uts Net Tax Revenue Non-Tax Revenue Capital Receipts Recovery Of Loans Other Receipts (Disinvestment) Borrowing and Other Liabilities Net Market Borrowing Total Receipts (1+4) 7839 7869 4484 2964 1416 104 3385 1318 1373 694 2232 5637 2202 4327 90 227 656 3354 12166 7899 9325 5352 3600 1645 107 3973 1517 1636 820 2680 6645 1254 4678 150 400 698 3430 12577

in Rupees Billion

FY12BE

FY12RE*
7671 9037 5148 3349 1699 100 3889 1476 1476 937 2621 6417 1254 5555 190 130 698 4537 13226

FY13BE*
8762 10509 5872 3818 1954 100 4637 1668 1845 1124 3048 7462 1300 5737 190 400 700 4447 14499

Expenditure
11 12 12a 12b 12b1 12b2 12b3 12c 12d 13 14 15 16 17 18 19 20 21 22 23 Non-Plan Expenditure (12+13) Non-Plan Revenue Expenditure Interest Payment Subsidies Food Fertilizer Others Grants to States and Uts Others Non Plan Capital Expenditure Plan Expenditure (15+16) Plan Revenue Expenditure Plan Capital Expenditure Total Expenditure (11+14) Revenue Expenditure (12+15) Capital Expenditure (13+16) Revenue Deficit (18-1) Fiscal Deficit 17-(1+4a+4b)) Primary Deficit (21-12a) Gross Domestic Product (GDP) PD/GDP % RD/GDP % FD/GDP % 8216 7268 2408 1642 606 550 486 526 2692 948 3950 3269 681 12166 10537 1629 2698 4010 1602 76741 2.1% 3.5% 5.23% 8162 7336 2680 1436 606 500 330 663 2557 826 4415 3636 779 12577 10972 1605 3073 4128 1448 89744 1.6% 3.4% 4.60% 9000 8180 2680 2300 650 900 750 650 2550 820 4280 3500 780 13280 11680 1600 4009 5289 2609 89122 2.9% 4.5% 5.93% 9700 8800 2900 2450 750 900 800 700 2750 900 4708 3850 858 14408 12650 1758 3888 5056 2156 100708 2.1% 3.9% 5.02%

Source: Budget Document; House View by - PCG Research, Kotak Securities * House View by Kotak Securities- Private Client Research Estimates

Prerana Desai Vice President- Research prerana.desai@kotakcommodities.com +91-22-66528894

Dharmesh Bhatia AVP Research- Technical Analyst dharmesh.bhatia@kotakcommodities.com +91-22-66528846

Faiyaz Hudani Sr. Research analyst- Spices, Edible Oil faiyaz.hudani@kotakcommodities.com +91-22-6652837

Amit Sajeja Sr.Research analyst- Technical Analyst amit.sajeja@kotakcommodities.com +91-22-66528847

Sudha R. Acharya Research analyst- Edible Oil, Pulses, Grains sudha.acharya@kotakcommodities.com +91-22-66528809

Ajay Baheti Associate Research- Technical Analyst ajay.baheti@kotakcommodities.com +91-22-66528845

Madhavi Mehta Research analyst- Energy, Bullion madhavi.mehta@kotakcommodities.com +91-22-66528809

Priyanka Jhaveri Research analyst- Base Metals priyanka.jhaveri@kotakcommodities.com +91-22-66528848

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