Basics of Budget

Chapter - III

What is a Budget
As a financial blueprint of a government, budget a an important instrument to carry out its policies & programmes. A budget is a description of a financial plan. It is a list of estimates of revenues to and expenditures by an agent for a stated period of time. Normally a budget describes a period in the future

Phases of Budgetary Cycle

The budget is presented every year in the parliament by the Finance Minister of the country, it is called as the budget speech. The budget speech constitutes the core of the budget document. It provides glimpses of the events, challenges and problems of the Indian economy and the corrective measures taken by the government.

Annual Financial Statement

Budget is defined as Under article 112 of the constitution, a statement of estimated receipts and expenditure of the central government which is laid down before the parliament in respect of every financial year which runs from April 1 to March 31 in the document titled Annual Financial Statement is the basic budget document

Annual Financial Statement

It gives details of the actual receipts and expenditures for the preceding year, revised estimates for the current year and causes for such revisions and budget estimates for the ensuing year.

Accounts of Government
Annual Financial Statement shows the receipts & payments of the Govt under 3 parts: 1. Consolidated Fund of India: All expenditure of the
government is incurred from this fund. This is basically the reservoir into which money received by government, all loans raised by them and all money received by the government in repayment of loans are paid. No money can be withdrawn out of this fund without the permission from the Parliament and authorized by an Appropriation Act.

Accounts of Government
2. Contingency Funds: This fund is kept at the disposal of the government to meet emergency and unforeseen expenditures which cannot be delayed. Any amount of withdrawal from this fund requires approval of the Parliament. The corpus of the fund authorized at present is Rs. 50 crores. 3. Public Accounts: There are certain other transactions which enter the government account, where the government acts as a banker. For eg, transactions relating to provident funds, small savings etc, which have to be paid back to the depositors once they mature. The money received through these transactions are kept by the government in the Public Account and the concerned payment are also made therefrom. No Parliamentary approval is required for payment from this account.

Phases of Budgetary Cycle

1.

2.
3. 4.

Preparation of Budget Legalisation of the Budget Execution of the Budget Auditing of accounts

Phases of Budgetary Cycle

1. a.

b.

Preparation of Budget: involves the following steps: It involves considerable efforts on part of the Ministry of Finance, other Ministries/Depts and the Planning Commission. It is sometime in the month of September every year that the Budget Division of the Dept of Economic Affairs of the Ministry of finance sends a circular to various Ministries/Dept, requesting them to prepare estimates of expenditure to the incurred by them in the following year .

Phases of Budgetary Cycle

c) Specific information is sought on :Actual of the previous year ii) Sanctioned budget estimates for the current year. iii) Revised estimate for the current year iv) Proposed estimate for the next financial year with explanation for any increase or decrease in estimates .
i)

Phases of Budgetary Cycle

d) With the help of the financial advisers, these dept formulate their spending plans and these estimate of expenditure are furnished to the ministry of finance during December/ January for screening and integration into main budget. e) Then based on the estimate, the revenue required is prepared by the Revenue Dept

Phases of Budgetary Cycle

f) Based on all these projections of resources
and the Non-Plan expenditure commitments, an idea of likely availability of budgetary resources for financing the Plan is conveyed to the Planning Commission. g) The Planning Commission prepares the blueprint of accordance with the guidelines provided by the National Dev Council ( NDC ). After approved by (NDC) and finalized by the Central Govt, it is implemented.

Phases of Budgetary Cycle

h) The Final budget is presented by the finance Minister to the Parliament on the last working day of February every year.

Phases of Budgetary Cycle

2. Legalisation of the budget: Once the budget is prepared, it has to pass through the following review & approval stages in the Parliament: a) Presentation of the budget by the Finance Minister in both the Houses of Parliament. b) General Discussion on revenue & expenditure proposals. c) Presentation, discussion and voting on demand for grants. d) Voting & passing of the Appropriation Bill e) Passing of the Finance Bill.

Phases of Budgetary Cycle

Execution of the Budget: Once the Appropriation Bill & the Finance Bill are passed, the executive departments get a green signal to collect revenue & spend money on approved schemes. Collection of revenue is the duty of the Revenue Dept of Ministry of Finance. This Dept has two wings: A) The Central Board of Direct Taxes B) The central Board of Excise Duty and Customs.

Phases of Budgetary Cycle

Maintenance of Accounts: The primary objective of government accounts is to facilitate the formulation, authorization & execution of the budget. Auditing of Accounts: Audit of public expenditure is an ex-post check to ensure that the spending was within the budgeted amount and for the purpose intended.

Structure of the Central Government Budget

Under Article 112(2)(b)of the Constitution, the budget of the govt has to distinguish expenditure on revenue account from other expenditure. Therefore it is presented in 2 parts: Revenue Budget and capital Budget 1. Revenue Budget: shows the revenue receipts and expenditure met from these revenues. It consist of a) Revenue Receipts b) Revenue Expenditure.

Structure of the Central Government Budget

Revenue Receipts: All those receipts of the government which are non-redeemable may be termed as Revenue Receipts. Revenue receipts are further divided into: I) Tax Revenue: plays a very important role in the revenue receipts of the government. It is basically the revenue generated by the government through taxes and duties imposed by the Union. In fact there are three pillars of the central tax system they are Income Tax, Custom Duties and Excise Duties. Besides these there are some other taxes of minor revenue significance.
A)

Structure of the Central Government Budget

ii) Non-Tax Revenue: mainly consists of interest &
dividends on investments made by the govt and fee & other receipts for services rendered by it. 2. Revenue Expenditure: relates to the day-to-day expenses incurred by the government for normal running of various departments and various services. It also includes the debt incurred by the government and grants given to various parties. Ti is basically the non-developmental expenditure by the government which does not lead to any physical or financial asset creation. The revenue expenditure in the Budget document is presented under two parts:

Structure of the Central Government Budget

Plan Expenditure ii) Non-Plan Expenditure. ii) Plan Expenditure: Out of the total expenditure of the government, a significant part is incurred as Plan Expenditure. This expenditure relates to Central Plan and Central assistance for State and Union Territory Plans. ii) Non-Plan Expenditure: includes both Revenue and Capital Expenditure, Developmental and NonDevelopmental Expenditure. Non-Plan Revenue Expenditure covers wide variety of General, Social, Economic Services made by the government
i)

Structure of the Central Government Budget

a) General Services: Expenditure made by the government to maintain both civil and defence services like expenditure on i) Organs of State like the President, Vice-President, Parliament, Council of Ministries, Administration of justice, elections and Audit ii) Fiscal Services Like Tax Collection, Collection of Excise Duty and Custom duties, Other taxes and duties on commodities and services. iii) Interest Payment and Debt Servicing iv) Administrative services like Public service Commission, Secretariat-General Services, District Administration, Jails, Police, Stationery and Printing, Public Work, External Affairs v) Pensions and General Miscellaneous services vi) Defence Services like Army, Navy, Air-Force Research and Development. b) Social and Community Services : Expenditure incurred by the government on education, art and culture, Family Welfare, Medical and Public Health, water supply and sanitation, urban development, housing, information and publicity broadcasting, Welfare of ST, SC and BC. Labour employment, Relief on account of natural calamities etc in the economy fall under Social and Community Services

Structure of the Central Government Budget

c) Economic Services: Expenditure incurred by the government a) Agriculture and Allied services like Crop Husbandry, Animal Husbandry, Diary Development, Fisheries, Forestry and Wild Life, Agricultural Research and Development etc. b) Rural Development like Special programmes on Rural Development, Rural Employment, Land Reforms. c) Special Area Programmes for Northern Eastern Regions d) Irrigation and Flood Control e) Energy like Power, Petroleum, Coal and Lignite and nonConventional sources of Energy f) Industry and Mining g) Transport and Communication like Railways, Aviation, Shipping, Roads, Postal Services, Telecommunication, Statelite etc h) Science Technology and Environment like Research and development fall under Economics Services.

Structure of the Central Government Budget

d) Unaccountable Services: Expenditure which is non-developmental in nature which cannot be and are put to use also fall under non-plan expenditure. Expenditure made by the government on grants-in-aids and contribution, grants-in-aids to the State, grants-in-aids to Union Territories, Technical and Economic cooperation with other countries, aid material and equipments.

Structure of the Central Government Budget

Capital Budget: comprises of Capital Receipts and Capital Expenditure of the Central Government. It shows the capital requirements and the sources through which the government collects revenue to finance its projects. Among the important sources of revenue used by the government to raise funds are Market Loans, Special Deposits, External assistance, Recovery of loans and Advances, Small Savings, Provident Funds and Other Receipts.

Structure of the Central Government Budget

Capital Receipts: Capital Receipts are those receipts of the government which creates liability or reduce assets. Main components are: 1. Market Loans: Gross borrowings minus repayments of loans by the govt.

Structure of the Central Government Budget

2. Special Deposits 3. External Assistance 4. State Provident Funds 5. Disinvestment 2. Capital Expenditure: Those expenditure of the Govt which leads to creation of physical or financial assets or reduction in recurring financial liabilities fall under the category of capital expenditure. For eg: expenditures pertaining to payments on purchase of land, buildings, machinery, equipments, as also investment in shares, loans & advances given to the state govts, public sector entrprises & other parties.

Structure of the Central Government Budget

Budget document categorise total Capital Expenditure into: a) Plan Capital Expenditure: relates to Central Plan & Central assistance for State & Union Territory Plans. Plan Expenditure: estimated at Rs. 172,728 crore, up by 20.4% ACC TO BUDGET ESTIMATES OF 2006-07

Structure of the Central Government Budget

Non-Plan Capital Expenditure: covers various general, social & economic services provided by the govt. General Services: expenditure made on civil & defence services. Social & Community Services: includes expenditure on buildings for schools, technical institutions, scientific research organization,& various welfare programmes. Economic Services: expenditure: made on agriculture & allied services. Loans & Advances: Given to the Sate Govts, Union Territories, Foreign govts & Central Govt employee for various purposes

Structure of the Central Government Budget

Finance Bill: A legislative act intended to raise public revenues. The regular budget contains proposals of both direct & indirect taxes. These proposals regarding the levy of new taxes, modifications in the existing taxes or continuance of existing rates of taxes for further period is presented through the Finance Bill. The Lok Sabha has passed the Finance Bill, 2007, including the amendments introduced by the Government, today. The following are the major relief proposed by the Finance Minister while moving Government amendments.

Finance Bill
Direct Taxes: New section 80-IE is proposed to be inserted for providing fiscal incentives as contained in North Easter Industrial and Investment Promotion Policy, 2007, to units located in North-Eastern States and State of Sikkim. Under this new section, undertakings located in these states, and which begins to commence manufacturing or under going substantial expansion or commence eligible business on or after 1st April 2007, but before 1st of April 2017, will be eligible for 100% deduction of profits from such business for ten consecutive years. 2. Investment in rural bonds of NABARD, as notified by the Central Government, is proposed to be included in the list of permissible investment under section 80C.
1.

Finance Bill
2. Indirect Taxes:
Excise duty: Excise duty on texturised vegetable proteins (soya bari) has been reduced from 8% to Nil. Similarly, excise duty on ready to eat packaged food has been reduced from 8% to Nil.
a.

Excise duty (excluding Biri Workers' Welfare Cess) has been reduced on hand made biris from Rs. 11 to Rs. 9 per thousand and on other biris (machine made) from Rs.24 to Rs.21 per thousand. Excise duty on slide fasteners, including zip fasteners, and their parts falling under heading 9607 has been reduced from 16% to 8%.

Finance Bill
b. Customs Duty : Export duty on iron ores fines of Fe content of 62 percent and below has been reduced from Rs.300 per metric tonne (PMT) to Rs.50 PMT. Cut and polished diamonds have been fully exempted from customs duty. Customs duty on nickel and articles of nickel has been reduced from 5% to 2%. Customs duty on 'refrigerated motor vehicles' has been reduced from 10% to Nil

Finance Bill
Full exemption from customs and excise/CV duty has been extended to aircrafts and their parts, imported/procured for providing 'Nonscheduled Air transport (passenger) services and Non-scheduled Air transport (charter) services, subject to specified conditions.

Appropriation Bill
An appropriation bill or supply bill is a legislative motion (bill) which authorizes the government to spend money. In most democracies, approval of the legislature is necessary for the government to spend money. An Appropriation Act is an Act of Parliament passed by the Indian Parliament which, like a Consolidated Fund Act, allows the Treasury to issue funds out the Consolidated Fund.

Various Types of Budget Deficits

Every year due to non-developmental expenditure of the Indian government there has been a gap in the revenue received and expenditure received. This excess expenditure over revenue has lead to budget deficit. There are different types of deficit the government incurs. This includes Overall Deficit, Fiscal Deficit, Revenue Deficit, Primary Deficit and Monetized Deficit. Let us understand what each of these deficit means:

Various Types of Budget Deficits

1. Overall Deficit: This is also known as Budgetary

deficit. This basically represents the gap between the aggregate expenditure and the aggregate revenue of the government, where the expenditure exceeds receipts. Thus the Overall Deficit depicts only a part of resource gap in the current financial operations of the government and does not fully capture the imbalances in the financial operations. Thus, Overall Budget Deficit = Aggregate Expenditure Aggregate Receipts

Various Types of Budget Deficits

Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources.

Various Types of Budget Deficits

Thus, we see that when the governments total expenditure exceeds its revenue from taxes and other normal receipts, fiscal deficit is created. Fiscal deficit is financed in two ways. Firstly, through borrowing by the government from the market, both domestic and international, which creates internal and external debt but the government has to pay rate of interest annually for the borrowings taken.

Various Types of Budget Deficits

Secondly, through borrowings from the Reserve Bank of India which issues new notes against government securities

Various Types of Budget Deficits

3. Revenue Deficit: It is an economic phenomenon,
where the net amount received fails to meet the predicted net amount to be received. Revenue Deficit refers to the excess of revenue expenditure over revenue receipts. Revenue Deficit = Total Revenue Expenditure Total Revenue Receipt

Various Types of Budget Deficits

4. Primary deficit is the gross deficit which is obtained by subtracting interest payments from budget deficit of any country of a particular year. We need to know the value of primary deficit, while calculating the fiscal deficit. Primary Deficit = (Fiscal Deficit Interest Payment)

Various Types of Budget Deficits

Statistical reports: Primary deficit ( in India) In the fiscal year 1999-2000: primary deficit was (-) Rs.2598.72 crore

In the fiscal year 2000-2001: primary deficit was (-) Rs.1038.38 crore
In the fiscal year 2001-2002: primary deficit was (-) Rs.2598.72 crore

Various Types of Budget Deficits

Over the last few year the fiscal status of India has improved. In the fiscal year 2006-07, the revenue deficit in India was 2%, primary deficit was 0.1% and fiscal deficit was 3.7 percent. The government of India budget for 2007-08 predicts a revenue deficit of 1.5%, primary deficit of -0.2% and fiscal deficit of 3.3 percent.

Various Types of Budget Deficits

Monetised Deficit: As already discussed, the Central government borrows from the RBI against securities and treasury Bills. For this purpose the RBI issues new currency in circulation, this leads to an increase in the money supply. This was earlier known as Deficit Financing but this concept in economic recently is known as Monetisation of Deficit Financing the budget by issuing new currency through borrowing from the RBI against government securities is known as Monetisation of Deficit. It must be noted that earlier deficit financing were separately provided by the government but in the recent years it has become a part of fiscal deficit.

The End

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