The budget process in India, like in most other countries, comprises of
1) Budget Formulation– Preparation of estimates of expenditure and receipts for the ensuing financial year;
2) Budget Enactment– Approval of the proposed Budget by the Legislature through the enactment of Finance Bill and Appropriation Bill;
3)Budget Execution– Enforcement of the provisions in the Finance Act and Appropriation Act by the government—collection of receipts and making disbursements for various services as approved by the Legislature;
4) Legislative Review of Budget Implementation– Audits of government’s financial operations on behalf of the Legislature.
Drafting commences in August- September
By convention, the Union Budget for next financial year is presented in Lok Sabha by the Finance Minister on the last working day of February. However, the process of budget formulation starts in the last week of August or the first fortnight of September. To get the process started, the Budget Division in the Department of Economic Affairsunder the Ministry of Finance issues the annual budget circular to all the Union government ministries/departments around August- September. The Circular contains detailed instructions for these ministries/ departments on the form and content of the statement of budget estimates to be prepared by them.
Three kinds of figures in a Budget
The ministries are required to provide three different kinds of figures relating to their expenditures and receipts during this process of budget preparation.
- Budget Estimates (BE)
- Revised Estimates (RE)
Let’s have a look on the whole mechanism in the context of Union budget 2015-16, which was presented, as usual, on 28th of February 2015 by the Finance Minister, ARUN JAITELY within the arena of LokSabha. However, the process of its formulation would have got started in August 2014 through issuance of Budget Circular of the Budget Division and this process would have continued till February 2015.
The approval of Parliament is sought for the estimated receipts/expenditures for 2015-16, which would be called Budget Estimates (BE).
At the same time, the Union government, in its budget for 2015-16, would also present Revised Estimates (RE) for the ongoing financial year 2014-15.
The government would not seek approval from Parliament of revised estimates of 2014-15; but, these revised estimates allow the government to reallocateits funds among various ministries based on theimplementation of the budget for 2014-15 during the first six months of financial year 2014-15.
Finally, ministries also report their Actual receipts and Expenditures for the previous financial year 2013-14.
Hence, the Union budget for 2013-14 consists of——
- Budget Estimates for 2015-16
- Revised estimates for 2014-15
- Actual Expenditures and Receipts of 2013-14.
Role of Planning Commission– NOW — NITI AAYOG
The ministries would provide budget estimates for plan expenditure for budget estimates for the next financialyear, only after they have discussed their respective plan schemes with the NITI AAYOG.
The Nitiaayog depends on the Finance Ministry to first arrive at the size of the Gross BudgetarySupport, which would be provided in the budget for the next annual plan of the Union government.
- Inprinciple, the size of each annual plan should be derived from the approved size of the overall Five-YearPlan (12th Five-Year Plan, 2012-13 to 2016-17, in the present instance).
- However, the size ofthe gross budgetary support for an annual plan also depends on the expected availability of funds with thefinance ministry for the next financial year.
Reducing Deficit is on Priority
In the past few years, the Finance Ministry has been vociferously arguing for reduction of Fiscal Deficit and Revenue Deficit of the Union government, citing the targets set by the Fiscal Responsibility and Budget Management Act and its rules.
Hence, presently, the aspirations of the Planning Commission and Uniongovernment ministries with regard to spending face the legal hurdle of this Act, which has made it mandatoryfor the Union government to show—-
- Revenue deficit as Nil (total Revenue Expenditure not exceeding totalRevenue Receipts by even a single rupee);
- Fiscal deficit as less than 3 per cent of GDP by 2016-17.This meansnew borrowing of the government in a financial year cannot exceed 3 per cent of the country’s GDP forthat year.
Final stages of Budget Formation
During the final stage of budget formation, the revenue-earning ministries of the Union government providethe estimates for their revenue receipts in the current fiscal year (Revised Estimates) and next fiscal year(Budget Estimates) to the Finance Ministry.
Subsequently, usually in the month of January, more attentionis paid to finalisation of the estimated receipts. With an idea about the total requirement of resources tomeet expenditures in the next fiscal year, the finance ministry focuses on the revenue receipts for the nextfiscal.
At this stage of budget preparation, the Finance Minister examines the Budget Proposals prepared by theministry and makes subsequent changes in them, if required. The Finance Minister consults the Prime Minister, and alsobriefs the Union Cabinet, about the Budget at this stage. If there is any conflict between any ministry and theFinance Ministry with regard to the budget, the matter is supposed to be resolved by the Cabinet.
Consultations with various stakeholders is crucial
In the run-up to Union Budget each year, the Finance Minister holds Pre-Budget Consultations with relevantstakeholders. The Finance Minister also holds consultations with Finance Ministers of States/Union Territories as wellas Trade and Industry representatives. This has great significance for the process of Budget formulation asit helps the Finance Minister takes decisions on suitable fiscal policy changes to be announced during the budget.
For this year’s budget, representatives from the agriculture sector, various trade unions, economists, bankingand financial institutions and also social sector groups participated in these consultations in January 2015.
Among others, a delegation of People’s Budget Initiative also met Finance Ministry officials and shared the People’s Charter of Demands in the month of January 2015. But this year too, like in previous years, theprocess started late. Desired changes in expenditure programmes and policies can be influenced only if theconsultations are begun earlier, preferably in October.
Consolidation of Budget data
At the final step, the Budget Division in the Finance Ministry consolidates all figures to be presented in thebudget and prepares the final budget documents. The National Informatics Centre (NIC) helps the budget division in the process of consolidation of the budget data, which has been fully computerised. At the endof this process, the Finance Minister takes the permission of the President of India for presenting the UnionBudget to Parliament.
It would be useful to point out that while the second and the third stage in the budget cycle of our countryare reasonably transparent, the First stage of actual budget preparation cannot be said to be open. The processis rather carried out behind closed channels.
Understanding the Budget: Concept And Terminologies
Union Budget is a comprehensive statement of government finances relating to a particular financial year.
Every Budget broadly consists of two parts-
- (a) Expenditure Budget;
- (b) Receipts Budget;
- The amounts of intended expenditure by the Government in the next financial year are expressed in the Expenditure Budget.
The entire Expenditure Budget can be divided into two distinct categories, viz.
(a) Capital Expenditure:
- Those expenditures by the government that lead to an Increase in the assets or a Reduction in the liabilities of the government. It is however not necessary that the assets created should be productive or they should even be revenue generating. Only the charges towards the construction of the asset are counted as Capital expenditure.
- The subsequent charges for its maintenance are considered as Revenue expenditure.
- Most capital expenditure is Non Recurring.
Examples of Capital Expenditure causing ‘Increase in Assets’:
- Construction of a new Flyover;
- Union Govt. giving a Loan to a State Govt.
Examples of Capital Expenditure causing ‘Reduction of a Liability’:
- Union Govt. repays the principal amountof a loan it had taken in thepast.
(b) Revenue Expenditure:
- Those expenditures by the government that do not affect its asset-liability position.
- Most kinds of revenue expenditures are seen as Recurring Expenditures.
- Theentire amount of Grants given by the Union Government to States is reported in theUnion Budget as Revenue Expenditure, even though a part of those Grants getutilized by States for buildingSchools, Hospitals etc. Thisis so because the ownershipof the schools or hospitals built from the Central grantswould not be with the UnionGovernment.
Examples of Revenue Expenditure are:
- Expenditure on Food Subsidy;
- Salary of staff;
- Procurement of medicines;
- Procurement of text books;
- Payment ofinterest, etc.
Total government expenditure can also be divided into another set of categories, viz.
(A) Plan Expenditure:
- Plan expenditure refers to government expenditure, which is meant for financing the programmes/schemes formulated under the ongoing/ previous five year Plan.
(B) Non-Plan Expenditure:
- Those Expenditures of the government, which are not included under the PlanExpenditure are called as Non Plan Expenditure.
- It includessome of the important types ofgovernment expenditure, like:
interest payments; pension, defence expenditure, disbursement on law and order, disbursement on legislature, subsidies, and salary of regular cadre teachers, doctors and other government officials.
The Receipts Budget
It presents the information on how much the Government intends to collect asits financial resources for meeting its expenditure requirements and from which sources, in the next fiscal year.
This can also be dividedinto two categories:
(a) Capital Receipts:
- Those receipts that lead to a reduction in the assets or an increase in the liabilities of the government.
Capital Receipts that lead to a ‘reduction in assets’:
- Recoveries of Loans given by the government and Earnings from Disinvestment;
Capital Receipts that lead toan ‘increase in liabilities’:
REVENUE in BUDGET
a.tax-income — contribute 84% as per highest priority–
- corporate tax
- personal IT
- excise wealth
- customers tax etc
b.non tax –income– contibutes –16%
- PSU profits
- fees & fines
- INTEREST & PAYMENTS
- SOCIAL SERVICE(education ,helath , sanitation)
- MARKET BORROWINGS
- return loans
- provident funds
- CAPITAL EXPENDITURE
note always ___ CR >> CE
(b) Revenue Receipts:
- Thosereceipts that don’t affect theasset-liability position of the government.
- RevenueReceipts comprise proceeds of Taxes (like, Income Tax, Corporation Tax, Customs, Excise, Service Tax, etc.)
- Non-tax revenue of the government (like, Interest receipts, Fees/ User Charges, and Dividend & Profits from PSUs).
Government Revenue through Taxation:
- It can be divided into Direct Taxes and Indirect Taxes.
- Those taxes forwhich the tax-burden cannot beshifted are called Direct Taxes.
Examples of Direct Taxes are:
- This is a tax levied on the income of registered companies in thecountry, whether national or foreign, under the Income Tax Act, 1961.
(B) Personal Income tax:
- This is a tax on the income of individuals, firms etc. Other than Companies, under theIncome Tax Act, 1961. This head also includes other Taxes, mainly the ‘SecuritiesTransaction Tax’, which is levied on transaction in listed securities undertaken on stock exchanges and in units of mutual funds.
(C) Wealth Tax- This is a tax leviedon the benefits derived fromthe ownership of property,
under the Wealth Tax Act,1957. Wealth tax has virtuallybeen abolished in India.
- Those taxes for which the tax-burden can be shifted are called Indirect Taxes. Any person, who directly pays this kind of a tax to the Government, need not bear the burden of that particular tax; he/she can ultimately shift the tax burden to other persons laterthrough business transactions of goods/ services.
- Indirect tax on any good or service affects the rich and the poor alike!
- Unlike indirect taxes, direct taxes are linked to the tax-payee’s ability to pay and hence are considered to be progressive.
Examples of Indirect Taxes are:
- Customs Duties: In this,the taxable component isimport into or export from thecountry.
- Excise Duties: It is a typeof tax levied on those goods,which are manufactured in the country and are meant for domestic consumption. It is a tax on manufacturing, which is paid by the manufacturer, but he passes this burden on to the consumers.
- Sales Tax: It is levied onthe sale of a commodity,which is produced/importand being sold for the first time. If the product is soldsubsequently without beingprocessed further, it is exempt from sales tax.
Before theintroduction of VAT (Value Added Tax), salestax used to be levied under the authority of both CentralLegislation (Central SalesTax) and State Government’s Legislation (Sales Tax).
- Service Tax: It is a tax leviedon services provided by aperson and the responsibilityof payment of the tax iscast on the service provider.However this tax can berecovered by the serviceprovider from the servicereceiver in course of his/herbusiness transactions.
- Value Added Tax (VAT): VATis a multi-stage tax, intendedto tax every stage of sale ofa good where some valuehas been added to the rawmaterials; but taxpayers doreceive credit for tax alreadypaid on the raw materials inearlier stages.
Debt and Deficit:
- Debt is a kind of receipt that necessarily leads to an increase of the government’s liabilities.
- The government incurs a Debt only for meeting the gap created by excess of its expenditure over its receipts for that year, which is called Deficit.
- It is the gap between thegovernment’s total Expenditure(including loans net of repayments)and its Total Receipts (excludingnew debt to be taken). Thus FiscalDeficit for a year indicates the borrowing to be made by thegovernment that year.
- The gap between Total RevenueExpenditure of the Governmentand its Total Revenue Receipts iscalled the Revenue Deficit.
Distribution of financial resources between the Centre and the States:
- A Finance Commission is setup every five years to recommend measures for sharing of resources between the Centre and the States, mainly pertaining to the Tax Revenue collected by the Central Government.
- Presently the recommendations made by the 14th Finance Commission are in effect (from 2014-14 to 2019-2020), whereby 42 percent of the shareable/divisible pool of Central tax revenue is transferred to States every year and the Centre retains the remaining amount for the Union Budget.
- Gross Domestic Product (GDP) is an indicator of the size of a country’s economy. In order to assess the extent of government’s policy interventions in the economy, some of the important fiscal parameters, like, total expenditure by the government, tax revenue, deficit etc. are expressed as a proportion of the GDP.
- Accordingly, a country’s Tax to GDP ratio helps us understand how much tax revenue is being collected by the government as compared to the overall size of the economy.
- A higher tax to GDP ratio in a country is a positive sign meaning that the government is collecting a decent amount of tax revenue as compared to the size of its economy.