The Constitution of India mandates the Government to present the Union Budget every year through Finance Minister. This Budget presented every year on 1st February, is referred to as the Annual Financial Statement of estimated receipts and expenditure of Central Government. The Union Budget is an important document that outlines the government’s fiscal policies, plans and programmes for the upcoming financial year. The budget-making process begins in August-September, almost six months before its presentation date. Budget is prepared by the Finance Ministry with assistance of number of expert advisors and specially chosen bureaucrats. For its preparations, various ministries send proposal of estimates of plan and non-plan expenditure.
Finance Ministry takes into account views, representations and opinions of industry captains, economists, various accounting, financial organizations and business bodies and also the public. This Budget which is called Finance Bill after approval of Lok Sabha and Rajya Sabha is sent to the President of India for assent. Thereafter it becomes the law when signed by the President. Government can levy taxes or disburse funds only on approval by both houses of Parliament. Since the President’s assent happens usually after 1st April, vote-on-account is usually obtained in Parliament to incur essential expenditure.
With Budget documents, one can understand the intention of the government, its priorities, its policies, its allocation of financial resources among different regions, sectors, industries etc.
The Budget comprises of receipts on capital account and revenue account and payments for capital expenditure and revenue expenditure- both plan and non-plan. The gap between receipts and expenditure is called Fiscal Deficit and same is made up with borrowings from Reserve Bank of India by issue of sovereign securities.
Capital Budget
The capital budget consists of capital receipts and payments. Capital receipts are Government loans raised from the public, Government borrowings from the RBI and treasury bills, disinvestment of equity holding in public sector enterprises, loans received from foreign Governments and bodies, securities against small savings, State provident funds, and special deposits.
Capital payments refer to capital expenditures on the construction of capital projects and the acquisition of assets like land, buildings machinery, and equipment. It also includes investment in shares, and loans and advances granted by the Central Government to State Governments, Government companies, corporations, and other parties.
Revenue Budget
The revenue budget consists of revenue receipts of the Government and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues constitute taxes like income tax, corporate tax, excise, customs, goods and service tax, and other duties that the Government levies.
The non-tax revenue sources include interest on loans, dividend on investments etc. Revenue expenditure is the expenditure incurred on the day-to-day running of the Government and its various departments, and for services that it provides. It also includes interest on its borrowings, subsidies and grants given to State Governments and other parties. This expenditure does not result in the creation of assets. In case the difference between revenue receipts and revenue expenditure is negative, there is a revenue deficit. It shows the shortfall of the Government’s current receipts over current expenditure. If the capital expenditure and capital receipts are taken into account too, there will be a gap between the receipts and expenditure in a year. This gap constitutes the overall budgetary deficit, and it is covered by issuing Treasury Bills, mostly held by the Reserve Bank. The money is provided by RBI through printing of notes.
Fiscal deficit is measured as percentage of Gross Domestic Product (GDP). GDP is commonly an indicator of the economic health of the country and to gauge a country’s standard of living. GDP is the market value of all officially recognised final goods and services produced within a country in a given period of time usually per annum. The fiscal deficit estimated at 9.2% during the pandemic year FY 2020-21 moderated to 6.7% in FY 2021-22 and declined further in FY 2022-23 to 6.4% of GDP and is expected to reduce further to 5.9% for 2023-24. Target fixed by 2025-26 is 4.5%, which is reasonable if we want to achieve 5 trillion dollar economy.
Budget deficit results in inflation due to more money in circulation due to expenditure. If deficit is on account of productive capital expenditure for infrastructure development like highways, ports, airports, railways; in the long run it facilitates reduction in costs, more exports, more foreign exchange. But if the borrowings are to meet salary expenditure, interest payments, freebies; it results in inflation which is bad for the economy. One can get into a debt trap by paying interest on borrowings which are used to pay interest as happened to Sri Lanka and Pakistan.
GDP growth depends on Government policies and RBIs monetary policy. Cash Reserve Ratio (CRR) , Statutory Liquid Ratio (SLR), repo rates for RBI loans to banks, reverse repo rates for funds lend to RBI are the tools used by the RBI to manage circulation of money and credit and to manage demand and supply and consequently inflation. If these are reduced, banks credit in the market increase resulting in lower rate of interest and vice versa.
Since 2024 is an election year, this February the Government will present the interim budget. After the general elections, the new government presents a full budget.
The budget plays an important role in shaping India’s economic landscape and addressing the diverse needs of its vast population to ensure sustained economic prosperity for all citizens.
(The author is a Chartered Accounant by profession)