A budget is a financial plan of the government that forecasts its expenditures and revenues for a specific period of time. Simply, a budget is an annual financial statement of the government.
The period covered by a budget is usually a year, known as a financial or fiscal year (April-March in India), which may or may not correspond with the calendar year.
The period covered by a budget is usually a year, known as a financial or fiscal year (April-March in India), which may or may not correspond with the calendar year.
Contents
Types of Budget
According to the government, the budget is of three types:
- Balanced budget.
- Surplus budget.
- Deficit budget.
1. Balance budget: A government budget is said to be balanced when it is estimated revenues and anticipated expenditures are equal. i.e. government receipts and government expenditures. The concept of a balanced budget has been evocated by classical economists like Adam Smith. A balanced budget was considered by them as neutral in its effects on the working of the economy and hence they regarded it as the best.
2. Surplus budget – when estimated government receipts are more than the estimated government expenditure it is termed a surplus budget. When the government spends less than the receipts the budget becomes surplus that is.Estimated government receipts > anticipated government expenditure. A surplus budget is used either to reduce government public debt or increase its savings . The surplus budget is undesirable. It may lead to unemployment and low levels of output as an economy.
3. Deficit budget – when estimated government receipts are less than the government expenditure. In modern economies, most of the budgets around the world are of this nature. The estimated government receipts < anticipated government expenditure. A deficit budget increases the liability of the government or decreases its reserves.
- Union Budget: Here is the definition of the Union Budget according to Article 112 of the Indian Constitution. Union Budget is the statement of estimated receipts and expenditures of the government called the Annual Financial Statement for a specific year.
- Capital Budget: The capital budget consists of capital receipts and payments. Capital receipts are Government loans raised from the public, Government borrowings from the Reserve Bank and treasury bills, divestment 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.
- 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, service and other duties that the Government levies. The non-tax revenue sources include interest on loans, dividends on investments etc. Revenue expenditure is the expenditure incurred on the day-to-day running of the Government and its various departments and for its services.
- Revenue Deficit: Revenue Deficit refers to the difference between revenue expenditure (on the government’s day-to-day operations) and revenue receipts (or income from taxes and other sources).
- Fiscal Deficit: This 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. The gap is bridged through additional borrowing from the Reserve Bank of India, issuing Government securities etc. The fiscal deficit is one of the major contributors to inflation.
- Primary Deficit: The primary deficit is the fiscal deficit minus interest payments. It tells how much of the Government’s borrowings are going towards meeting expenses other than interest payments.
- Finance Bill: The Government proposals for the levy of new taxes, alterations in the present tax structure, or continuance of the current tax structure are placed before the Parliament in this bill. The bill contains amendments proposed to direct and indirect taxes.
- Excess grant: If the allotted cash is insufficient, the government can seek additional funds. Article 115 of the Constitution of India provides an Excess Grant option to the government for managing such times.
- Direct and Indirect Taxes: Direct taxes are levied on the incomes of individuals and corporations. For example, income tax, corporate tax, etc. Indirect taxes are paid by consumers when they buy goods and services. These include excise duty, customs duty etc.
- Balance of Payments: Balance of payments is the difference between the demand for, and supply of, a country’s currency on the foreign exchange market. In layman words, Balance of Payment (BoP) is the difference between the total amount of money entering a country over a specific time period and the total amount of money leaving the country to the rest of the world.
- Consolidated Fund: Under this, the Government pools all its funds together.It includes all Government revenues, loans raised, and recoveries of loans granted.All expenditure of the Government is incurred from the consolidated fund and no amount can be withdrawn from the fund without the authorization of the Parliament.
- Contingency Fund: This is a fund used for meeting emergencies where the Government cannot wait for authorization from the Parliament. The Government subsequently obtains Parliamentary approval for the expenditure. The amount spent from the contingency fund is returned to the fund later.
- Cut Motions: While the Demand for Grants during the Budget is made for each ministry, the Parliament can check the government’s expenditure and decide to deny or change the demands. If the Parliament decides to reduce the demand, it is known as Cut Motion.
Procedure for passing of Budget
- Presentation of Budget: Conventionally, the budget is presented to the Lok Sabha by the finance minister on the last working day of February. Since 2017, the presentation of the budget has been advanced to 1st of February.
- General discussion: It takes place in both the House of Parliament and lasts usually for three to four days.
- Scrutiny by Departmental Committees: After the general discussion on the budget is over, the Houses are adjourned for about 3-4 weeks. During this gap period, the 24departmental standing committee of Parliament examine and discuss in detail the demands for grants of the concerned ministers and prepare reports on them.
- Voting on Demands for Grants: After the report of departmental standing committees, the Lok Sabha takes up voting of demands of Grants. A demands becomes a grant after it has been duly voted.
- Passing of Appropriation Bill: The Constitution states that no money can be withdrawn from the Consolidated Fund of India except under appropriation made by law. Accordingly, an Appropriation bill is introduced.
- Passing of Finance Bill: The Finance Bill is introduced to give effect to the financial proposal of GOI for the following year. According to the Provisional Collection of Taxes Act of 1931, the Finance Bill must be enacted within 75 days.
Landmark Budgets
- Epochal Budget: Manmohan Singh’s landmark 1991 budget that ended licence raj and began the era of economic liberalisation, is known as ‘Epochal Budget’. Presented at a time when India was on the brink of an economic collapse, it among other things slashed customs duty from 220 per cent to 150 per cent and took steps to promote exports.
- Dream Budget: P Chidambaram in the 1997-98 budget used the Laffer Curve principle to lower tax rates to increase collections. He slashed the maximum marginal income tax rate for individuals from 40 per cent to 30 per cent and that for domestic companies to 35 per cent besides unleashing a number of major tax reforms including a voluntary disclosure of income scheme to recover black money. Referred to as the ‘Dream Budget’, it also slashed customs duty to 40 per cent and simplified the excise duty structure.
- Millennium Budget: Yashwant Sinha’s Millennium Budget in 2000 laid the road map for the growth of India’s Information Technology (IT) industry as it phased out incentives on software exporters and lowered customs duty on 21 items such as computer and computer accessories.
- Rollback Budget: Yashwant Sinha’s 2002-03 budget for the NDA government headed by Atal Bihari Vajpayee is popularly remembered as the Rollback Budget as several proposals in it were withdrawn or rolled back.
- Once-in-a-Century Budget: Nirmala Sitharaman on February 1, 2021, presented what she called was ‘once-in-a-century budget’ as it looked to revive Asia’s third-largest economy via investing in infrastructure and healthcare while relying on an aggressive privatisation strategy and robust tax collections.
Recent Reforms in the Budgeting Process
- Advancement of Budget Cycle: Advancing the budget avoids the process of the vote on account and allows the government to fully start its plans from the first day of the new financial year itself. Due to the vote on account and the onset of monsoon, many projects could not even begin before September. Now, before the monsoons can pause the progress of new projects, the availability of the entire financial allocation at the beginning aids early starts to new projects and timely completion of ongoing projects.
- Removal of the Plan-non-Plan distinction: Since the 1950s, Budgetary allocations have been categorised as Plan and Non-Plan; Plan denotes the allocations on Programmes and Schemes and Non-Plan refers to mostly establishment items. Such distinction, at times, led to a distortion in the perception of these two types of allocation. With the removal of Plan and Non Plan classification in budget and accounts, the focus has shifted to holistic allocation on any scheme/ programme with bifurcation on revenue and capital expenditure.
- Merger of Rail Budget with General Budget: The merger reduced the procedural requirements of having two separate budgets and instead bring into focus, the aspects of delivery and good governance.
Before the implementation of this budgetary reform, the long-term fiscal considerations of budget formulation remained fragmented. Further, a formal and public presentation of the railway budget, at times, shifted the focus on the introduction of new trains and new projects.
