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A beginner’s guide to the Union Budget

A beginner’s guide to the Union Budget
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First Published: Mon, Feb 25 2008. 12 25 AM IST

Updated: Mon, Feb 25 2008. 12 25 AM IST
The Union Budget marks the major heads of earning and spending for the Central government for the fiscal year beginning April. This includes all sources of income such as tax revenues and borrowings as well as government spending.
After the presentation of the Budget on the last day of February, parliamentary standing committees examine the government’s claim for expenditure.
A formal approval by both houses of Parliament must come within the next 75 days. This usually happens in late May, when Parliament reconvenes to close the Budget session. Prior to the break, Parliament passes a vote on account, before 31 March, which allows the government to continue using its fiscal machinery till the Budget is formally approved.
The Budget is also scrutinized by the Comptroller and Auditor General, who is expected to submit his report by the end of the calendar year, as well as by the public accounts committee. In the course of the year that has been budgeted for, the government clears the expenditures through submission of three supplementary demands for grants.
All taxes, revenues, grants, loans, repayments, proceeds from loans floated by government, and advances from the Reserve Bank go into the Consolidated Fund of India. Such monies are voted funds, that is, they are put to vote in Parliament. Nothing can be put in or taken out of here without Parliament’s permission. Thus, the Railway Budget is also a part of the Consolidated Fund. All other public money, such as small savings, goes into the Public Account of India. These are called charged funds and don’t belong to the government, which means they don’t have to be voted on and can simply be discussed. The Annual Financial Statement shows the expenditure charged on the Consolidated Fund.
The Fiscal Responsibility and Budget Management (FRBM) statements are mandated by the FRBM Act that the government passed in 2003 to limit its spending and borrowing. The Act also seeks that all government accounts and financial activities, including the Budget process, be fully transparent and subject to public scrutiny.
Gross domestic product (GDP):
The added value of output of all productive sectors in an economy as measured by the Central Statistical Organisation (CSO). Beginning February every year, the CSO releases three estimates of the GDP for the ongoing full fiscal year—advance, revised and quick—as well as three detailed quarterly estimates, along with savings, investment and consumption data.
Fiscal deficit:
This is the total new borrowing made by the government every year to meet the gap between its income and expenditure, and doesn’t include interest payments on old debt. Thus, the fiscal deficit is the gross addition to the government’s domestic debt burden, which is currently at over 59% of GDP. So a lower deficit keeps the liability low. A low level of debt liability increases the net worth of the government, and allows it to tax less and spend more on the people. The FRBM Act wants the government to limit its fiscal deficit to 3% of GDP by 2009, a level the government claims it’s on course to achieve.
Revenue deficit:
This measures the gap between the government’s current income through taxes and other revenues and its spending for the year. A growing economy ends up spending more on the development and welfare of its citizens as well as on its own consumption such as running huge offices and staff. But a government that cannot pay for at least its own maintenance, let alone the citizens’, is no good. The FRBM Act, therefore, mandates the government to eliminate such deficit by 2009 and generate a surplus on this front. Although recent high economic growth has allowed the government to boost its tax revenues, it is unlikely to achieve a zero deficit soon.
Primary deficit:
This is the difference between the fiscal deficit and the interest payments, and describes the net new borrowings. A high primary deficit means the government is borrowing more to simply pay off old, high-cost debt and is therefore highly undesirable. In 2007-08, for instance, the government is expected to show a surplus worth 0.2% of GDP after a long time.
Capital and revenue budgets:
Expenditure that doesn’t create an asset, such as subsidies or interest payments, is classified as revenue expenditure. Conversely, spending to create an asset such as land or buildings and loans given by the Centre to states is capital spending. Such expenditure is balanced against receipts, which comprise tax collections, interest and dividend on Central government investments, etc., on the revenue side, and loans raised by the Centre on the capital side.
Plan and non-Plan expenditure:
Plan spending is the annual funds allocated by the Central government for development schemes outlined in the ongoing Five-year Plan, while the expenditure incurred on maintenance of the projects already created is accounted for under non-Plan spending. Both these spendings have capital and revenue components.
Outcome budget:
A practice started by current finance minister P. Chidambaram in 2005 to improve the accountability of funds utilization by the various arms of the government, this budget attempts to give a detailed account of the performance of all major programmes outlined in the main budget and implemented by all the Central ministries.
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First Published: Mon, Feb 25 2008. 12 25 AM IST