Indian Union Budget – ICSI CSEET (Paper-3)
OVERVIEW OF INDIAN UNION BUDGET
- The first Indian Budget was presented by Mr James Wilson on February 18, 1869 after Indian Budget was introduced on April 7, 1860 by the East India Company.
- The first Budget of Independent India was presented by the then Finance Minister, Mr RK Shanmukham Chetty on November 26, 1947.
- Till 1955, Budget was only printed in English language. However, from 1955-56, budget started getting printed in both languages, Hindi and English.
- In the British Era, the Budget used to be presented at 5 PM. This practice was discontinued in the year 2001 by presenting the Budget at 11 AM.
- Until 2017, the ritual was to present the Budget on the last working day of the February. From last 2 years, Budget is now presented on the first working day of the February.
- Mr KC Neogy and Mr HN Bahuguna were the only two Finance Ministers who did not present any Indian Budget.
- The record of presenting maximum number of Budgets is held by Shri Morarji Desai for presenting 10 Budgets.
- For the first time in 92 years, Union Budget of 2017 merged the Union Budget with the Rail Budget, which was usually presented separately.
KEY TERMINOLOGIES / HEADS COVERED UNDER THE BUDGET
- Annual Financial Statement
Article 112 of the Constitution requires the government to present to Parliament a statement of estimated receipts and expenditure in respect of every financial year – April 1 to March 31. This statement is the annual financial statement.
The annual financial statement is usually a white 10-page document. It is divided into three parts, consolidated fund, contingency fund and public account. For each of these funds, the government has to present a statement of receipts and expenditure.
- Consolidated Fund
This is the most important of all government funds. All revenues raised by the government, money borrowed and receipts from loans given by the government flow into the consolidated fund of India. All government expenditure is made from this fund, except for exceptional items met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without the Parliament’s approval.
- Demand For Grants
Demand for Grants is the form in which estimates of expenditure from the Consolidated Fund, included in the annual financial statement and required to be voted upon in the Lok Sabha, are submitted in pursuance of Article 113 of the Constitution.
The demand for grants includes provisions with respect to revenue expenditure, capital expenditure, grants to State and Union Territory governments together with loans and advances. Generally, one demand for grant is presented in respect of each ministry or department. However, for large ministries and departments, more than one demand is presented.
- Appropriation Bill
Appropriation Bill gives power to the government to withdraw funds from the Consolidated Fund of India for meeting the expenditure during the financial year. Post the discussions on Budget proposals and the Voting on Demand for Grants, the government introduces the Appropriation Bill in the Lok Sabha. It is intended to give authority to the government to withdraw from the Consolidated Fund, the amounts so voted for meeting the expenditure during the financial year.
- Finance Bill
A Finance Bill is a Money Bill as defined in Article 110 of the Constitution. The proposals of the government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through this bill.
The Finance Bill is accompanied by a Memorandum containing explanations of the provisions included in it. The Finance Bill can be introduced only in Lok Sabha. However, the Rajya Sabha can recommend amendments in the Bill. The bill has to be passed by the Parliament within 75 days of its introduction.
- Contingency Fund
As the name suggests, any urgent or unforeseen expenditure is met from this fund. The Rs 500-crore fund is at the disposal of the President. Any expenditure incurred from this fund requires a subsequent approval from Parliament and the amount withdrawn is returned to the fund from the consolidated fund.
- Public Account
This fund is to account for flows for those transactions where the government is merely acting as a banker. For instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid back at some time to their rightful owners. Because of this nature of the fund, expenditure from it are not required to be approved by the Parliament.
For each of these funds the government has to present a statement of receipts and expenditure. It is important to note that all money flowing into these funds is called receipts, the funds received, and not revenue. Revenue in budget context has a specific meaning.
The Constitution requires that the budget has to distinguish between receipts and expenditure on revenue account from other expenditure. So all receipts in, say consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure. For understanding these budgets – Revenue and Capital – it is important to understand revenue receipts, revenue expenditure, capital receipts and capital expenditure.
- Revenue receipt/Expenditure
All receipts and expenditure that in general do not entail sale or creation of assets are included under the revenue account. On the receipts side, taxes would be the most important revenue receipt. On the expenditure side, anything that does not result in creation of assets is treated as revenue expenditure . Salaries, subsidies and interest payments are good examples of revenue expenditure.
- Capital receipt/Expenditure
All receipts and expenditure that liquidate or create an asset would in general be under capital account. For instance, if the government sells shares (disinvests) in public sector companies, like it did in the case of Maruti, it is in effect selling an asset. The receipts from the sale would go under capital account. On the other hand, if the government gives someone a loan from which it expects to receive interest, that expenditure would go under capital account. On the other hand, if the government gives someone a loan from which it expects to receive interest, that expenditure would go under the capital account.
In respect of all the funds the government has to prepare a revenue budget (detailing revenue receipts and revenue expenditure) and a capital budget (capital receipts and capital expenditure). Contingency fund is clearly not that important. Public account is important in that it gives a view of select savings and how they are being used, but not that relevant from a budget perspective. The consolidated fund is the key to the budget.
As mentioned in the first part, the government has to present a revenue budget (revenue account) and capital budget (capital account) for all the three funds. The revenue account of the consolidated fund is split into two parts, receipts and disbursements – simply, income and expenditure. Receipts are broadly tax revenue, non-tax revenue and grants-in-aid and contributions.
Preparing a Budget is extremely tedious and a lengthy process. It begins with the Budget Division issuing circular to all ministries, states, UTs, autonomous bodies, deparments and the defence forces, who are asked to submit expenditure estimates for the upcoming year. Extensive consultations are held between Union ministries and the Department of Expenditure of the finance ministry once the estimates have been submitted.
In the meantime, the Department of Economic Affairs (DEA) and Department of Revenue meet stakeholders such as farmers, businessmen, FIIs, economists and civil society groups to take their views. Once the pre-Budget meetings are over, a final call on the tax proposals is taken by the finance minister. The proposals are discussed with the Prime Minister before the Budget is finally prepared.
The Budget presentation speech comprises the following parts:
- Annual Financial Statement (AFS)
- Demand for Grants (DG)
- Appropriation Bill
- Finance Bill
- Macro-economic framework for the relevant financial year
- Medium-Term fiscal policy and a strategy statement
- Expenditure Profile
- Expenditure Budget
- Receipts Budget
REVENUE, CAPITAL AND EXPENDITURE BUDGETS
The Revenue Budget records all the revenue receipts and expenditure. If the revenue expense is more than that of receipts, it indicates that there is a revenue deficit. Revenue expenditure is for the normal running of government departments and various services, interest payments on debt, subsidies, etc. Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies.
In non-tax revenue, the government’s sources are interest on loans and dividend on investments like PSUs, fees, and other receipts for services that it renders.
The Capital Budget part of the Union Budget has accounts for capital payment and receipts of the government. Capital receipts include:
(i) Loans from the public;
(ii) Loans from RBI
Capital receipts are loans raised by the government from the public (which are called market loans), borrowings by the government from the Reserve Bank of India and other parties through sale of treasury bills, loans received from foreign bodies and governments, and recoveries of loans granted by the Central government to state and Union Territory governments and other parties.
Capital payments include expenses incurred towards building long term assets and facilities like land, buildings, machinery, etc.
The expenditure budget refers to the estimated expenditure of the government during a given financial year. It shows the capital and revenue disbursements of various ministries/departments and presents it under ‘Plan’ and Non Plan’. Expenditure Budget provides analysis of various types of expenditure. Demand for grants of the Central government is also a part of the Expenditure Budget.
MAJOR COMPONENTS OF REVENUE AND CAPITAL BUDGET
Government receipts which neither create asset nor reduce any liability are called Revenue Receipts. Essentially, these are current income receipts for the government from all sources. Revenue Receipts are further classified into tax revenue and non-tax revenue.
Tax Revenue will include receipts from direct tax which is in the form of income tax is paid to the government. It will also include various indirect taxes like GST and Cess levied and collected by the government on various goods and services.
Non-tax Revenue will include receipts from the government’s divestment process which are nothing but the proceeds from the stake sale in various public sector undertakings. Non-tax Revenue will also include the dividend income which the government receives as a shareholder of the various public sector undertakings.
As the name suggests, Revenue Expenditure is also called income statement expenditure. It denotes short-term cost-related assets that are not capitalised. To put it simply, these are the maintenance expenditure which the government makes towards the assets which it owns in order to keep them functioning. These expenditures are recurring in nature and are incurred by the government regularly.
Revenue Expenditure does not create an asset for the government. For example, payment of salaries or pension as it does not create any asset. However, the amount spent on construction of Metro is not Revenue Expenditure as it leads to the creation of an asset.
Revenue Expenditure also must not decrease the liability for the government. For example, repayment of borrowings is not Revenue Expenditure as it leads to a reduction in liability of the government.
The difference between Revenue Receipt and Revenue Expenditure is known as Revenue Deficit. A Revenue Deficit does not denote an actual loss of revenue for the government but it only means a shortfall in revenue from what was expected by the government.
Capital Budget is one of the two parts of the government budget. Generally, the budget is divided into revenue budget and capital budget. This classification is made by considering the items that comes under the two budget components. Capital budget is considered to be productive as it shows the investment type activities of the government.
Capital budget consists of capital receipts and payments. The capital receipts are:
(1) loans raised by Government from public, called market loans, borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies,
(2) disinvestment receipts and
(3) recoveries of loans from State and Union Territory Governments and other parties.
Capital expenditure consists of expenditure for acquiring of assets like land, buildings, machinery, equipment, investments in shares, etc., and loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties.
A fiscal deficit is a shortfall in a government’s income compared with its spending. The government that has a fiscal deficit is spending beyond its means.
A fiscal deficit is calculated as a percentage of gross domestic product (GDP), or simply as total dollars spent in excess of income. In either case, the income figure includes only taxes and other revenues and excludes money borrowed to make up the shortfall.
In other words, fiscal deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. A fiscal deficit situation occurs when the government’s expenditure exceeds its income. This difference is calculated both in absolute terms and also as a percentage of the Gross Domestic Product (GDP) of the country. A recurring high fiscal deficit means that the government has been spending beyond its means.
The government describes fiscal deficit of India as “the excess of total disbursements from the Consolidated Fund of India, excluding repayment of the debt, over total receipts into the Fund (excluding the debt receipts) during a financial year”.
The elements of the fiscal deficits are:
(a) The revenue deficit, which is the difference between the government’s current or revenue expenditure and total current receipts, that is excluding borrowing.
(b) Capital expenditure.
In order to have a proper understanding on fiscal deficit, it is essential to have a fair idea on government’s total income and receipts.
- Revenue Receipts
- Corporation Tax
- Income Tax
- Custom Duties
- Union Excise Duties
- Non-tax Revenues
- Interest Receipts
- Dividends and Profits
- External Grants
- Other non-tax revenues
- Receipts of union territories
- Expenditures of the government
- Revenue Expenditure
- Capital Expenditure
- Interest Payments
- Grants-in-aid for creation of capital assets
Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts)
If the total expenditure of the government exceeds its total revenue and non-revenue receipts in a financial year, then that gap is the fiscal deficit for the financial year. The fiscal deficit is usually mentioned as a percentage of GDP. For example, if the gap between the Centre’s expenditure and total income is Rs 5 lakh crore and the country’s GDP is Rs 200 lakh crore, the fiscal deficit is 2.5% of the GDP.
COMPONENTS / VARIABLES COVERED UNDER FISCAL DEFICIT
From the following exhibit, the various components covered under the fiscal deficit may be understood
|% change (RE 2018-19 to BE 2019-20)|
|Recoveries of Loans||15,633||12,199||13455||14,828||12-7%|
|Other receipts (including disinvestments)||1,00,045||80,000||80,000||1,05,000||31.3%|
|Total Receipts (without borrowings)||15,50,911||18,17,937||18,22,837||20,82,589||14.2%|
|% of GDP||2.6||2.2||2.2||2.3|
|% of GDP||3.5||3.3||3.4||3.3|
|% of GDP||0.4||0.3||0.2||0.2|
Note: Budgeted estimates (BE) are budget allocations announced at the beginning of each financial year. Revised Estimates (RE) are estimates of projected amounts of receipts and expenditure until the end of the financial year. Actual amounts are audited accounts of expenditure and receipts in a year.
The fiscal deficit for the year 2017-18 (Actuals) is calculated by deducting Total Receipts of INR 15,50,911 from the Total Expenditure of INR 21,41,973 = INR 5,91,062 Crore.
It is to be noted that fiscal deficit could be financed by borrowing from Reserve Bank of India, which also known as deficit financing or money creation and market borrowing (from money market, that is mainly from banks).
- If the revenue expense is more than that of receipts, it indicates that there is a __________.
(a) Primary Deficit
(b) Fiscal Deficit
(c) Monetary Deficit
(d) Revenue Deficit
- The __________ records all the revenue receipts and expenditure.
(a) Capital Budget
(b) Cash Budget
(c) Revenue Budget
(d) Foreign Exchange Budget
- Government receipts which neither create asset nor reduce any liability are called __________
(a) Revenue Receipts
(b) Capital Receipts
(c) Cash Receipts
(d) Financial Receipts
- Which of the following is not covered under the revenue receipts of Government of India?
(a) Corporation Tax
(b) Loans from RBI
(c) Income Tax
(d) Custom Duties
- Payment of salaries is covered under which form of government expenditure?
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Planned Expenditure
(d) Unplanned Expenditure