Union Budget 2018-19 primer

By Ramya Raghavan

The Union Budget 2018-19 will be presented by the Finance Minister Arun Jaitley on February 1, 2018. Due to the rising fiscal deficit and low GDP growth rate, the government is pressured to present a budget that has an appropriate combination of populist schemes and fiscal prudence in order to bring the economy back on track.

What is the Union Budget?

The Union Budget of India, also referred to as the ‘Annual Financial Statement’ in the Article 112 of the Constitution of India, is an annual statement presented by the Finance Minister to the Parliament. It details the receipts and expenditures of the government, as expected over the fiscal year, which runs from 1 April to 31 March. In other words, it shows the amount of money the central government expects to raise in the upcoming financial year, and how it will spend that money.  

It aims at reallocation of resources, equitable distribution of income and wealth, economic stability and management of public enterprises. The budget speech is also used by the government to propose changes in policy measures.

Interesting facts—History of the Union Budget

Independent India’s first Union Budget was presented by R. K. Shanmukham Chetty, the first Finance Minister of India on November 26, 1947, for the period up to March 31, 1948. The budget estimated the government’s total revenues to be Rs. 171.15 crores and the fiscal deficit to be Rs. 24. 59 crores.

In 1970, Indira Gandhi, the then Prime Minister of India, took over the Ministry of Finance. She presented her government’s budget and was the first and only woman Finance Minister of India to present a budget in the Parliament.

In 2001, Yashwant Sinha, the then Finance Minister in the NDA government led by Atal Bihari Vajpayee, broke the colonial practice, by delivering the Union Budget speech at 11 A.M., instead of 5 P.M. in the evening. Until the 1990s, the budgets aimed to primarily increase taxes, and a presentation in the evening allowed producers and tax agencies to use the night and work out price changes.

Morarji Desai, the former Prime Minister of India, presented 10 Union Budgets in his role as Finance Minister. In the history of independent India, he is credited with the largest number of Union Budgets.

Till 2016, the Union Budget was presented on the last working day of February by the Finance Minister of India in the Parliament. In 2017, departing from the colonial-era tradition, Arun Jaitley, the Minister of Finance in the NDA government led by Narendra Modi announced that it will henceforth, be presented on 1 February. Additionally, the Rail Budget, which was presented separately for 92 years, was merged with the Union Budget.

How is the Union Budget made?

The Department of Economic Affairs under the Ministry of Finance is the key agency responsible for preparing and producing the Union Budget. The Budget is made in consultation with other ministries and NITI Aayog.

In September, the Budget Division in the Department of Economic Affairs initiates the process of collating receipts and expenditures from Union Government ministries, state ministries, Union Territories, autonomous bodies and defence bodies, for preparing the budget estimates for the upcoming year. The economic division works on developing the country’s macroeconomic background.

Each ministry is expected to provide three different kinds of figures, related to expenditure and receipts—budgets for the preceding year, revised estimates for the present year and budgets for the upcoming year.

Once the demands are collected, key stakeholders in the economy, such as industrialists, bankers, agriculturalists and economists are met with, as a component of the pre-budget consultative exercise. The Department of Revenue and the Department of Economic Affairs are in charge of conducting the same.

Consultation also takes place between Union Ministries and the Finance Ministry’s Department of Expenditure. The Finance Minister holds meetings with officials of the ministry to decide the agenda of the budget and engages the Prime Minister to receive feedback. In the final stage of the process, the Budget division consolidates the figures to prepare the final Budget Document.

The entirety of the budget-making process is shrouded in secrecy. The Finance Ministry has never witnessed a breach of security in the days following up to the budget, which indicates the level of strict security measures in place. The documents related to the budget are printed a week before the Budget presentation in the Parliament, at a printing press, in a basement located in the North Block. The officials involved in the process of the budget creation are required to stay back from a week before the presentation and are not allowed any contact with outside world.

After the general and detailed discussion in both the Houses of the Parliament on the Budget, the Parliament votes on the Finance Bill and Appropriation Bill, presented during the Budget. The Finance Bill presented (and voted on) contains the various legal amendments to bring the tax changes proposed by the government into effect. The Demands for Grants and Appropriation Bill are documents that request the Parliament to allocate the aforementioned funds to different ministries and schemes. The Parliament votes to pass these documents, which are due for implementation on April 1, the beginning of the new financial year.

Expenditure Classification

Expenditures listed in the budget are classified in two ways: Plan versus non-plan, and capital versus revenue expenditures.

• Plan versus non-plan expenditure: Plan expenditures involve expenditures on schemes and projects included in the 5-year plans developed by the Planning Commission. These plans are developed after consultation with individual ministries (such as the Mid-Day Meal Scheme). Expenditures incurred by the government are required to fulfil its planned development programmes. Plan expenditures can contain revenue and capital components. Non-plan expenditures include ongoing expenditures that are not covered by the plans. Examples include interest payments on government debt and expenditure on maintaining government schools and hospitals.
• Capital versus revenue expenditure: Capital expenditures contribute to creating assets (building a road) or reducing liabilities (paying off a debt). In contrast, revenue expenditures do not contribute to creating assets or reducing liabilities. Examples include old age pensions and interest payments on the debt.

Receipt Classification

Receipts listed in the budget are similarly classified as capital or revenue receipts.

Capital receipts either cause a reduction in the assets of the government or create a corresponding liability for the government. Examples of capital receipts include recovery of funds loaned by the government and receipt of new funds borrowed by the government. Revenue receipts are those that do not create any corresponding liability for the government or cause any reduction in its assets. Examples of revenue receipts include license fee, fines paid to the government by lawbreakers, donations, dividends from companies owned by the government and tax receipts.

Types of budgets

The government can have a surplus, balanced or deficit budget.

• Surplus budget: A surplus budget is one where the estimated receipts are greater than the estimated expenditures of the government. A surplus budget decreases consumer demand and slows down the economy. Hence, it is generally advocated when an economy has excess demand.
• Balanced budget: A balanced budget is one where the estimated receipts are equal to the estimated expenditures of the government. A balanced budget is advocated when an economy is close to achieving its full employment equilibrium.
• Deficit budget: A deficit budget is one where the estimated receipts are lesser than the estimated expenditures of the government.

Types of budget deficits

A budget deficit is a situation where the total expenditure (revenue expenditure and capital expenditure) exceed the total receipts (revenue receipts and capital receipts).

• Revenue deficit: Revenue deficit is the excess of revenue expenditure over revenue receipts. The government is compelled to cope with high revenue deficit through capital receipts, for instance, borrowings, the sale of assets or disinvestment. In countries like India, where it is difficult to force the poor to pay taxes, the government has to resort to capital receipts (such as borrowings) to fund maintenance and administrative expenses. The revenue deficit can be severed through interest payments on borrowings.
• Fiscal deficit: Fiscal deficit is a situation where the government’s total expenditure exceeds the revenue it generates, excluding the money from borrowings. It is an indication of the borrowings needed by the government, and hence shows the government’s dependence on borrowings to meet its total budget expenditure. A greater fiscal deficit implies greater borrowings by the government since the government has to pay the interest and the principal amount of the loan, thus increasing the future financial burden with a mounting interest.  Payment of interest increases the revenue expenditure, resulting in a probable revenue deficit. This may lead to further borrowings, causing a debt trap. The consequence of a large fiscal deficit includes inflation, due to an increased supply of money and increases our foreign dependence, in the event that the government borrows from the rest of the world.
• Primary deficit: Primary deficit is the difference between fiscal deficit and interest payment. Whilst fiscal deficit shows the borrowing requirements of the government to meet expenditures “inclusive” of interest payment, primary deficit shows the borrowing requirements of the government to meet expenditures “exclusive” of interest payments.

Difference between charged and voted expenditure

Certain items of expenditure, such as salaries and allowances of the President and judges of the Supreme Court are not voted on by the Parliament. These are ‘charged’ directly to the government revenue. The largest component of charged expenditure is the interest payment on borrowings of the government.

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