Introduction to Finance Budget

  1. What is a union budget and why is it important?

A statement (document) showing the estimated receipts and expenditure of the govt of India for a particular financial year is popularly known as “budget”. The budget shows how the govt plans to earn its revenue and spend the same. It is made on cash-basis. It gives a direction to the govt as priorities and limits of expenditure are set. At the same time, it also reviews past performances. A budget for a particular financial year (say 2016-17, i.e. 1st April 2016 to 31st March 2017) shows estimates for 2016-17, revised estimates for the previous financial year (i.e. 2015-16) and actual receipts and expenditure for the year before that (i.e. 2014-15). It ensures govt’s answerability to its financial performance over these 3 financial years. Provisions related to budget are mentioned in Article 112 of the constitution of India.

 

  1. So, who presents the budget and what is the procedure?

The Finance Minister takes the President’s permission to present the budget in the parliament (The President cannot refuse to give the permission, so this step is just a formality). Then, the budget is presented by the Finance Minister in Lok Sabha, generally on the last working day of February. [So, the budget being presented on 29th February 2016 will present estimates for financial year 2016-17]. The budget speech has 2 parts. Part A deals with a general economic survey, its results and govt policy statements. Part B contains recommendations made by the Finance Minister (on behalf of the central govt) regarding receipts and expenditure. The budget, which also includes the Finance Bill, is presented in both the Houses (Lok Sabha and Rajya Sabha) on the same day. However, the budget can be presented in Rajya Sabha only after the Finance Minister concludes his speech in Lok Sabha.

 

  1. What happens then?

As budget is a money bill…

 

  1. Hold on! What is a Money Bill?

Money Bill is a bill which exclusively contains provisions related to taxes, spending money out of govt treasury (technically called “Consolidated Fund of India”), taking loans etc. Budget is also a type of Money Bill. Money bills must be first introduced in Lok Sabha.

 

  1. Ok, so, what happens after the Finance Minister’s speech in Lok Sabha?

Over the next weeks, both Houses discuss the budget. It must be noted that Rajya Sabha has to clear a Money Bill. So, it cannot reject the budget and has to clear it within 14 days from the date of its receipt. Rajya Sabha can suggest changes, but they are not binding on Lok Sabha. That is, Lok Sabha can ignore the suggestions of Rajya Sabha. After the budget is cleared from both the Houses, it is sent for President’s approval. The President’s permission is necessary before presenting any Money Bill in parliament. So, when a Money bill reaches the President after being cleared from both the Houses, he cannot reject it. Therefore, the President has to approve the budget.

 

  1. But what if the budget is not cleared from Lok Sabha itself?

That’s a good question! A money bill is presented in Lok Sabha first, so it is Lok Sabha’s moral responsibility to get it cleared. The Parliament has to pass the budget within 75 days of its introduction. As the central govt itself presents the budget, it is practically certain to get cleared from Lok Sabha (which has elected members forming the govt). However, it is possible in case of a coalition govt that the budget does not win majority in Lok Sabha itself. In such a case, this amounts to a loss of confidence in the govt. It implies that the govt does not have the majority (and hence, the moral backing of the nation) in Lok Sabha and the govt has to resign. Fresh elections are to be conducted within the next 6 months.

 

  1. Alright! So, what is a “Demand for Grants”?

“Demand for Grants” is the form in which all the ministries/departments present their estimated expenditure over the upcoming financial year to the Finance Minister and ask for grant for the same. Each department/ministry presents its estimates in a separate form, with detailed information. In simple terms, all the ministries/departments ask the Finance Minister for money to meet out their estimated expenditure.  The form in which such request is made is called “Demand for Grants”. These forms are an integral part of the budget and are discussed and voted upon. They show the areas on which the central govt is focusing. For instance, if the Health ministry is allowed an increase in its “Demand for Grant” (simply called “health budget”), it shows that the central govt is paying more attention to the health sector in the country.

 

  1. Cool! So, can you discuss a few highlights of our last budget?

For the financial year 2015-16 (i.e., in the budget declared in February 2015), the Plan Expenditure was estimated to be Rs. 4,65,277 crores, while Non-Plan expenditure was estimated at Rs. 13,12,200 crores. So, the total estimated expenditure was Rs. 17,77,477 crores.

The govt expected Rs. 14,49,490 crores as tax-receipts, out of which Rs. 5,23,958 crores were estimated to go to state govts.  Non-tax revenues were estimated at Rs. 2,21,733 crores.

 

  1. Stop! Stop! Explain these heavy terms! Isn’t that supposed to be the entire point behind these articles?

Plan-Expenditure is the expenditure incurred on programmes mentioned under current Five-Year Plan. In simple terms, Plan Expenditure is associated with productive expenditure, which increases the productive capacity of the economy. E.g. generation of electricity, construction of roads, bridges, dams, science & technological research and development etc.

On the other hand, Non-Plan Expenditure is the expenditure on routine functioning of the govt. It is incurred to keep the govt running. E.g. payment of interest on loans, subsidies (mainly on food and fertilizers), wage and salary payments to govt employees, grants to states and union territories, defence expenditure etc.

 

  1. Hang on! It seems we are spending more than we are earning!

True. Deficit = Expenditure – Receipts

A developing country like India is expected to have a deficit. Govt is not meant to make profits. It is supposed to spend heavily on basic infrastructure, education, eradication of poverty, hunger etc.

 

  1. So, where does this excess money come from to spend?

This deficit is managed by taking loans, and printing more currency through RBI.

 

  1. Is this what is called “Fiscal Deficit”?

No. Fiscal Deficit is more precise. Fiscal Deficit is the gap between the govt’s total spending and sum of its revenue receipts and non-debt capital receipts. Let’s assume you have to spend Rs. 100 next month. Your salary is Rs. 65. You had given a loan to a friend last month of Rs. 15. This loan will be recovered by you next month (such receipts are called “non-debt capital receipts”). So, how much money do you need to borrow from your parents/outsiders? The answer is Rs. 20. That is your fiscal deficit. Fiscal deficit is the amount of borrowed funds required by the govt to completely meet its expenditure.

Fiscal Deficit is generally expressed as a percentage of the GDP. So, if our GDP is Rs. 1000 and our fiscal deficit is Rs. 50, we say that our fiscal deficit is 5% of our GDP. In the last budget, our fiscal deficit was estimated to be 3.9% of GDP.

 

 

We hope you liked this article. If you did, kindly share it with your friends so that they can also learn these basics. If you didn’t, tell us why and we will work harder next time.  If you have any questions, please do ask via comments. We will be very happy to get back to you with all the answers! Happy learning!

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