What is Budget? How Budget is prepared?

Structure and Overview of Indian Budget

Budget Meaning:

The budget is the overall financial framework that serves as the performance benchmark for all financial decision.

 Article 112 of the Constitution of India calls it – ‘Annual Financial Statement’

·        Statement of Revenue

·        Statement of Expenditure

·        Overall Statement

Importance of Budget:

• Intension of the Government

• Priority of the Government

• Policies of the Government

• Allocation of the Financial Resources

• Planned approach to Government’s activities.

• Integrated approach to fiscal operations

• Influences on the functioning of the economy

• Index of Government’s functioning

• Public accountability

Origin of word:

Budget word is adopted from Middle English Word ‘Bowgett’ which came from Middle French word ‘BOUGETTE’ – which means a “Leather Bag”.

History of Budget in India:

The founder of Budget system in India is James Wilson who presented a Budget on 18th Feb.1860 as a member of council of the Viceroy Lord Canning. The First Budget of Independent India was presented by R. K. Shanmukham Chetty on 26th Nov. 1947.

Who Causes the Budget:

The President of India causes the budget to be laid before the Lok Sabha.

Department of Ministry of Finance:

The Ministry comprises of the five Departments namely:

·      Department of Economic Affairs

·      Department of Revenue

·      Department of Expenditure

·      Department of Financial Services

·      DIPAM (Department of Investment and Public Asset Management)

How is the Budget Made in India:

·        The Budget Division of the Department of Economics Affairs of the Ministry of Finance is the nodal body responsible for  the preparation & presentation of the Budget.

·        Department of Economics Affairs of the Ministry of Finance publishes annual Economic Survey.

·        For preparing the estimates for the next year, the budget division issues the circular to –

• Union Ministries

• Union Territories

• Autonomous Bodies & Departments

• Defence Forces

·        Budget is made through a consultative process involving –

• Ministry of Finance

• NITI Aayog

• Spending Ministries

Finance Ministry issues guidelines to spending, based on which ministries present their demands

Pre-Budget Meetings:

• After receiving the demands, extensive consultations are held between Union Ministries and Department of Expenditure.

• At the same time pre-budget consultations are held with different stakeholders viz. State representatives, Agriculturists, Industrialists, Businessmen, Economists, Civil Society Groups & Trade Unions to take their views.

• Once the pre-budget meetings are over, the final call on the tax proposal is taken by the Finance Minister.

• Proposals are discussed with the Prime minister before the Budget is frozen.

• Finance Ministry collects information about receipts and expenditure from various departments to prepare the revised estimates for the budget.

Budget Printing:

• The Finance Minister and other official participate in ‘Halwa Ceremony’ which marks the starting of the process of Printing Document of the Budget.

•The officials and support staff directly involved in the budget making and printing process are required to stay in the ministry and remain cut-off from their families until the presentation of the Budget.

Budget Consists of  following  details:

·        Actual of the previous year (Actual)

·        Budget estimate of current year (B.E.)

·        Revised estimate of current year (R.E.)

·        Proposed Budget estimate of next year (B.E.)

Presentation of Budget:

• Finance Minister goes to meet President to seek permission for Budget Presentation.

• The Finance Minister briefs the cabinet on budget proposals through the ‘summary for the cabinet’ just 10 minutes before presenting the budget in the Parliament.

Budget Consists of two parts:

·        Part A – Speech

·        Part B – Amendments in Taxes

Three major changes in budget 2017-18:

·         Budget Presentation Day advanced from end-February to 1st February.

·         Elimination of the distinction of Plan and Non-Plan expenditure in the Budget.

·        Railways Budget merged with General Budget.

Railway Budget briefing:

• 1920 : William Mitchell Acworth ; Chairman, Committee of East Indian Railways;  recommended about consolidation and nationalization of the Indian Railways.

• Acworth Committee recommendations were finally passed on 20 September 1924 as the Separation Convention.

• The Railway finances of India were separated from the general government finances in 1924.

• Committee of Restructuring of Indian Railways, Chairman Dr. Bibek Deboray (Sept. 2014 – June 2015); Recommended Railway budget should be phased out, and general budget support to railways to be mentioned as a paragraphs in the budget.

The budget is divided into two parts 1- Revenue Account and 2- Capital Account.

Now we will see brief introduction of above these two accounts…

 

(This above chart is the Broader outline of budget)

Revenue Account:

Revenue Account covers the current receipts and running expenditure. It includes the variations in money balances created or owned by the Government.

 Revenue Receipts include proceeds of taxes and other duties levied by the Government, interest & dividends on investment made by the Govt., & Fees and other receipts for services rendered by the Govt.

 Revenue receipts increase treasury’s usable funds without increasing debt obligations.

 Revenue Expenditure is meant for normal running of Govt. departments and various services, interest charges on debt incurred by the Govt. and subsidies, grants given by the Govt. etc.

Broadly speaking, the expenditure that does not result in creation of assets is treated as revenue expenditure. Revenue expenditure decrease treasury’s usable funds without decreasing debt obligations.

Capital Account:

The Capital account covers the creation and disposal of assets and liabilities. It includes the items of receipts & disbursements of those items –

·        Which do not belong to the Govt. (e.g. loans, deposits etc.)

·        Which lead to variations in physical assets of the Govt. (e.g. their acquisition, creation, disposal etc.)

·        Which lead to variations in financial claims & liabilities of the Govt.

The main items of capital receipts of loans raised by the Govt. from the public, borrowings from the RBI, loans from abroad, recovery of loans & also proceeds from the disinvestment of Govt. equity in public enterprises.

Capital Expenditure includes the payments for acquisition of assets like land, building, machinery, equipment etc., and also investment in shares & loans given by the Govt.

Revenue Account Chart:- 

Capital Account Chart:-

Plan Vs. Non-Plan Expenditure:

·        11th Finance Commission (2000-2005) headed by Dr. A. M. Khusro had recommended to examine the issue for eliminating the distinction between plan and non-plan expenditure.

·        High level Expert Committee on Efficient Management of Public Expenditure headed by Dr. C. Rangarajan had recommended a fundamental shift in the approach of public expenditure by removing the Plan & Non-plan distinction and budgeting linked to output & outcomes.

·        Union Budget 2016-17 announced that the Plan & Non-Plan classification to be eliminated from 2017-18.

·        Now after abolition of Planning Commission & Setting up of NITI Aayog the term Plan expenditure has lost its relevance. Therefore after the end of the 12th Five Year Plan in 2012-17,  the Plan and Non plan distinction has been removed from 2017-18.

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