Government Budgeting

Why in News

The Union Minister of Finance recently presented the Budget 2020-21 in the Parliament. The central
theme of the Budget- “Ease of living for all citizens” was based on three prominent themes:

Aspirational India - better standards of living with access to health, education and better jobs for
all sections of the society
Economic Development for all - “Sabka Saath, Sabka Vikas, Sabka Vishwas”.
Caring Society- both humane and compassionate; Antyodaya as an article of faith.

Budget and Constitutional Provisions

According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as
the Annual Financial Statement (AFS).
It is a statement of the estimated receipts and expenditure of the Government in a financial
year (which begins on 01 April of the current year and ends on 31 March of the following year). In
addition to it, the Budget contains:

Estimates of revenue and capital receipts,

Ways and means to raise the revenue,
Estimates of expenditure,
Details of the actual receipts and expenditure of the closing financial year and the reasons
for any deficit or surplus in that year, and
The economic and financial policy of the coming year, i.e., taxation proposals, prospects of
revenue, spending programme and introduction of new schemes/projects.
In Parliament, the Budget goes through six stages:

Presentation of Budget.
General discussion.
Scrutiny by Departmental Committees.
Voting on Demands for Grants.
Passing of Appropriation Bill.
Passing of Finance Bill.
The Budget Division of the Department of Economic Affairs in the Finance Ministry is
the nodal body responsible for preparing the Budget.

Changes Introduced in 2017

Advancement of Budget presentation to February 1 (earlier presented on the last working day of
February),
Merger of Railway Budget with the General Budget, and
Doing away with plan and non-plan expenditure.

Key Words

Receipts: It indicates the money received by the government. This includes:

 the money earned by the government
the money it receives in the form of borrowings or repayment of loans by states.
Plan Expenditure: All expenditures done in the name of planning (i.e. Five Year Plans) were
called plan expenditures. For example expenditure on electricity generation, irrigation and rural
developments, construction of roads, bridges, canals, etc.
Non-plan Expenditure: All expenditures other than plan expenditure were known as non-plan
expenditure. For example interest payments, pensions, statutory transfers to States and Union
Territories governments, etc.

Objectives of Government Budget

Reallocation of Resources– It helps to distribute resources keeping in view the social and
economic conditions of the country.
Reducing Inequalities in Income and Wealth– Government aims to bring economic equality by
imposing taxes on the elite class and spending the collected money on the welfare of the poor.
Contributing to Economic Growth– A country’s economic growth is based on the rate of
investment and savings. Therefore, the budgetary plan focuses on preparing adequate
resources for investing in the public sector and raise the overall rate of investments and savings.
Bringing Economic Stability– The Budget focuses on avoiding business fluctuations so as to
accomplish the aim of financial stability. Policies such as Deficit Budget (during deflation) and
Surplus Budget (during inflation) assist in balancing the prices in the economy.
Managing Public Enterprises– Many public sector industries are built for the social welfare of
the people. The Budget is planned to deliver different provisions for operating such business and
imparting financial help.
Reducing Regional Differences– It aims to reduce regional inequalities by promoting the
installation of production units in the underdeveloped regions.

Components of Government Budget

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Revenue Budget– It consists of the Revenue Expenditure and Revenue Receipts.

Revenue Receipts are receipts which do not have a direct impact on the assets and
 liabilities of the government. It consists of the money earned by the government through
tax (such as excise duty, income tax) and non-tax sources (such as dividend income,
profits, interest receipts).
Revenue Expenditure is the expenditure by the government which does not impact
its assets or liabilities. For example, this includes salaries, interest payments, pension, and
administrative expenses.
Capital Budget– It includes the Capital Receipts and Capital Expenditure.

Capital Receipts indicate the receipts which lead to a decrease in assets or an

increase in liabilities of the government. It consists of: (i) the money earned by selling
assets (or disinvestment) such as shares of public enterprises, and (ii) the money received
in the form of borrowings or repayment of loans by states.
Capital expenditure is used to create assets or to reduce liabilities. It consists of: (i)
the long-term investments by the government on creating assets such as roads and
hospitals, and (ii) the money given by the government in the form of loans to states or
repayment of its borrowings.

Other Types of Budgets

Zero Based Budgeting: Zero-based budgeting is a method of budgeting in which all expenses
are evaluated each time a Budget is made and expenses must be justified for each new period.

Zero budgeting starts from the zero base and every function of the government is analysed
for its needs and cost. Budget is then made based on the needs
Outcome Budget: Outcome Budget analyses the progress of each ministry and department and
what the respected ministry has done with its Budget outlay. It measures the development
outcomes of all government programs. It was first introduced in the year 2005.
Gender Budgeting: The gender-budgeting is defined as “gender-based assessment of Budgets,
incorporating a gender perspective at all levels of the budgetary process and restructuring
revenues and expenditures in order to promote gender equality”. It is actually budgeting for
gender equity.

Through Gender Budget, the Government declares an amount to be spent over the
development, Welfare, Empowerment schemes and programmes for Females.

Balanced, Surplus and Deficit Budget

Balanced Budget – A government Budget is assumed to be balanced if the expected expenditure

is equal to the anticipated receipts for a fiscal year.
Surplus Budget – A Budget is said to be surplus when the expected revenues surpass the
estimated expenditure for a particular business year. Here, the Budget becomes surplus, when
taxes imposed, are higher than the expenses.
Deficit Budget- A Budget is in deficit if the expenditure surpasses the revenue for a designated
year.

Measures of Government Deficit

There are various measures that capture government Deficit:

Revenue Deficit: It refers to the excess of government’s revenue expenditure over revenue
receipts.

Revenue Deficit = Revenue expenditure – Revenue receipts

The revenue Deficit includes only such transactions that affect the current income and
expenditure of the government.
When the government incurs a revenue deficit, it implies that the government is dissaving
 and is using up the savings of the other sectors of the economy to finance a part of its
consumption expenditure.
Fiscal Deficit: It is the gap between the government’s expenditure requirements and its receipts.
This equals the money the government needs to borrow during the year. A surplus arises if
receipts are more than expenditure.

Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating

capital receipts).
It indicates the total borrowing requirements of the government from all sources.
From the financing side: Gross fiscal deficit = Net borrowing at home + Borrowing from RBI
+ Borrowing from abroad
The gross fiscal deficit is a key variable in judging the financial health of the public sector
and the stability of the economy.
Primary Deficit: Primary deficit equals fiscal deficit minus interest payments. This indicates the
gap between the government’s expenditure requirements and its receipts, not taking into account
the expenditure incurred on interest payments on loans taken during the previous years.

Primary deficit = Fiscal deficit – Interest payments

Fiscal Policy

Fiscal policy is the use of government revenue collection (mainly taxes but also non-tax revenues
such as divestment, loans) and expenditure (spending) to influence the economy.
Through the fiscal policy, the government of a country controls the flow of tax revenues and public
expenditure to navigate the economy. If the government receives more revenue than it spends, it
runs a surplus, while if it spends more than the tax and non-tax receipts, it runs a deficit. To meet
additional expenditures, the government needs to borrow domestically or from overseas.
Alternatively, the government may also choose to draw upon its foreign exchange reserves or print
additional money.
Fiscal policy in India is the guiding force that helps the government decide how much money it
should spend to support the economic activity, and how much revenue it must earn from the
system, to keep the wheels of the economy running smoothly.
Attaining rapid economic growth is one of the key goals of fiscal policy formulated by the
Government of India. Fiscal policy, along with monetary policy, plays a crucial role in managing a
country’s economy.

Main objectives of Fiscal Policy in India

Economic growth: It helps to maintain the economy’s growth rate so that certain economic goals
can be achieved.
Price stability: It controls the price level in the country so that when the inflation is too high,
prices can be regulated.
Full employment: It aims to achieve full employment, or near full employment, as a tool to
recover from low economic activity.

Importance of Fiscal Policy in India

In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both
in the public and private sectors.
Through taxation, the fiscal policy helps to mobilise a considerable amount of resources for
financing its numerous projects.
Fiscal policy also helps in providing stimulus to elevate the savings rate.
The fiscal policy gives adequate incentives to the private sector to expand its activities.
Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.

Deficit Financing in India

Deficit financing is defined as “borrowings from the Reserve Bank of India against the issue of
 Treasury Bills and running down of accumulated cash balances”.
When the government borrows from the Reserve Bank of India, it merely transfers its securities to
the Bank. On the basis of these securities the bank issues more currency and puts them into
circulation on behalf of the government. This amounts to the creation of money.
Rationale for Deficit Financing: sometimes the government fails to mobilise adequate
resources. In this situation, the option of deficit financing is required to meet fiscal deficit targets.
If the option of deficit financing is not utilized the government ends up compromising on growth
targets.

FRBM Act

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of
India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic
management and the overall management of the public funds by moving towards a balanced
budget.

Objectives

Reduction of fiscal deficit and revenue deficit;

To achieve inter-generational equity in fiscal management by reducing the debt burden of the
future generation;
Achieving long-term macroeconomic stability;
Better coordination between fiscal and monetary policy;
Transparency in fiscal operations of the Government.

Major Provisions of the FRBM Act, 2003

The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09. This will be
realized with an annual reduction target of 0.3% of GDP per year by the Central government.
Revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination by
2008-09.
Reduction of Public Debt
The government has to take appropriate measures to reduce the fiscal deficit and revenue deficit
so as to eliminate revenue deficit by 2008-09 and thereafter, sizable revenue surplus has to be
created.
It mandated setting annual targets for the reduction of fiscal deficit and revenue deficit, contingent
liabilities and total liabilities.
The government shall end its borrowing from the RBI except for temporary advances.
The RBI was supposed to not subscribe to the primary issues of the central government securities
after 2006.
The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds
of national security, calamity and other exceptional grounds to be specified by the Central
government.
Amendments to FRBM Act: Fiscal Responsibility and Budget Management Act, 2003 was
amended in 2012 that mandated the Central Government to lay before the Houses of Parliament,
Macro-Economic Framework Statement, Medium Term Fiscal Policy Statement and Fiscal Policy
Strategy Statement along with the Annual Financial Statement and Demands for Grants.
NK Singh committee, that was set up in 2016 to review the FRBM Act, recommended that the
government must target a fiscal deficit of 3% of the GDP in the years up to March 31, 2020,
subsequently cut it to 2.8% in 2020-21 and to 2.5% by 2023.

For Mind Map

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