Public Finance

in India
Why Budget?
 With the emergence of Welfare State, Governments have
come to look after virtually every sphere of human life.
 Government has to perform manifold functions from
 maintaining law and order
 protecting territories
 implementation of plans for economic and social
betterment
 provide a variety of social services like education, health,
employment and housing to the people.
Thus, Government requires adequate resources to discharge
these functions effectively.

 It is not as if the Government can tax, borrow and spend

money the way it likes. Since there is a limit to the resources,
the need for proper budgeting arises to allocate scarce
resources to various Governmental activities.
Consolidated Fund (Constituted under Article 267 of the
Constitution, the Consolidated Fund of India is one of the most
important government accounts. All the income generated
through direct taxes, indirect taxes, and other sources of revenue
(excluding exceptional items) are part of the Consolidated Fund
of India.)
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can be withdrawn from this fund without the Parliament's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.

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subsequent approval from Parliament and the amount withdrawn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 .
Constitutional Provisions
 Following provisions of the Constitution make the
Government accountable to Parliament.
 Article 265 provides that ‘no tax shall be levied or
collected except by authority of law’;
 No expenditure can be incurred except with
the authorisation of the Legislature (Article 266); and
 President shall, in respect of every financial year,
cause to be laid before Parliament, Annual Financial
Statement (Article 112).
 The ‘Annual Financial Statement’, laid before both the
Houses of Parliament constitutes the Budget of the Union
Government.
 The statement embodies the estimated receipts and
expenditure of the Government of India for the financial
year.
 Along with the ‘Annual Financial
Statement’ Government presents the
following documents:
 an Explanatory Memorandum briefly
explaining the nature of receipts and
expenditure during the current year
and the next year and the reasons for
variations in the estimates for the two
years,
 the Books of Demands showing the
provisions Ministry-wise and a separate
Demand for each Department and
service of the Ministry.
 The Finance Bill which deals with the
taxation measures proposed by
Government. It is accompanied by a
memorandum explaining the
provisions of the Bill and their effect on
the finances of the country.
 The Appropriation Bill is intended to give authority to
Government to incur expenditure from and out of the
Consolidated Fund of India.

 The Finance Bill seeking to give effect to the

Government’s taxation proposals is taken up for
consideration and passing after the Appropriation Bill
is passed.

 The estimates of expenditure included in the Budget

and required to be voted by Lok Sabha are in the form
of Demands for Grants.

 These Demands are arranged Ministry-wise and a

separate Demand for each of the major services is
presented. Each Demand contains first a statement of
the total grant and then a statement of the detailed
estimate divided into items.
  The Budget speech of the Finance
Minister is usually in two parts. Part
A deals with general economic survey
of the country while Part B relates to
taxation proposals.
 General Budget was earlier being
presented at 5 P.M. on the last
working day of February, but since
1999 the General Budget is being
Budget presented at 11 A.M. And since 2017
at 11 A.M. on 1 February.
Speech  In an election year, Budget may be
presented twice—first to secure Vote
on Account for a few months and
later in full.
 the Vote of Parliament for a sum
sufficient to incur expenditure on
various items for a part of the year.
 (When Parliament votes to spend
money on certain things for a portion
of the year.)
The Process
 After the first stage of General Discussion on both
Railway as well as General Budget is over, the House
is adjourned for a fixed period. During this period, the
Demands for Grants of various
Ministries/Departments are considered by concerned
Standing Committees. The demands made under
Railway Budget are also considered.
 After the reports of the Standing Committees are
presented to the House, the House proceeds to the
discussion and Voting on Demands for Grants,
Ministry-wise.
 The time for discussion and Voting of Demands for
Grants is allocated by the Speaker in consultation
with the Leader of the House.
 On the last day of the allotted days, the Speaker puts
all the outstanding Demands to the Vote of the
House. This device is popularly known as ‘guillotine’.
In the context provided, "adjournment" refers to a temporary
suspension or pause in the proceedings of the House to allow the
Standing Committees to review and consider the Demands for
Grants of various Ministries/Departments. During this adjournment
period, the Standing Committees conduct a detailed examination
of the budgetary requests and prepare reports to be presented to
the House for further discussion and voting.
 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 Air
India, 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 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.
 The government presents a revenue budget (revenue account) and capital budget (capital account).
 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.
 The most important receipts under the non-tax revenue are interest payments (received on loans given by the
government to states, railways and others) and dividends and profits received from public sector companies. Various
services provided by the government - police and defense, social and community services such as medical services,
and economic services such as power and railways - also yield revenue for the government.
 .

 Interest payments are received by the government on loans given to states, railways, and other entities. Dividends
and profits received from public sector companies also contribute to non-tax revenue.

 Additionally, revenue is generated through various services provided by the government. This includes revenue from
police and defense services, social and community services such as medical services, and economic services such as
power and railways. These services generate revenue through user fees, charges, and other sources of income.
 Fiscal Deficit:
When the government's non-borrowed
receipts fall short of its entire expenditure, it
has to borrow money from the public to
meet the shortfall. The excess of total
expenditure over total non-borrowed
receipts is called the fiscal deficit.

FD = Total expenditure both on revenue

account and capital account- revenue receipts
+ non-debt capital receipts
Primary deficit:

The revenue expenditure includes

interest payments on
government's earlier borrowings.
The primary deficit is the fiscal
deficit less interest payments. A
shrinking primary deficit indicates
progress towards fiscal health.
The Budget document also
mentions deficit as a percentage
of GDP. This is to facilitate
comparison and also get a proper
perspective.
Prudent fiscal management
requires that government does
not borrow to consume in the
normal course.

PD = FD – Interest payments
 Revenue Deficit definition:
Revenue deficit arises when the
government's revenue
expenditure exceeds the total
revenue receipts.
 Revenue deficit includes those
transactions that have a direct
impact on a government's current
income and expenditure.

 Effective Revenue Deficit is the

difference between revenue
deficit and grants for creation of
capital assets.
 The concept of effective revenue
deficit has been suggested by the
Rangarajan Committee on Public
Expenditure. It is aimed to deduct
the money used out of borrowing to
finance capital expenditure.
FRBM Act

Enacted in 2003, Fiscal Responsibility and Budget

Management Act require the elimination of revenue
deficit by 2008-09.

From 2008-09, was expected to meet all its revenue

expenditure from its revenue receipts.

Any borrowing would only be to meet capital

expenditure. The Act mandates a 3% limit on the fiscal
deficit after 2008-09.
Total Market
revenue and borrowing;
capital debt
expenditure financing
(G) Fiscal Deficit and foreign
G-R assistance

Revenue Monetization
receipts and of deficit /
non-debt Money
capital financing
receipts (R)
Fiscal deficit: the context

 Role during planning period

 Role after market reforms
 Role in a developing country
Debt Financing of Deficit
 Government issues interest-bearing bonds to banks
which buys those using the currency deposits of the
public.
 Short-run and long-run consequences
 Need to pay annual interest and the principal sum
eventually
 Need to be careful about “debt trap”
Implications:
 Increase in interest rate
 Future increase in taxes
 Crowd in or crowd out private investment
 Productive use vs consumption use
 Sustainable if growth rate exceeds the rate of interest
Monetisation of the Deficit
 Monetising deficit means RBI purchases government bonds in
the primary market and prints more money to finance the debt.
 This is resorted to only when the government cannot borrow
from the market (Banks and other Financial Institutions like LIC).
 The money printed by the RBI is called high powered money or
reserve money or monetary base.
 RBI also conducts indirect monetization of deficit through Open
Market Operations (OMOs).
 OMOs are market operations conducted by RBI by way of
sale/purchase of government securities to/from the market with
an objective to adjust the rupee liquidity conditions in the
market on a durable basis.
• Deficit financing is inflationary
• It may push up interest rates and thus make it even more
difficult for the government to service the loan.
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