All you want to know about Budget

Its that time of the year where the people and media are filled with discussion regarding Budget. So here is the answer to all your questions regarding the Union Budget.

What is annual Financial Statement/Budget?

• The “annual financial statement” of the estimated receipts( income) and expenditure of the Government of India.
• Interestingly the term Budget is not used in the constitution, Article 112 describes it as “Annual financial statement.”

Why does government need a Budget at all?

• Any large, complex entity with financial dealings, like a company or a government, must keep accounts of what it earns and spends — and how. The Budget is a statement of those accounts.
• Under Article 112 of the Constitution, the Government of India must present to the representatives of the people an “annual financial statement” of “the estimated receipts and expenditure” of the government for that year financial year. India’s financial year runs from April 1 to March 31.

The Budget Making Process

When does budget making begin?

• The process of Budget making has begun every year in September. This year, as a result of the advancement of the date of presentation, the entire process has had to be speeded up.

What  is individual ministries role in budget?

• Individual ministries or departments work out their demands for grants — the expenditure they expect to incur on projects or programmes and payment of salaries — which are incorporated in the Union Budget. Once Parliament approves the proposals, they can start spending.
• It would be cumbersome and impractical to have the hundreds of departments of the government individually seeking Parliament’s approval for their spending. So individual ministries does not have separate budget.

The first circular

Five months ahead of the presentation of the Budget, by September of the previous year, the Budget division of the Finance Ministry sends a note to central government ministries and departments, seeking details of expenditure incurred by them in the fiscal year until then, the projected expenditure for the next fiscal, estimates of non-tax receipts including fees earned for services, other earnings, and dividends of public sector firms controlled by them.

Meetings follow

• During October and November, the Expenditure Secretary holds meetings with senior officials of the ministries, including financial advisers of some departments, to review their spending and discuss the rationale for proposals for the next year.
• Meanwhile, several other discussions including  senior officials of other departments in the Finance Ministry, discussions with economists and experts from various sectors follow, with the Finance Minister himself sitting in on the meetings.

Core takes over

• Once the expenditure numbers are in, the Core Budget team discusses broad overall revenues, new proposals to raise revenue, ways to raise more funds, the levels of deficits, and related numbers.
• The Core team is headed by the Finance Minister, and consists of the senior officials  of the ministry.

The blue sheets

• Budget proposals are outlined on a blue sheet of paper and discussed by the Core team.
• Some of these papers are subsequently destroyed by the senior official in charge of the Budget division to ensure secrecy.

Lockdown begins

• By late November, the Ministry is declared out of bounds for visitors, and intelligence agencies begin surveillance. Meanwhile, under the supervision of the Chief Economic Advisor, work on the Economic Survey, which precedes the Budget, gets under way.

PM enters picture

• In the first meeting between the Finance Minister and Prime Minister, the overall fiscal scenario, scope for fresh spending, new schemes or additional revenue measures, and the general direction of the Budget is discussed. The Prime Minister puts forward any suggestions that he might have.

Documents readied

• In early February — a couple of weeks ahead of what has so far been Budget day — the expenditure budget, which outlines spending by various ministries, is sent for printing to the press in the Finance Ministry basement.(Since budget is presented on February 1st this process has started earlier this year)
  
• Those working there, and some officers from the Finance Ministry and the legislative branch of the Law Ministry who vet draft laws such as the Finance Bill and the Appropriation Bill, are quarantined there — and released only on Budget day.
• Other documents — such as the implementation of the Budget proposals and the revenue budget with the Finance Bill — are prepared as the Budget nears.
• The Finance Minister’s speech is the last, and is printed just a few days before the budget day

Budget day

• On the day of the Budget, the Finance Minister first goes to the President to get his signature on the file approving the Budget.
• This is followed by a short Cabinet meeting in Parliament where the Finance Minister briefs the cabinet on the main features of the Budget. No details of tax proposals are given out.
• Minutes before 11 am, by tradition, the Prime Minister leads the Finance Minister to the Lok Sabha, where they take their seats. The Minister then begins reading the Budget speech after seeking permission from the Speaker.

Basics of Budget – Some terms

Fiscal Deficit

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.

How does the government raise resources?

• The government’s revenues come largely from taxes, which can be either ‘direct’ or ‘indirect’.
• Direct taxes include income tax or corporate tax, where the money is collected directly from a person or entity. Salaried individuals get their salaries after tax has been deducted at source (TDS).
• Indirect taxes are levied, as the name suggests, indirectly. An indirect tax on a good or service results in a higher price for that good or service. Thus, a part of what a buyer pays for, say, a TV, is routed to the government as excise duty levied on the manufacturing company.
• The government also charges for the services it provides, and makes money from dividends it earns from the companies it owns. Excise duty, service tax, value-added tax, stamp duty and entertainment tax are major indirect taxes.

Revenue Receipts

Revenue receipts are receipts of the government which are non-redeemable, that is, they cannot be reclaimed from the government. They are divided into tax and non-tax revenues. Tax revenues consist of the proceeds of taxes and other duties levied by the

central government. Non-tax revenue of the central government mainly consists of interest receipts on account of loans by the central government, dividends and profits on investments made by the government, fees and other receipts for services rendered by the government.

Capital Receipts

All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. The main items of capital receipts are loans raised by the government from the public which are called market borrowings. Other items include small saving,provident funds and net receipts obtained from the sale of shares in Public Sector Undertakings

Revenue Expenditure

This is the money the government spends on salaries of its employees and constitutional functionaries, interest payments on borrowings, and subsidies such as selling cooking gas at below cost price.

Capital Expenditure

This is the expenditure on building roads, power plants, health facilities — in short, on anything that leads to the creation of an asset.

Plan Expenditure

This is expenditure on development schemes during a certain period like the Five-Year Plan. The Five-Year Plans have been executed by the NITI Aayog since the Planning Commission was abolished in 2014. The 12th Five-Year Plan period is from 2012-17.

Non-Plan Expenditure

• This is spending on pension payments and wages, defence, interest on borrowings, and subsidies.
• Both revenue and capital expenditure can be categorised as either Plan or Non-Plan Expenditure.

Note : The distinction between plan and non plan expenditure has been done away from this year onwards

Also Read : New financial rules clear the air on capital, revenue spending

Goods and Services Tax

• The Goods and Services Tax or GST will subsume other taxes such as excise, customs duty and service tax into one tax.
• It is expected to be introduced mid-year, and has the potential to boost revenues with greater coverage of tax assesses.

Also read : All you want to know about- Goods and Services Tax or GST

Budget 2017-2018 – Three major differences from earlier budgets

The government merged the Railway Budget with the main Budget this year. Why ?

• Unlike the general Budget, there is no constitutional or legal requirement for a Railway Budget.
• It is rooted in the recommendations made by a British committee in 1924.
• Many Railway Ministers have been accused of using the Railway Budget for populist reasons rather than to run the Railways efficiently.

The Budget has traditionally been presented on the last day of February. Why was it advanced to February 1 this year?

• The government says it will speed up the process of getting the Budget approved by Parliament. Once that is done by March-end, spending can begin from April 1.
• Until now, Parliament has signed off on the Budget only by May, and spending has been postponed in some cases.

The distinction between plan and non plan expenditure has been done away with. Why?

• In line with the government’s decision to dismantle the Planning Commission, the new spending classification will  comprise of capital and revenue spends
• Economists have for long argued that Plan and Non-Plan classifications should be done away with and the focus should be on improving the quality of government spending by focussing on the end use of the funds.

Budget 2017-2018 – Highlights

This was the third full Budget of this government. What is the state of the economy today?

• Politicians on the two sides of the political divide disagree.
• While government spokespersons stress that India is the “fastest growing major economy in the world”, critics have pointed to indicators that raise questions on the health of the economy.
• However, the slowdown is clear — growth, which was projected at 7.6% at the beginning of 2016, has now been scaled back to 7.1%, and even under 7%, by many forecasters and agencies.
• The overall demand for goods and services has been hit.

And what were the expectations from this Budget?

Given the background, the Budget had fuelled hopes of higher spending by the government on infrastructure or other projects, and a stimulus to boost growth — including lower tax rates for both companies and individuals, and income support to poor households. These popular expectations have not been met by the Budget.

What has the Budget done to raise resources?

• The government hopes to raise money by taxing the well-off a little more — those with a taxable income of Rs 50 lakh or more will have to pay a surcharge of 10%.
• It proposes to publicly list more companies, which could mean divesting a part of the government’s shares to investors, and to bring a larger number of transactions in the tax net.

Does the Budget boost spending?

• To a limited extent. The spending will be in select sectors such as roads (where it plans to spend Rs 64,000 crore) and housing, and on schemes like the Pradhan Mantri Awas Yojana.
• It has proposed to utilise a part of the land controlled by the Airports Authority of India to build airport infrastructure, and earmarked Rs 55,000 crore for railway projects.
• Government spending is important because it stimulates the economy and creates jobs.

What other steps has the Budget taken to create jobs?

• The corporate tax rate for Micro, Small and Medium Enterprises (MSMEs) in India, with a turnover of up to Rs 50 crore has been cut to 25%.
• The government says 96% of MSMEs will benefit, and hopes that they will be incentivised to add jobs.

What does the Budget have for the elderly and the retired?

There is now the comfort of assured returns of 8% for 10 years backed by a government-supported institution like Life Insurance Corporation of India (LIC) on their investments.

And what’s there for the poor — in urban and rural areas?

For the urban poor, there is the promise of affordable housing, while for the rural poor, an increased allocation has been made under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Are there any innovative ideas in the Budget?

• An interesting idea is to issue bonds to fund political parties.
• Political funding has been repeatedly flagged as a major source of corruption, and this step is intended to bring about more transparency and accountability to the process.

Has the Finance Minister been bold, or has he played it safe?

• Even aside from the political risks that bold proposals carry, the Minister had limited economic elbow room to be bolder.
• In many ways, he has sought to play it safe given the global uncertainties, which have a significant bearing on growth in India.

The government keeps talking of ‘minimum government, maximum governance’. Has the Budget signalled a reduced role for the government?

To an extent. The government has said it will do away with the Foreign Investment Promotion Board (FIPB), an agency that approves foreign investment proposals, thus reducing a layer of bureaucracy.

Infrastructure has been another one among this government’s buzzwords. How will the measures proposed in the Budget affect you on this count?

• The plan to spend Rs 1 lakh crore over five years for rail safety should improve safety standards in the Indian Railways, and the proposal to spend Rs 1,31,000 crore by the Railways, including on development work, could mean cleaner trains.
• Greater spending on roads could mean improved, faster access between cities and towns, and facilities such as motels and hotels en route.
• This could attract more traffic and economic activity.

Finally, what is the big political message from the Budget?

• Certainly, that the government is serious about eliminating black money, the theme on which it sought to sell the withdrawal of Rs 500 and Rs 1,000 notes in November last year.
• It has proposed a scheme, through amendments to the RBI Act, to issue bonds to fund political parties. The other big signal is that the government is more pro-poor — demonstrated by the move to tax the rich more.

And the outlook for the future?

The theme of the Budget, as articulated by the Finance Minister, is to transform and energise the country and the economy — as well as a much cleaner economy. How the year ahead will play out will depend on growth in the major economies, fresh investment by Indian companies, and spending by consumers and the government.