understanding india's budget & its ingredients

During India's annual budgets of 2011 and 2012 I contributed for the newspaper I presently work for a primer on the country's budget and its various statements. Here is what I wrote in the primer last year (March, 2012):


Decoding India's budget

Here's a helping hand to make you understand the most important economic policy tool of the government in which we have a big stake

The elected governments at the Centre and the states run our country through the framing of laws and policies and their implementation. Money is inevitably required to do all this. The Union budget is, therefore, an annual exercise in financial planning and financial accounting by the central government (state governments have their own annual budgets). It is the government's most important economic policy tool.

Budget directly or indirectly affects the life of every citizen, including you and me. There is a lot at stake in the budget and to know how the country is being run is highly important on its own right. The budget is also important because as a taxpayer you are paying for services that the government  provides.

Budget matters to you if you are a bank depositor because your bank is investing at least 24 per cent of your deposits in government securities whose proceeds are used to run the government. Or you could be an investor in a debt scheme of a mutual fund which also invests a portion of its corpus directly in government securities or indirectly through investment in bank deposits. You get returns from these investments and you would like to see it maximised in a safe manner, not unlike to what you would as an investor when you invest in the shares of a listed company or the units of an equity fund.

As a consumer too you have a stake in the budget. The tax you pay on income, the service tax you pay on your lunch or dinner at a restaurant, the excise duty that is built into the retail price of consumer goods you buy, all these are parts of the most sought-after item by the government – revenue receipts.

It becomes imperative for you to know where this revenue is going and how it is being spent; and for that you have to look at the expenditure statements of the government.

To get a proper hang of revenue and expenditure as well as the government's strategy to manage them, or fiscal policy, you have to sift through budget documents. The budget follows a format similar to the one companies use in financial statements. They are segregated based on the provisions mandated by the Constitution. Budget documents of the past 15 financial years (FYs), from FY 1996-97 onwards, can be downloaded from the government's union budget website (http://indiabudget.nic.in).

An annual budget comprises different statements (see accompanying box). The government provides some help to understand them via explanatory notes and summary statements. Use the 'Budget at a Glance' document to quickly know the main items that use much of the government's expenditure and revenue. For instance, you can get a neat break-up of receipts into revenue and capital receipts and further into revenue from taxes and other categories.

If you want to dig deeper, the annual financial statement is a good place to start. It will tell you the names of funds that are used to collect and disburse money. The expenditure budget is another area of importance, which usually comes in two volumes. It not only gives you the latest year's details but also the trend over the past few years. For instance, it will tell you that a fairly large portion of government receipts is spent on defence forces and subsidies.

A subsidy is the money that is paid by the government to companies to reduce the cost of services or of producing goods so that their prices can be kept low. Fertiliser is highly subsidised in India. You can get a clear picture of various subsidies and their total by going through an annexure 'Details of subsidies included' in volume one of the expenditure budget.

Taxes are covered in an elaborate and separate document, the finance bill. To help understand it better, there is a separate document called 'Memorandum explaining the provisions in the finance bill'. A significant aspect of taxation that is important to everyone is the differential rates in indirect taxes such as excise and customs. Concessions are given in excise and customs to many industries and items, lowering the receipts of the government, which can be found in detail in the 'Revenue foregone statement'.

Government expenditure happens through ministries. As per the procedure specified in the Constitution, each ministry has to give a 'demand for grants', which is its expenditure estimate. In the end, it is important to note that all demand for grants, the finance bill and other budgetary statements have to be passed by the Lok Sabha. 

KEY BUDGET STATEMENTS & DOCUMENTS

 

Annual financial statement

Emanating from Article 112 of the Constitution of India , the AFS is nothing but the profit and loss account of three different Funds controlled by the government of India -- Consolidated Fund of India, Contingency Fund of India and Public Account of India. Interestingly, the receipts and expenditure are given separately for capital account, and revenue account, items.

Consolidated fund of India.

Article 266 of our Constitution describes it most articulately, "... with respect to the assignment of the whole or part of the net proceeds of certain taxes and duties to States, all revenues received by the Government of India, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances and all moneys received by that Government in repayment of loans shall form one consolidated fund."

Contingency fund

An imprest placed at the disposal of the president to meet urgent un-foreseen expenditure pending authorisation from Parliament. The current corpus is Rs 500 crore.

Public account of India.

It is the expenditure and receipts statement of the corpus that the central government manages on behalf of the people akin to a fund manager of a mutual fund. Majority of the corpus comes from the small savings schemes launched by the government and the state provident funds.

Demand for grants.

It is an accounting of the utilisation and estimated requirement of the funds taken out of the Consolidated Fund of India by every ministry of the central government and is subject to approval of Lok Sabha.

Finance bill.

The term is misleading. Only taxation part is covered in the Finance Bill. It is one of the definitions of a Money Bill under Constitution's Article 110 (1) dealing with "imposition, abolition, remission, alteration or regulation of any tax". It covers direct taxes such as corporation tax and income tax and indirect taxes such as excise duties and customs duties.

Deficit.

There are three kinds of deficits -- revenue, fiscal and primary -- of which the first two are critical. Revenue deficit is the excess of revenue expenditure over revenue receipts. Fiscal deficit is the excess of total expenditure (revenue plus capital) over total receipts minus the capital receipt in the form of borrowings.

Revenue receipts and expenditure.

Revenue receipts are primary tax revenues coming from income tax, corporation tax, securities transaction tax, customs duties, union excise duties, service tax, etc. There is also a little bit of revenues coming from dividends from public sector companies and other areas such as interest received and grants. Examples of revenue expenditure are money spent on the running of the central government and its various ministries, money spent on operating and maintaining the vast military of the country, interest paid on government's borrowings from the RBI and others and money spent on other services provided by the government.

Capital receipts and expenditure.

Capital receipts are predominantly the loans taken by the central government from the market through the issue of government securities via the RBI. Capital expenditure includes the expenditure on all services which includes, among others, the cost of acquiring assets and cost of laying out new, or upgrading existing, infrastructure such as rail and road networks. Purchase of equipment for the Indian military is the largest capital expenditure.

Macroeconomic framework statement

Started from Budget 2005-06, this statement provides a nice glance at the economic performance of the country. In one place, you get to see the absolute value figures of GDP, money supply, imports, exports and foreign exchange reserves, as well as the average index figure (during April to December of the current financial year) of index of industrial production, wholesale price index and consumer price index. It also provides a summary financial picture of the government's finances that is otherwise also given in annual financial statement.

Revenue foregone statement.

It was first introduced in Budget 2006-07 as an annexure in the receipts budget. From the following year, it was given as a separate document. It brings into light the impact of reduced tax rates, exemptions, deductions, rebates, deferrals and credits that affect the receipts from tax.

Fiscal policy strategy statement.

Available from 2005-06 buget, it, according to government's own words, "outlines the strategic priorities of the Government in the fiscal area for the ensuing financial year" and "gives the rationale for any major deviation in key fiscal measures."