A BRIEF ABOUT BUDGET

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                                    A BRIEF ABOUT BUDGET...!!

 Circa 1760, the chancellor in England would carry the statement of government finances to the House of Commons in a leather bag. The French word for such a leather bag is “bougette”, which became budget in English. Thus, the Chancellor would present the “budget” in the House of Commons.

In India, it is the finance minister who presents the Union Budget in parliament on the last working day of February. The fiscal year begins on April 1 and ends on March 31. The government has to operationalise the budget from April 1. However, before that happens, it has to get the budget approved by Parliament. The railway budget is presented separately.

The speech of the finance minister in parliament consists of two parts. In part A, the minister presents the economic survey of the fiscal year gone by. This is the ministry’s view on the annual economic development of the country, and it forms the backdrop for the presentation on the budget for the new fiscal year in part B of the speech. One can access the Economic Survey and the budget documents at the Government of India’s website at http://indiabudget.nic.in .

The finance minister also submits the annual final statement, which consists of estimated receipts and spending, which are operated through three separate accounts:

• The Consolidated Fund
• The Contingency Fund
• The Public Account 

Consolidated Fund  : All revenues and loans raised and recovered from part of consolidated fund, of which no amount can be spent without the approval of parliament.

Contingency Fund : It is an imprest that is available to the president of India to meet unforeseen expenditures, such as expenditures to tackle natural disasters or accidents.

Post-facto approval of such expenditure is sought from parliament, and an equivalent amount is drawn from the consolidated fund.

The current corpus of this contingency fund is Rs 500 crore. (not sure if it is still the same)

Public Account : It holds amounts which are held by the government in trust. These include items such as the Employees’ Provident Fund and small savings.

No parliamentary approval needed for such payments, except when the amounts are withdrawn from consolidated funds and kept in public account for specific expenditures (for example, road construction)

One popular and useful measure of the size of an economy is called GDP. When we express the size of the economy, that tells us how big or small government participation is in the economy.

TYPES OF EXPENDITURES AND REVENUES

Revenue Expenditure: All the expenditures incurred on the functioning of the judiciary, maintaining law and order , routine administration, salaries, subsidies, pensions for administrative staff and payments on past debts are classified as revenue expenditure.

Capital Expenditures: These include asset-creating expenditures for providing public goods such as dams, bridges & roads and plants & machinery built for use in the govt. sector.

Revenue Receipts: These include tax receipts and non-tax receipts, such as stamp duties, fees & dividends, if any, from public sector undertakings.

Capital Receipts: include grants received and loans recovered by the govt. and occasional disinvestment proceeds earned by selling PSUs. These are called non-debt capital receipts.

Generally, the non-debt capital receipts are low, and this means that the govt. has to borrow to cover the deficit amount.  Therefore, borrowing is a capital receipt, albeit a debt-creating capital receipt.

The govt. has three choices for generating debt capital receipts: borrowing domestically from the public; borrowing from external financial institutions; or , under extreme conditions, borrowing from the central bank of the country.

TYPE OF DEFICIT:

Revenue Deficit : It measures the difference between revenue expenditure and revenue receipts. It shows that the govt. has to borrow money to finance administrative activities which do not lead to the creation of any assets.

Fiscal deficit: It is the difference between total expenditure and the total non-debt receipts. It shows the total debt generated by the govt. to finance the total budget expenditure. Such a deficit is justified as long as the expenditures are being incurred to finance activities leading to the creation of national assets.

Primary deficit: The difference between the fiscal deficit and the interest payment on debts incurred in earlier years. The incumbent govt. uses this static to show that the interest payments on previous debt are not of its making. If the resultant deficit turns out to be very small, it proves the prudent management of the budget by the incumbent government.

The International Monetary Fund has been recommending that the fiscal deficit should not be more than 3% of GDP.

The revenue deficit as a percentage of the fiscal deficit has been extremely high in the recent past, averaging about 75%. Such a high percentage is worrisome, for it tells us that most of the debt that the govt. is incurring is being used for routine administrative expenses and will not lead to any asset creation.

When the government’s fiscal deficit is large, it implies that the govt. has to borrow heavily. This means that the demand for loans will rise in the market, causing interest rates to go up. As interest rates rise, the cost of borrowing for private firms goes up. As the cost of borrowing rises, firms find that fewer and fewer investment projects are economically viable. Therefore, private firms borrow less and do not invest in new projects. The fall in private investments naturally has an adverse impact on employment generation and income.