All about India’s Budget

July 4th, 2009  |  Published in Business and Finance, General Awareness

The Budget Speech of the Finance Minister

It is fine tuned to the last minute. Some of the budget documents are almost ready and goes for printing to a press located in North Block itself. Security agencies cordon off the press and entry is almost prohibited.

In India, the Budget is presented in Parliament on a date fixed by the President.

The finance minister delivers the Budget speech in Parliament. Normally, on February 28, the finance minister delivers the Budget Speech in Lok Sabha. After which Budget documents are made available. These are out on the web site .However, if the year turns out to be leap year; the budget is presented to Parliament on 29th February.

 The Budget speech of the Finance minister is usually divided in two parts. Part A deals with general economic survey of the country while part B relates to taxation proposals.

The general budget was earlier presented at 5PM on the last working day of February, but since 1999 it is being presented at 11AM on the last working day of February, i.e., about a month before the commencement of the financial year except in the year when general elections are held.

In an election year, Budget may be presented twice –first to secure vote on account for a few months later in full. This year budget will be presented on July 6.

Why Budget is tabled usually on the last day of February? The finance minister is required to submit the Budget in Parliament usually on the last day of February so that the Lok Sabha has one month to review and modify the Budget proposals.

If by April 1, the beginning of the country’s fiscal year, the parliamentary discussion on the Budget is completed, then only the Budget is proposed by the Finance minister comes into effect.

What is a Revenue Budget?

The Revenue Budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure.

Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies. In non-tax revenue, the government’s sources are interest on loans and dividend on investments like PSUs, fees, and other receipts for services that it renders. Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that if offers to its citizens.

The government also has other expenditure like servicing interest on its borrowings, subsidies, etc. Usually, expenditure that does not result in the creation of assets, and grants given to state governments and other parties are revenue expenditures.

The difference between revenue receipts and revenue expenditure is usually negative. This means that the government spends more than it earns. This difference is called the revenue deficit.

What is a Capital Budget?

The capital budget is different from the revenue budget as its components are of a long-term nature. The capital budget consists of capital receipts and payments.

Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, disinvestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits.

Capital payments are capital expenditures on acquisition of assets like land, buildings, machinery and equipment. Investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.

What are direct taxes?

These are the taxes that are levied on the income of individuals or organizations. Income tax, corporate tax. Inheritance taxes are some instances of direct taxation. Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc. Corporate tax is the tax paid by companies of firms in the incomes they earn.

What are indirect taxes?

These are the taxes paid by consumers when they buy good and services. These include excise and customs duties. Customs duty is the charge levied when good are imported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by the manufactured on items manufactured within the country. Usually, these charges are passed on to the consumer.

What is plan and non-plan expenditure?

There are two components of expenditure – plan and non-plan. Of these, plan expenditures are estimated after discussions between each of the ministries concerned and the Planning commission.

Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilizers), wage and salary payments to government employees, grants to State and Union territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments.

Non-plan capital expenditure mainly includes defense, loans to public enterprises, loans to States, Union Territories and foreign governments.

What is Central Plan Outlay?

It is the division of monetary resources among the different sectors in the economy and the ministries of the government.

What is the fiscal policy?

Fiscal policy is a change in government spending or taxing designed to influence economic activity. These changes are designed to control the level of aggregate demand in the economy. Governments usually bring about changes in taxation, volume of spending, and size of the budget deficit or surplus to affect public expenditure.

What is fiscal deficit?

This is the gap between the government’s total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the government to completely meet its expenditure.

What is the Finance Bill?

The government proposals for the levy of new taxes, alterations in the present tax structure or continuances of the current tax structure beyond the period approved by the Parliament, are laid down before the Parliament in this bill. The Parliament approves the Finance Bill for a period of one year at a time, which becomes the Finance act.

 What impact does the Budget have on the market and economy?

The budget impacts the economy, the interest rate and the stock markets. How the finance minister spends and invests money affects the fiscal deficit. The extent of the deficit and the means of financing it influence the money supply and interest rate in the economy. High interest rates means higher cost of capital for the industry, lower profits and hence lower stock prices.

The fiscal measures undertaken by the government affect public expenditure. For instance, an increase in direct taxes would decrease disposable income, thus reducing demand for goods. This decrease in demand will translate into a decrease in production, therefore affecting economic growth.

Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially of completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce profit margins of companies, this slowing down production and growth.

Non-plan expenditure like subsidies and defense also affect the economy as limited government resources are used for non-productive purposes.


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