Union Budget

Union Budget: Overview

The Union Budget is the annual budget of the Republic of India presented by the Finance Minister. It is referred to as the Annual Financial Statement under Article 112 of the Constitution of India and is presented by the means of Finance bill and Appropriation bill. The union budget is strategically presented in February so that it can be duly materialized before the commencement of Financial Year, that is, April 1.

Union Budget 2017 is the most recent budget of the country and was presented by Finance Minister Arun Jaitley on 1st February 2017. From FY 2017-18 onwards, the Outcome Budget of all Ministries has been combined into one single document and will be brought out by the Ministry of Finance in collaboration with the NITI Aayog. Railway budget, which was earlier presented separately by the Railway Minister, has now been combined with the Union Budget.

History of Union Budget

The first Union Budget of Independent India was presented by the first Finance Minister R. K. Shanmukham Chetty on 26th November 1947. From 1959-61 to 1963-64, Morarji Desai held the office of Finance Minister and in this tenure he presented five annual budgets and one interim budget. In the second tenure, he was elected as the Deputy Prime Minister of India as well as the Finance Minister and during that period he presented three final budgets and one interim budget. In the pre-liberalisation period, several other people, in the capacity of Finance Minister, presented the Union Budgets including Indira Gandhi, Rajiv Gandhi, Pranav Mukherjee and N D Tiwari.

After the economic liberalisation of 1991, Dr Manmohan Singh presented the Union Budget that facilitated foreign investments and encouraged private players of the economy. A non-Congress ministry assumed office in 1996 and hence the budget for 1996-1997 was presented by P. Chidambaram. A special parliament session was summoned to pass the 1997-98 budget following a constitutional crisis. In 1998, the Bharatiya Janta Party came to form the Central Government in the country and Yashwant Sinha presented the budget for 1998-99. Jaswant Singh, P. Chidambaram and Pranab Mukherjee presented budgets in the years that followed. Since 2014, Arun Jaitley has been presenting the Union Budget every year in the parliament.

Union Budget Time and Date

The practice of announcing the Union budget on the last day of February at 5 pm was inherited from the colonial period. The tradition of presenting the budget in the evening was continued till the year 1998. In 1999, the then Finance Minister Yashwant Singh changed the ritual and announced the budget at 11 am on the last day of February.

In 2017, Finance Minister Arun Jaitley changed the colonial-era tradition of presenting the Union Budget on the last day of February and announced it on the first day of February instead. Also, for the last 92 years the Rail Budget of India has been presented separately but in 2017 it was merged with the Union Budget.

Interim Budget and Vote on Account

During an Election Year, when a party in power is moving out and a different political party is taking chair, it is impractical for the ruling government to pass a budget as the two parties may have different fiscal plans for the country. So, in order to ease the transition, an interim budget is created to help the country function during the period a new government is creating its final budget. Also, a full-fledged budget cannot be created in such a short session. An interim budget is a complete set of accounts and includes both the expenditure and receipts of the government in the year gone by.

As per article 116 of the Constitution of India, Vote on Account is to be passed after general discussion on the budget. It should be noted that a Vote on Account is only about the expenditure and not receipts. Although it is not a rule, normally the vote on account includes the expenditures of just two months which roughly equal to one-sixth of the total budget expenditure.

Components of Union Budget

Like any other budget, the central governments union budget is comprised of revenue and expenditure, just that it pertains to country level finances.

A. Expenditure

Two types of classifications are used by the government- Plan Expenditure Vs Non-Plan Expenditure and Revenue Vs Capital Expenditure.

Plan Expenditure- This section includes expenditure incurred on schemes and projects which are commonly referred to as the five-year plans. The Planning Commission is responsible for developing these five-year schemes in consultation with individual ministries. Each plan specifies what these programmes are targeted at along with the funds that these ministries need to put in. These expenditures can be further classified into revenue and capital expenditure. Pradhan Mantri Awaas Yojana is one such example of a five year plan.

Non-plan Expenditure- Apart from funding its five-year plans, the government has several other expenses such as government debt, expenses on state judiciary, maintenance of existing establishments, etc. These are covered under the non-plan expenditure. Basically, the expenditure which is not covered under the ‘plan’ category will be referred to as ‘non-plan’ expenditure in the Union Budget.

In addition to the above classification, government expenditure is broadly classified into revenue and capital expenditure. Revenue expenditure refers to the expenses that do not lead to asset creation such as the expenses incurred by the government in paying staff salaries or the administrative costs. On the other hand, capital expenditures are incurred to create new assets or reduce existing liabilities.

B. Receipts

The government incurs expenses but also earns from different sources. Just like the expenditure, receipts are also classified as revenue and capital. Repayments made by the state government to central government or proceeds from the disinvestment of public sector companies will be included in the capital receipts section. Government receipts in the form of taxes, dividends and public service charges will be counted under the head revenue receipts.

Every year, several changes are effected in the budget especially in the following major segments-

  • Tax Propositions including changes in tax slabs
  • Financial Sector- Policy reforms and budget allocation
  • Agricultural Sector
  • Energy Sector- Budget allocation and investment
  • Infrastructure and Railways- Investment and development
  • Funding of Political Parties
  • Defence Sector
  • Healthcare for the poor and underprivileged
  • Financial propositions for the rural population and for the youth of the country
  • A look at the current fiscal situation and proposing reforms for its betterment

How is the Union Budget Prepared?

Much like other types of budgets, the Union Budget is also prepared on the basis of estimation. Representatives from the government, private sector, NGOs and other stakeholders gather to put forward their expectations from the budget on the basis of which different revenues and expenditures are estimated. The government carries out the following activities-

  • Estimation of government’s plan expenditure
  • Estimation of government’s non-plan expenditure
  • Estimating revenue from tax
  • Estimating non-tax revenue
  • Meeting with different industries
  • Finalizing the budget proposal

Before actual presentation of the budget, an Economic Survey is conducted a few days before the budget speech. Through this survey, the government takes a closer look at the current economic scenario in the country.

After the budget is prepared, it is tabled in the Parliament for discussion. A general discussion takes place on the broad budget measures but no voting is conducted at this stage. The Parliament goes into a three week recess thereafter and during this period the standing committees oversees the work of every ministry and conducts a detailed survey of their expenditure known as Demand for Grants. These Demand for Grants are then presented in the Lok Sabha after which a detailed discussion is again started.  Here the MPs have the right to call for cut motion or an ‘economy’ cut to reduce the grant amount for a respective ministry.

After the votes, an Appropriation Bill is generated and voted on. This authorises the government to take money from the Consolidated Fund of India. The Finance Bill is also introduced and passed in the Lok Sabha. Only the Lok Sabha has the right to approve the Union Budget; the Rajya Sabha is only authorised to suggest amendments.

Fiscal Deficit and Revenue Deficit

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. Two things may be responsible for an increase in government’s fiscal deficit- either the capital expenditure has shot up or there has been a decline in government’s revenue. When the interest payment is deducted from the fiscal deficit, you will arrive at primary deficit. Revenue deficit is the difference between revenue receipts and revenue expenditure and arises when the receipts are lower than the expenses.

Different economists have different views of Fiscal Deficit. While some believe that a country should not have fiscal deficit, other opine that it prevents the country from going into recessionary scenario. However, when the deficit is too much it means that the inflation will be higher.

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