What is the Budget all about?

[K.Karthik Raja]

What is the Budget all about?

Yet another Budget is around the corner. This will be UPA government's
last full Budget as the government is set to face elections in May
2009.

It is likely to be a 'people friendly Budget'. Finance Minister P
Chidambaram is not likely to take any adverse step in the wake of the
general election.

The Union Budget is the most awaited event in India as it affects each
one of us. Here's all that you want to know about the Budget.

What is the Union Budget?

The Union Budget is the annual report of India as a country. It
contains the government of India's revenue and expenditure for the end
of a particular fiscal year, which runs from April 1 to March 31.

The Union Budget is the most extensive account of the government's
finances, in which revenues from all sources and expenses of all
activities undertaken are aggregated.


February: The Budget month


Who decides the Budget day?

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

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 5 pm on the last working
day of February, but since 1999 the it is being presented at 11 am 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 and later in full.

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 as proposed by the finance minister comes into effect.



Revenue and Capital Budgets

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 it 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, divestment 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.

It's all about taxes


What are direct taxes?

These are the taxes that are levied on the income of individuals or
organisations. Income tax, corporate tax, inheritance tax 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 or firms on the incomes
they earn.

What are indirect taxes?

These are the taxes paid by consumers when they buy goods and
services. These include excise and customs duties.

Customs duty is the charge levied when goods are imported into the
country, and is paid by the importer or exporter.

Excise duty is a levy paid by the manufacturer 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 fertilisers), wage and salary payments
to government employees, grants to States 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 defence, loans to public
enterprises, loans to States, Union Territories and foreign
governments


Spending & Taxing


What is the 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 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 a 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 continuance 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.

Impact of the Budget


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 the interest rate in the economy.
High interest rates mean 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 or 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, thus slowing down production and growth.

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