How India's Budget is prepared

[K.Karthik Raja]

How India's Budget is prepared

The Budget process is a massive exercise. The exercise has different
stages and each stage kicks off at a different stage of Budget making
process.

The two sides of the Budget

Like our family budget, the nation's General Budget has two major
parts: Revenue and Expenditure.

Assessing the revenues from different central taxes is the primary
function of the Department of Revenue and the expenditure estimates
for the current and the next year for various expenditure heads are
assessed by the Department of Expenditure. The Department of
Expenditure also assesses the resources of the public sector
undertakings (PSUs).

The Budget division is a part of the Department of Economic Affairs.
The Finance Secretary coordinates the overall Budget-making process.
All of them keep the finance minister informed and seek directions
from time to time. The Chief Economic Advisor assists the concerned
departmental officer in this process.

1) Resources (Revenues) side

Leaving aside the tax receipts, the other sources of the revenue which
go into the Budget are the dividends paid by the PSUs on the
government shareholdings, including the interim dividends and the
capital receipts on account of the divestment of the government share
holdings.

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Besides external receipts on account borrowing from international
agencies like World Bank, ADB, etc, are also estimated and included in
the assessment of the gross budgetary resources of various programmes
under various ministries.

Resources of the public sector undertakings, including their operating
surplus and the borrowings by them, also constitute an important
component of the gross budgetary resources and goes to fund their
plan.

The general policy is to fund the plans of the PSUs through their own
resources except in some strategic and economically vital areas where
the budgetary support is provided based on the recommendations of the
Planning Commission.

This assessment of the Internal and External Budgetary Resources(IEBR)
conducted by the Department of Expenditure forms part of the total
plan resources and is also reflected in the budget documents.

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To estimate the earnings of PSUs, the government invites CMDs or the
finance directors of the PSUs to the North Block. A joint secretary
level officer of the ministry of finance holds one-on-one meeting with
the PSU chairmen and estimates revenue.

He passes on the information to Expenditure Secretary, who in turn,
passes on the information to Finance Secretary. This exercise starts
usually in the month of August/September. This revenue forms a part of
plan expenditure.

Now comes role of the ministries of the government. Each ministry has
a financial advisor. The financial advisor is called by the ministry
of finance and asked about the expenditure of the amount allocated to
his ministry. Generally, ministries are not able to spend the
allocated amount but some may overspend as well.

Based on the inputs of different ministries Revised Estimate (RE) is
prepared. Revised Estimate means as to how much is actually required
by the ministry.

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As a part of the expenditure management, the government has issued
instructions to various ministries to adhere to the quarterly
expenditure schedule and to avoid bunching of the expenditure in the
last quarter.

Additional funds are also provided in the RE stage. Important is the
estimates of the non-plan requirement for the next year.

Plan allocations are to be provided by the Planning Commission later
based on the total gross budgetary support (GBS) indicated by the
ministry of finance. This exercise starts in the month of October-
December.

As is known, the Department of Revenue, the ministry of finance has
two boards -- Central Board of Direct Taxes (CBDT) and Central Board
of Excise and Customs (CBEC). By mid-January, these boards give the
figure of tax collection up to December 31. For remaining three
months, tax collection is assumed on the basis of previous trends.

The boards also estimate the tax revenue expected in next financial
year. The integrity of the budget making depends on the realistic
nature of these estimates particularly in the face of the fiscal
discipline imposed by the FRBM Act.

It is a happy development in the past two or three years the estimates
are generally not very wide off the mark.

2) Expenditure side

Parallel to all this, the Planning Commission goes into stock-taking
mode. It starts meeting with individual ministries in the month of
September-October and reviews ongoing schemes of the ministries,
considers allocation for them, etc. It may decide to stop some ongoing
scheme or merge two similar schemes.

Thus, an estimate of Plan Budget is prepared. The Planning Commission
conveys to the ministry of finance that it requires so and so amount
to run planned schemes for next financial year.

The finance minister and the Deputy Chairman of Planning Commission
discuss the demand in detail. This way Plan Expenditure is ready.
Different ministries are also asked to tell about their fund
requirement, which forms a part of budget estimate.

Side by side, Department of Economic Affairs meets representatives of
trade unions, industry chambers, economists and other groups. In the
Budget-making exercise, suggestions of different stakeholders are kept
in mind.

FM has to decide with his team

By this time, the finance minister is in a position to estimate as to
how much it will get through taxes and how much it has to spend in
coming financial year.

The finance minister has other constraints also. He has to abide by
FRBM Act and cut fiscal deficit. Keeping in mind all these, the
finance minister -- with his team -- decides whether some new taxes
should be levied to collect more tax, how to widen tax net in order to
earn more revenue. While doing so the suggestions from various
interest groups are duly taken into account.

GDP assessment

The Department of Expenditure and the Department of Economic Affairs
sit to decide GDP assessment for next year. Generally, a nominal
growth in GDP is projected. Actual growth in GDP is nominal growth of
GDP reduced by inflation figure.

The Budget Speech of the FM

Now comes the Budget Speech. It is fine-tuned to the last minute.
Around February 15, 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.

The D-Day: 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.

However, 2008 being a leap year, this time the Budget would be
presented to Parliament on February 29.


K.Karthik Raja
www.kences1.blogspot.com