The Union Budget of Government of India is a very important exercise for the country. The Union Budget is prepared by Ministry of Finance of India and presented in the parliament in the month of February every year. It is a subject of great interest for academicians, industrialist, businessman, traders and public in general. It affects the life of all of us one way or other.
However, majority of the people, so called Aam Admi, don’t understand the financial jargons, implication of budgetary measures and therefore remain neutral to the whole exercise.
It requires great amount of understanding and ability to detangle the web to make sense out of the Union Budget. In this context, the following is an attempt to decode the Union Budget for general understanding of the masses, which will help to relate to the presentation made by the Finance Minister during Budget speech.
What is Union Budget?
The Union Budget is comparable to functioning of any household where estimate is made for income and expenditure for fulfilling various needs of the household. In case of a country the exercise is larger as sources of income and avenues for expenditure are many. In other words the Union Budget is an estimate of annual governmental expenditures and source of incomes to meet these expenditures.
Components of Union Budget
The Union Budget primarily has two component – 1) Receipts and 2) Expenditure. The sources of income of Government can broadly be divided into 2 categories – a) Revenue receipts and b) Capital receipts. The expenditures can be divided into two categories – 1) non plan expenditure and 2) plan expenditure.
Revenue receipt
It has two sub category – Tax revenue and Non-tax revenue
Tax revenue
The tax revenue includes corporation tax, income tax, goods and service tax ( GST), other taxes & duties. Whenever the government needs more money to implement various programmes for economic, social and general services, it can do so by raising these taxes.
However, it will have cascading effect on the purchasing power of the people. With high income tax the disposable income in the hands of people will go down, whereas a higher GST will lead to increase in price of products. As a consequence demands for various product and services may come down affecting the whole economic cycle.
It is like a double-edged sword. The government needs to be very careful in raising tax level for its adverse affect on the economy. A balance is needed to be maintained by countering one measure by another. This is taken care of while preparing the Union Budget.
Non-tax revenue
The other source of revenue is non-tax revenue such as interest income on loans given to states, foreign govt., dividend/profit from investment made in PSUs, external grants etc. It is a good source of income without having any adverse effect on the people or economy. However, the earning source of such income is limited to the government and not adequate to meet the huge expenditure bill for country like India.
Capital receipt
It has two sub category – Non-debt receipts and Debt receipts
Non-debt receipt
Non-debt receipts refer to recoveries of earlier loan & advances, disinvestment, miscellaneous capital receipt etc. It essentially reduces assets of the government.
Debt receipt
The other source is debt receipts. The government can raise capital from market by way of debt or borrowing. The general sources for debt are Reserve Bank of India, state Provident Funds, overseas funding agencies etc. Debt receipts create liability for the government and increases expenditure towards interest servicing.
Among all the above sources of receipts, tax revenue is the most appropriate source for various governmental expenditures. It is therefore essential to have a balanced, effective taxation system with minimal tax avoidance and evasion. It may also be noted that 41% of shareable tax (i.e. excluding cess, surcharge, cost of collection, taxes from union territories) need to be distributed among the states.
Non-plan expenditure
It has two sub categories – Revenue expenditure and capital expenditure.
Revenue expenditure
The revenue expenditures are towards interest payment on loans/debt, defense, subsidies, grant to states & Union Territories (UT), pension, police, assistance to states for national calamity, postal deficit, and grant to foreign government. It could be interpreted from the nature of these expenditures that they are non productive and more of administrative in nature.
Apart from these, there are three more areas which take major share of government’s revenue expenditure. They are expenditures towards a) economic services like agriculture, industry, power, transport, communication, science & technology etc. b) social services like education, health, broadcasting etc. and c) other general services like external affairs, tax collection, administration etc.
All these three categories are meant for improving the living quality of the people and growth of the economy. They have positive impact in the society and in many cases they are either self sustaining or contribute revenue to the exchequer.
Capital expenditure
The capital expenditure includes expenses for procurement of defense items, loan to public sector enterprises, loan to state & UT, loan to foreign govt. etc. These expenditures increase assets of the Govt.
Plan expenditure
The plan expenditure refers to expenses carried out by the Central Govt. for development of the States as decided by Niti Ayog. It too has two parts – revenue expenditure and capital expenditure.
Revenue expenditure
The revenue expenditure under planned expenditure include expenses for administrative improvement as referred earlier under non-plan expenditure.
Capital expenditure
It refers to expenditure toward creation of capital/assets like roads, bridges, airports etc. in the intended state. It can be summed from above that the government should maximize its revenue through taxation and minimize both plan and non-plan revenue expenditure.
What is revenue deficit and fiscal deficit.
Having understood the components of Union Budget, it is now important to understand two other concepts which are frequently referred to – Revenue deficit and fiscal deficit.
| RECEIPTS | EXPENDITURE | ||
| A) | Revenue receipt | C) | Non-plan expenditure |
| 1) | Tax revenue | 1) | Revenue expenditure |
| 2) | Non-tax revenue | 2) | Capital expenditure |
| B) | Capital receipts | D) | Plan expenditure |
| 1) | Non-debt receipts | 1) | Revenue expenditure |
| 2) | Debt receipts | 2) | Capital expenditure |
| TOTAL RECEIPTS | TOTAL EXPENDITURE |
Revenue deficit
The revenue deficit means there is excess revenue expenditure (under both plan and non-plan) compared to total revenue receipt. If the expenditure is less than revenue receipt than it would be a revenue surplus. From the above illustration Revenue deficit is (A) < [(C)(1)+(D)(1)], whereas revenue surplus will be if (A) > [(C)(1)+(D)(1)].
It essentially means the amount of income through various tax collection is not enough to meet the expenditure which are of administration in nature and non-productive.
To bridge this deficit the government has to raise fund from different sources as short term loan or divert some fund from capital receipt. This is not healthy and it will hamper the governments plan for expenditure towards capital creation.
Fiscal deficit
The fiscal deficit can be anaylsed at gross or net level. The gross fiscal deficit means excess of total expenditure over revenue receipt & external grant. It means that total revenue of the government which are non-debt in nature is not sufficient to meet its total expenditure.
In other words, the government has to borrow money to meet these expenditures. It signifies that the government is over spending and operating beyond its means.
The net fiscal deficit is gross fiscal deficit minus lending (i.e loans to public enterprise, loan to state & UT, loan to foreign govt. Considering vastness of expenditure required and limitation in raising revenue, a fiscal deficit upto 4% of GDP is acceptable. Beyond this is a concern.
The Covid-19 has disrupted the economies across the world. India is no different. The government has attempted to restore the economy for the impact of pandemic through various measures in last two Union Budget. The same effort will be there in the Union Budget of 2023.
Let’s look forward how efficiently the government bring forth welfare to the public while addressing various constraints through the Union Budget of 2023.
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