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Budget

Introduction –

• It is a statement of estimated receipts and expenditure of the government of India for the following financial year – 1st April to 31st March

The word ‘Budget’ is derived from the French word ‘bougette’ meaning a little bag to carry money or a small purse. This probably may be due to the fact that the entire wealth of one person could be carried in the little bag – a briefcase, these days!

So what is the Budget?

A budget is an annual statement of estimated revenue and expenditure in upcoming fiscal year. (Psst… Fiscal year lasts from April 1^st to March 31^st.)

Financial Year/Terms –

• Starts from 1st April and Ends Up on 31st March

Union Budget –

A. Revenue Account –

1. Revenue Receipt – i. Tax Receipt – What government gets from direct and indirect tax .
ii. Non Tax Receipt – What government gets from interests , fees , fines royalty dividends of PSUs , grants .

2. Revenue Expenditure – i. Development Expenses – On repairs of existing assets
ii. Non Development Expenses – On law and order defence , salaries subsidies .

B. Capital Account – 

i. Capital Receipts – Loan and borrowings , proceed from disinvestment sale of government assets , recovery of loans .
ii. Capital Expenditure – Repayment of loans , loans given to state government & UTs , expense on creation of Infrastructure

• Total Receipt = Revenue Receipts + Capital Receipts
• Total Expense = Revenue Expense + Capital Expense

Some Important Types of Budget –

1. Zero Based Budgeting – Here a department / Ministry prepares its budget every year on the assumption that they was no budget in the past . Hence each item in the budget is allocated on the merits rather than with reference to the allocation made in the previous years . The concept was advocated by Peter Fieri and was put in Practice by Jimmy Carter of USA

2. Outcome Budgeting – 

TRIVIA: It is Article 112 of the Indian Constitution that lays down the meaning of the Union Budget of India.

The budget has several objectives such as:

1. Reducing inequalities of income and wealth
   In Simple Terms: Making sure that there isn’t extreme poverty in the country and that the rich don’t get extra benefits because they are rich. The gap between the rich and the poor is reduced through taxation of the rich and subsidies to the poor.

2. Reallocation of resources between government and private sector
   In Simple Terms: The government is responsible for proper and managed distribution of resources. The private sector cannot cater to all the needs of the people of the country. So the government must decide where and how much to divide its collected funds. How much goes to the public sector, how much to the development of private sector?

3. Attaining economic stability
   In Simple Terms: Making sure India is economically independent and is protected from the shocks of international and domestic economic problems. The government must protect the economy from the risks of inflation and depression. During depression, the government reduces rates of taxation and borrowing, while increasing public expenditure. During inflation, the government increases the rate of tax and borrowing while reducing public expenditure.

4. Managing public enterprises
   In Simple Terms: Allocating funds to public arms of the government and public sectors companies to make sure they function properly and provide the goods/services that they were created for.

5. Achieving economic growth
   In Simple Terms: Making the country’s economy grows, both overall and in each state and region. Also to make India stand out in the global economy to achieve better standard of living for the citizens of the country.

Basic Budget Concepts for Beginners

There are three important concepts in relation to Budget

1. Receipts
2. Expenditures
3. Deficits

Receipts

Receipts refer to revenues collected by the government through various means. There are two kinds of Receipts:

1. Revenue Receipts
2. Capital Receipts

Capital Receipts are those receipts which create a liability or cause reduction in government assets.

Let us now explore various sources of Capital Receipts:

1. Recovery of Loans
   This reduces assets of government and hence must be classified as Capital Receipt. It should be remembered that a loan given is an asset in the book of accounts. And recovery of loans reduces this asset class. 

2. Borrowings
   Funds raised by government from borrowing are treated as capital receipts as these create liability for government. Amount borrowed is a liability since one has to repay the borrowing.

3. Disinvestment Receipts
   Funds raised by disinvestment are also capital receipts as these reduce assets of government. Disinvestment of public sector enterprise clearly reduces government ownership of these enterprises and thus reduces assets of government.

Revenue Receipts are those receipts (revenues) of government which do not create a liability or cause reduction in government assets. Examples of Revenue receipts are:

1. Tax Revenues
   Taxes are compulsory payments imposed by government on people. There are two kinds of taxes – direct tax and indirect tax.

1. 1. Direct Tax is when the burden of tax and liability of tax falls on the same person. Examples of direct taxes are Income Tax, Corporation Tax, Wealth Tax and Gift Tax. You pay these personally.
   2. In case the tax burden can be passed on to another person that kind of tax is called Indirect Tax – for instance – excise duty, custom duty, service tax, sales tax. These kinds of taxes are passed on by a person/organisation to another person/organisation i.e. you pay these taxes but recover them from the actual consumer.

2. Non-Tax Revenue
   These refer to those kinds of revenues other than taxes. Examples include: Profits and Dividends of Public Enterprises, Interest over loans granted, External Aid Received, Fees and Fines, etc.

Expenditures

Budget expenditure refers to estimated expenditures incurred by the government under different heads in a year. Just as there is classification in Receipts as revenue receipts and capital receipts, similarly budget expenditures are also classified as:

1. Capital Expenditures
2. Revenue Expenditures

Let us look at both of these types of expenditures one by one.

1. Capital Expenditure refers to those expenditures which result in creation of asset or reduction in liability. Examples of Capital Expenditure include expenses on creation of roads, bridges, buildings etc. Clearly a road, a bridge or a building is an asset.

2. Revenue Expenditures do not create assets and do not reduce liability. Examples include salaries, interest payments, pensions, subsidies etc. Capital expenditures can also be understood as developmental and revenue expenditures as non developmental.

NOTE: A capital expenditure can be distinguished from a revenue expenditure in that capital expenditures are a one-time expenditure, whereas revenue expenditures are recurring expenditures.

Deficits

Finally let us try to understand various kinds of deficits. A budget is said to be balanced when receipts equal expenditures.

Balanced Budget: Receipts = Expenditures

A budget is said to be in surplus when receipts are in excess of expenditures.

Surplus Budget: Receipts > Expenditures

A budget is said to be in deficit when receipts are short of expenditures.

Deficit Budget: Receipts < Expenditures

There are various kinds of deficits.

Revenue Deficit refers to excess of revenue expenditures over revenue receipts.

Revenue Deficit = Revenue Expenditures – Revenue Receipts

Capital Deficit on other hand refers to excess of capital expenditures over capital receipts

Capital Deficit = Capital Expenditures – Capital Receipts

Fiscal Deficit refers to excess of total expenditures over total receipt, excluding borrowings.

Fiscal Deficit = (Total Expenditures) – (Total Receipt – Borrowings)

Finally Primary Deficit means Fiscal deficit reduced by interest payments.

Primary Deficit = Fiscal Deficit – Interest Payments

Following are the highlights of his speech on various issues:

Demonetisation