Union Budget: What, When, Why & How

Budget is the buzzword on everyone’s mind today – from the farmer to the top-notch businessman. It would not be wrong to say that budget lies at the crux of the economy. To acknowledge the impact of budget in our lives, it is important that we understand and appreciate the various aspects of budget. A super hit Budget has its fair share of ingredients and a lot of hard work goes behind making it work.

Jasleen Kaur Batra takes you behind the scenes of the Union Budget with this lesson. Through this lesson you can get a glimpse of the past, fundamentals, process and implications of budget. Happy Learning!

by Budget 2013
1 year, 8 months ago
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The Union Budget of India, also called the general budget is an estimate of revenues and expenditures of the Government during any financial year. It is the most extensive account of the Government’s finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. The budget highlights the receipts and payments of Government which is kept under three accounts viz., Consolidated Fund, Contingency Fund & Public Account.

The Union Budget of India is referred to as the Annual Financial Statement in Article 112 of the Constitution of India and is the Annual Budget of the Republic of India.

Barring for election, it is presented each year on the last day of February by the Finance Minister of India in Parliament. The budget comes into effect after it is passed by the House the Budget. It is presented for the ensuing financial year replete with relevant statistics for the preceding years, the actual figures for the current year and planned estimates for the following year. The Budget is usually preceded by the tabling of the Railway Budget and the Economic Survey every year.


Each state government in India maintains its own budget, prepared by the state's minister of finance in consultation with appropriate officials of the central government. Primary control over state budget finances rests with the state legislature in the same manner as at the central government level. State finances are supervised by the central government, however, through the comptroller and the auditor general.

In India a separate railway budget is presented as it is one of the largest public sector enterprises and the Department of Posts and Telegraph have their own budgets, funds, and accounts. The railway has its own budgets, funds and accounts. However, their budget is subject to the same form of parliament and audit control.

We are hours away from the Union Budget - 2013. Budget touches the lives of each ...
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The history of budget has been very interesting since independence as it has tried to undertake all the tribulations and challenges that came its way. The budget has been a mirror of the political and social scenario that India faces. Over the years as the nation has progressed, the priorities have changed. To help climb the ladder from a developing to a developed nation, the budget has played a pivotal role in the development of the nation at large.

At the time of independence, when the first budget was present it covered aspects focusing to lay a strong base for heavy industries to set base to ensuring that the people and nation progress, to rebuild the economy of the country.

As India fought two big wars in the 60’s- the India and China war in 1962 and the India and Pakistan war in 1965 it took a huge toll on India. The defense expenditure increased along with the increase in expenditure towards the state run enterprise as it was considered as a tool of redesigning the social vision of the nation.

In a decade, primary focus shifted to better housing facilities and the breed of small enterprises in India & its growth along with focusing on price control. Inflation was rearing, resulting in part of the budget being directed towards fighting the impact of the high inflation. By mid 80’s the fiscal deficit rose sharply and so efforts were made in the budget to curtail it. However, to ensure that the development of the nation is not neglected upon, the budget did make a huge amount of spending to provide benefits for the poor and the underprivileged. 

Liberalization and globalization were concepts introduced in the 90’s, freeing up of license raj was one of the notable goals that the budget sought to achieve.

The past decade has witnessed many dramatic shifts in the union budget. Initially, the fiscal adjustments and increasing growth targets were at the top of the priority list in the budget which then shifted towards sustaining the high growth rate in the economy. This became a challenge as the world slipped into a big economic recession. Over the past few years, increasing efforts have been made by the budget
to bring down the tax rates and increase the compliances.

As we approach the financial D-day in India, let's take a sneak peek into ...
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  1. R K Shanmukham Shetty presented independent India's first economic budget.
  2. In 1950-51 budget, the then Finance Minister John Mathai announced the creation of the Planning Commission
  3. Budget papers began to be prepared in Hindi from 1955-56
  4. Jawahar Lal Nehru was the first Prime Minister to present the budget when he held the Finance portfolio in 1958-59
  5. The 1965-66 budget contained the first disclosure scheme for black money
  6. So far, Indira Gandhi was only woman Finance Minister. She was PM when Moraji resigned & she subsequently took over this responsibility as well
  7. The shortest ever Interim budget speech was only 800 words presented by HM Desai in 1977
  8. Since 1980, budget papers are printed in North Block and A week before the budget is presented, the employees of the press stay in the ministry and have no means of communicating with the outside world
  9. The exercises in zero-based budget began in 1987-88 (when Rajiv Gandhi presented budget)
  10. P. Chidambaram rewrote India`s Exim Policy in one non-stop eight-hour sitting in July 1991, when he became the Commerce Minister of 17 Budgets since 1991-92, on 10 occasions the stock markets fell in the one month following the Budget
  11. In an election year, Budget may be presented twice - first to secure vote on account for a few months and later in full
  12. Till date, Morarji Desai has had the longest tenure as Finance Minister, 8 years
  13. Jaswant Singh was Finance Minister for 13 days
  14. R Venkataraman was the only Finance Minister who later became the President of India
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The definition of a budget might mean different things to different groups. Taxpayers might view the budget from the perspective of a tax rate and express concerns over any increase in taxes. Analysts might look at a county budget from a historical perspective and develop charts to see trends in revenues and expenditures. However, the motive of creating a budget for the government remains the same.


Here are a few primary purposes of creating a budget enumerated as below:

  1. The budget provides a financial plan for the County Council and taxpayers that identifies the operating costs considered essential to the successful operation of the county for a given period.
  2. The budget cycle is year-round in nature because budget development and implementation occur throughout the year.
  3. The budget provides some statement of community goals. At a minimum, the allocation of resources among different functions reflects both the particular goals that the government hopes to attain and the relative priorities assigned to each goal.
  4. It reflects the elected official's philosophy of local government. By programming funds for certain activities, by reducing or omitting other functions, the policymaker indicates those services, which the government will (or will not) attempt to provide. 
  5. For the politically successful official, these activities are a statement and a synthesis of community goals and expectations.
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There is no set way to define types, though the following types of budgets are used commonly, however, these cannot be classified as the only types of budget used to make the Union Budget.

Balanced Budget: The receipts are equal to the current expenditure. This implies that taxes on income and expenditure etc are sufficient to meet payments for goods and services. However, balanced budget is not an ideal type of budget as argued by economist John Maynard Keynes.

Revenue Budget: This consists of revenue receipts of government (revenues from tax and other sources) and the expenditure met from these revenues. The other receipts primarily consist of interest and dividend on investments made by the government, fees, and other receipts for services rendered by the government.

Performance Budget: This is prepared by all the ministers who deal with development activities of the nation. Special in respect of certain major Central Sector Projects/ Programs are also provided in this report. It also includes the performance of each public sector.


Zero-Base Budget: This was adopted by India in 1986 as a technique for determining
expenditure budgets. The Ministry of Finance made it mandatory for all the administrative ministries to review their respective programs and activities in order to prepare expenditure budget estimates based on the principles of zero-base budgeting.

Capital Budget: Consists of capital receipts and capital payments. The capital receipts are loans raised by Government from public, called market loans, borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies, disinvestment receipts and recoveries of loans from State and Union Territory Governments and other parties. Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc and loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties.

Receipts Budget: Estimates of receipts included in the Annual Financial Statement are further analysed in the document “Receipts Budget”. The document provides details of tax and non-tax revenue receipts and capital receipts and explains the estimates. It also provides the arrears of tax revenues and non-tax revenues, as mandated under the Fiscal Responsibility and Budget Management Rules, 2004.

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The Budget is prepared on a schedule which is drawn by the Business Advisory Committee (BAC) of the Indian Parliament. Each Ministry involved receives a fixed schedule for discussion. This schedule includes pointers like inclusion and review of their spending as well as the revenue estimates. This is then included into one consolidated budget document which is then presented before the Indian Parliament.

A budget procedure refers to the process by which the government creates and approves the annual budget. In Parliament, the budget goes through five stages:

Four different organs of the Government are involved in budget making:

  • The Finance Ministry
  • The Administrative Ministries
  • The Planning Commission
  • The Comptroller & Auditor General
However, the overall responsibility for framing the Union budget lies in the hands of the Finance Ministry. The budget division in particular also holds the overall responsibility of preparing the budget with relevant inputs from all the ministries.

In case the complete budget is not presented to the Parliament on time, the constitution empowers the Lok Sabha to grant a Vote-on-Account (Article 116) so that the government can continue functioning with the requisite expenses for at least two months into the next financial year with time to get budget proposals tabled and approved.

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Along with Finance Minister’s speech, various other documents are also presented to the parliament. These are basically:

Annual Financial Statement (AFS)

The document as provided under Article 112 shows the estimated receipts and expenditure of the Government of India. This statement also distinguishes expenditure on revenue account from other expenditure. The estimates of receipts and expenditure included in the AFS are for the expenditure net of refunds and recoveries.

Demand of Grants (DG)

Article 113 of the Constitution mandates that the estimates of expenditure from the Consolidated Fund of India are submitted in the form of DG. The DG is presented to the Lok Sabha along with the AFS. Generally, one DG is presented in respect of each Ministry or Department. However, more than one Demand may be presented for a Ministry or Department depending on the nature of expenditure. Each Demand first gives the totals of voted and charged expenditure as also the revenue and capital expenditure included in the Demand separately, and also the grand total of the amount of expenditure for which the Demand is presented. This is followed by the estimates of expenditure under different major heads of account.

Appropriation Bill

Mandated by Article 112 of Constitution of India, no amount can be withdrawn from the Consolidated Fund without approval of Parliament. After the DG are voted by the Lok Sabha, Parliament’s approval to the withdrawal from the Consolidated Fund of the amounts so voted and of the amount required to meet the expenditure charged on the Consolidated Fund is sought through the Appropriation Bill. The purpose of the ‘Vote on Account’ is to keep the Government functioning, pending voting of final supply. The Vote on Account is obtained from Parliament through an Appropriation (Vote on Account) Bill.

Finance Bill

This bill is mandated by Article 113 of Constitution of India. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution. It is accompanied by a Memorandum explaining the provisions included in it. At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented in fulfillment of the requirement of Article 110 (1)(a) of the Constitution, detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget.

Memorandum explaining the provisions in Finance Bill

Mandated by Article 114(3) of Constitution of India, this bill is presented to facilitate
understanding of the taxation proposals contained in the Finance Bill, the provisions and their implications are explained in the document titled Memorandum Explaining the Provisions of the Finance Bill

Macro Economic Framework for the relevant financial Year

Mandated by Article 110(a) of Constitution of India the Macro-economic Framework Statement, presented to Parliament under Section 3(5) of the Fiscal Responsibility and Budget Management Act, 2003 and the rules made there under contains an assessment of the growth prospects of the economy with specific underlying assumptions. It contains assessment regarding the GDP growth rate, fiscal balance of the Central Government and the external sector balance of the economy.

Fiscal policy strategy statement for the financial year

As per provisions of Fiscal Responsibility and Budget Management Act 2003 this statement explains how the current policies are in conformity with sound fiscal management principles and gives the rationale for any major deviation in key fiscal measures. The Fiscal Policy Strategy Statement is presented to the Parliament under Section 3(4) of the Fiscal Responsibility and Budget Management Act, 2003

Medium term fiscal policy statement

As per provisions of Fiscal Responsibility and Budget Management Act 2003 the Medium-term Fiscal Policy Statement is presented to the Parliament under Section 3(2) of the Fiscal Responsibility and Budget Management Act, 2003. The Statement includes the underlying assumptions, an assessment of sustainability relating to balance between revenue receipts and revenue expenditure and the use of capital receipts including market borrowings for generation of productive assets.

Expenditure budget

As per provisions of Fiscal Responsibility and Budget Management Act 2003 this document deals with revenue and capital disbursements of various Ministries / Departments and gives the estimates in respect of each under Plan and Non-Plan. It also gives analysis of various types of expenditure and broad reasons for the variations in estimates.

Receipt Budget 

As per provisions of Fiscal Responsibility and Budget Management Act 2003, Receipts Budge provides details of tax and non-tax revenue receipts and capital receipts and explains the estimates. The document also provides the arrears of tax
revenues and non-tax revenues.

Budget at a glance

This document shows in brief, receipts and disbursements along with broad details of tax revenues and other receipts. It also exhibits broad break-up of expenditure - Plan and Non-Plan, allocation of Plan outlays by sectors as well as by Ministries / Departments and details of resources transferred by the Central Government to State and Union Territory Governments.

Highlights of budget

This document explains the key features of the Budget indicating the prominent achievements in various sectors of the economy. It also explains, in brief, the budget proposals for allocation of funds to be made in important areas. The summary of tax proposals is also reflected in the document.

Status of implementation of announcements made in Finance Minister’s Budget Speech of previous financial year - 

KEY TO BUDGET DOCUMENTS BUDGET 2012-2013 1. The Budget documents presented to Parliament comprise, besides ...
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Finance Minister, Pranab Mukherjee, presented the Union Budget in 2012. This was the 81st budget in India’s history. Individually, this was Mukherjee's seventh annual Budget, second-highest by any Finance Minister.

Mukherjee began his budget speech and said,

 We are reaching the end of a remarkable fiscal year. In a globalised world with its share of uncertainties and rapid changes, this year brought us some opportunities and many challenges as we moved ahead with steady steps on the chosen path of fiscal consolidation and high economic growth.” Adding to this he said, “Our growth in 2010-11 has been swift and broad-based. The economy is back to its pre-crisis growth trajectory. While agriculture has shown a rebound, industry is regaining its earlier momentum. Services sector continues its near double digit run. Fiscal consolidation has been impressive. This year has also seen significant progress in those critical institutional reforms that would set the pace for double-digit growth in the near future.
The budget was hence presented on these lines. Below are the key highlights of Union Budget 2012:

Overview of the economy

  1. Headline inflation was expected to moderate by July-August, 2012 and remain stable thereafter
  2. India’s GDP growth in 2012-13 was expected to be 7.6% +/- 0.25%
  3. Fiscal deficit for 2012-13 pegged at Rs 5,13,590 crore, which was 5.1 per cent of GDP

Subsidies

  1. Efforts to keep central subsidies under 2% of GDP in 2012-13. Subsidies related to administering the Food Security Act were to fully provided for.
  2. A mobile-based fertilizer management system (recommended by the task force headed by Nandan Nilekani) was designed to provide end-to-end information on movement of fertilisers and subsidies. Nation-wide roll out was to happen during 2012.
Tax Reforms
  1. Direct Tax Code (DTC) Bill was to be enacted after expeditious examination of the report of the Parliamentary Standing Committee.
  2. Model legislation drafting was undertaken for the Centre and State Goods Services Tax in concert with States is under progress. 
  3. GST network was to be set up as a National Information Utility and was to become operational by August 2012.

Disinvestment Policy

  1. For 2012-13, Rs 30,000 crore were to be raised through disinvestment.
  2. Foreign Direct Investment: Efforts were on to arrive at a broad-based consensus to allow FDI in multi-brand retail upto 2. 51%.

Direct Taxes

  1. Exemption limit for the general category of individual taxpayers proposed to be enhanced from Rs 1,80,000 to Rs 2,00,000.
  2. Upper limit of 20% tax slab proposed to be raised from Rs 8 lakh to Rs 10 lakh.
  3. Proposal to allow individual tax payers, a deduction of upto Rs 10,000 for interest from savings bank accounts.
  4. Senior citizens not having income from business proposed to be exempted from payment of advance tax.

Financial Sector

  1. Rajiv Gandhi Equity Saving Scheme was to allow for income tax deduction of 50% to new retail investors (whose annual income is below Rs 10 lakh), who invest upto Rs 50,000 directly in equities. The scheme will have a lock-in period of 3 years.

Legislative Reforms

  1. Rs 15,888 crore capital support was proposed to public sector banks and financial institutions. 
  2. Official amendment to The Pension Fund Regulatory and Development Authority Bill, 2011, The Banking Laws (Amendment) Bill, 2011 and The Insurance Law (Amendment) Bill, 2008 were to be moved in this Budget session.
Infrastructure and Industrial Development
  1. During 12th Five Year Plan period, investment in infrastructure was to go up to Rs 50 lakh crore, half of wasexpected from private sector.
  2. Tax free bonds of Rs 60,000 were crore to be allowed for financing infrastructure projects in 2012-13 which was Rs 30,000 crore in 2011-12.
  3. IIFCL put in place a structure for credit enhancement and take-out finance for easing access of credit to infrastructure projects.

Power and Coal

  1. Coal India advised to sign fuel supply agreements with power plants,having long-term power purchase agreements with DISCOMs and getting commissioned on or before March 31, 2015.
Indirect Taxes
  1. Standard rate of excise duty was to be raised from 10% to 12%, merit rate from 5% to 6% and the lower merit rate from 1% to 2% with few exemptions.
  2. Excise duty on large cars also proposed to be enhanced.
  3. Indirect taxes estimated were to result in net revenue gain of 45,940 crore.
Civil Aviation
  1. Tax concessions were proposed for parts of aircraft and testing equipment for third party maintenance, repair and overhaul of civilian aircraft.
  2. External Commercial Borrowing (ECB) was to be permitted for working capital requirement of airline industry for a period of one year, subject to a total ceiling of US $ 1 billion.
Housing Sector
  1. Various proposals to address the shortage of housing for low income groups in major cities and towns including allowing ECB for low cost housing projects and setting up of a credit guarantee trust fund were made.
Education
  1. To ensure better flow of credit to students, a Credit Guarantee Fund was proposed to be set up.
  2. For 2012-13, Rs 25,555 crore was provided for RTE-SSA representing an increase of 21.7 per cent over 2011-12.
Financial Inclusion
  1. Out of 73,000 identified habitations that were to be covered under Swabhimaan campaign by March, 2012, about 70,000 habitations have been covered. Rest were likely to be covered by March 31, 2012.
  2. Out of 82 Regional Rural Banks in India, 81 have successfully migrated to core banking solutions (CBS)
Mukherjee concluded the presentation of the budget and said, 
“As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities. With oneness of heart, let us all build an India, which in not too distant a future, will enter the comity of developed nations. 
With these words, I commend the Budget to the House.
Key Features of Budget 2012-2013http://indiabudget.nic.in
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Finance Minister of India, P. Chidambaram will be presenting the Union Budget for 2013-14. A lot of pre-budget discussion has aired around us as each sector has its own set of demands to ensure a health growth foe their sector. 

Looking at this, the key expectations from this year’s union budget could be enumerated as:

  1. Builders' Association of India (BAI) seek an increase exemption limit on interest of home loans to Rs 3 lakh from the present Rs 1.5 lakh.
  2. According to ASSOCHAM (The Association of Chamber of Commerce and Industry of India) to reduce fiscal deficit and economic inequalities, the government's emphasis should be on better tax administration, reduction in non-plan public expenditure and improvement in quality of governance.
  3. Industry body Indian Direct Selling Association (IDSA) has asked the government to look into various provisions including introduction of Good and Services Tax (GST) and lowering of various other taxes.
  4. The IT and IT-enabled service industries are expecting reduction in minimum alternate tax (MAT) to 5 percent in the budget 2013-14 for all IT companies operating in SEZs.
  5. Finance Minister is likely to modify the Rajiv Gandhi Equity Savings Scheme (RGESS) in the upcoming budget to make it more attractive for first time investors.
  6. Reintroduction of 5 per cent custom duty on crude oil is expected.
  7. Life insurers want the government to introduce separate tax deduction for investments in retirement savings outside the Rs 1 lakh deduction that is currently available under Section 80C of the Income Tax Act and a reduction in service tax rates after last year's 2 per cent increase.
  8. A 10 per cent increase in excise duty of cigarettes is expected.
  9. The natural gas segment wants Finance Minister to realize that gas, whether locally produced or imported, can be a viable substitute for crude oil and key to accelerating India's growth rate. They are hoping for tax breaks in the coming budget, and in particular, parity in tax rates with crude oil. With a transition to goods and services tax (GST) in the offing, these players - which include the oil marketing companies - want gas to be in the list of products covered by GST.
  10. The health care sector wishes that the budget for the health sector should be increased to 2.5 percent of GDP.
  11. Lower dividend distribution tax from foreign subsidiaries is expected.
  12. Bankers demanded that lock-in period for tax saving deposits be brought down to three years from five years to channelize more funds into the banking sector.
  13. Observing that India's life science industry is poised for spectacular growth and international participation, Corporate America has sought major reforms in the country's health sector including foreign direct investment and global collaboration in life sciences.
  14. Increase in import duty on gold and other precious metals is expected.
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Sections
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1. Union Budget: What is it?
2. Tracing the history of budget in India
3. History Trivia
4. Understanding the idea behind creating a Budget
5. Types of Budget in India
6. Making of Budget
7. Documents presented with the Union Budget
8. Key highlights of budget 2012-13
9. Expectation from 2013-14 Budget
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