Budget Forming in India:
What is Budget?
- The word ‘budget’ has been borrowed from the English word "Bowgette" which traces its origin from the French word “Bougette”.
- Word “Bougette” has arrived from the word, ‘Bouge’ which means a leather bag.
- A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.
- Budgets can be made for a person, a family, a group of people, a business, a government, a country, a multinational organization or just about anything else that makes and spends money.
- At companies and organizations, a budget is an internal tool used by management and is often not required for reporting by external parties.
Characteristics of Budget
- It is an estimate of the economic activities of an entity which related to a specified future period.
- It must be written and approved by the appropriate authority.
- It should be modified or corrected, whenever; there is a change in circumstances.
- It plays the role of a business barometer that helps in measuring the performance of the business by comparing actual and budgeted results.
- It is prepared on the basis of past experiences and trends in the business.
- It is a business practice, which is used to forecast the operating activities and financial position of the business.
- Budget is used to fix targets in monetary terms and control the deviations if any. Further, it can also be used as a basis to measure the performance of the organization.
Budget in India:
- India’s first budget was presented on April 7, 1860, by the then Minister of Finance James Wilson, when India is under British Rule.
- The first Union Budget of Independent India was presented by the first Finance Minister of Independent India, Sir R. K. Shanmukham Chetty, on November 26, 1947.
- It was the first Union Budget wherein it was decided that both India and Pakistan would share the same currency till September 1948.
- Sir Chetty resigned as the Finance Minister of India, and the responsibility ultimately was passed on to John Mathai, who presented the subsequent Union Budgets of 1949-50 and 1950-51.
- The budget of 1949-50 was the first instance of a budget being prepared for a United India, including all princely states.
- According to Article 112 of the Indian Constitution, the Union Budget of a year, also referred to as the annual financial statement, is a statement of the estimated receipts and expenditure of the government for that particular year.
- Union Budget keeps the account of the government's finances for the fiscal year that runs from 1st April to 31st March.
- Union Budget is classified into Revenue Budget and Capital Budget.
- Revenue budget includes the government's revenue receipts and expenditure.
- There are two kinds of revenue receipts - tax and non-tax revenue.
- Revenue expenditure is the expenditure incurred on day to day functioning of the government and on various services offered to citizens.
- If revenue expenditure exceeds revenue receipts, the government incurs a revenue deficit.
- Capital Budget includes capital receipts and payments of the government. Loans from public, foreign governments and RBI form a major part of the government's capital receipts.
- Capital expenditure is the expenditure on development of machinery, equipment, building, health facilities, education etc.
- Fiscal deficit is incurred when the government's total expenditure exceeds its total revenue.
- The budget takes into account the estimated capital receipts and expenditure of the business for a specified period.
- The budget that covers all the revenue receipts and expenses of a particular financial year is a revenue budget.
Vote on account:
- The Vote on Account is the special provision given to the government to obtain the vote of Parliament to withdraw money when the budget for the new financial year is not released or the elections are underway, and the caretaker government is in place.
- According to the Article 266 of the Constitution, it is mandatory for the government to seek approval from the parliament before raising any funds from the consolidated funds of India.
- The preparation of estimates of expenditure and receipts for the ensuing financial year;
- Approval of the proposed Budget by the Legislature through the enactment of Finance Bill and Appropriation Bill;
- Enforcement of the provisions in the Finance Act and Appropriation Act by the government—collection of receipts and making disbursements for various services as approved by the Legislature; and
Legislative review of budget implementation:
- Audits of government’s financial operations on behalf of the Legislature.
Process starts August-September:
- In the Union government; there is a budget division in the department of economic affairs under the Ministry of Finance.
- This division starts the process of formulation of the next financial year’s Union budget in the months of August–September every year.
- To start the process, the budget division issues an annual budget circular around the last week of August or the first fortnight of September every year.
- This annual budget circular contains detailed instructions for the Union government ministries/departments relating to the form and content of the statement of budget estimates to be prepared by them.
Estimates, revised estimates and actual:
- The ministries are required to provide three different kinds of figures relating to their expenditures and receipts during this process of budget preparation.
- These are: budget estimates, revised estimates and actuals.
Call to reduce deficit:
- In the past few years, the finance ministry has been vociferously arguing for reduction of fiscal deficit and revenue deficit of the Union government, citing the targets set by the Fiscal Responsibility and Budget Management Act and its rules.
- Hence, presently, the aspirations of the Planning Commission and Union government ministries with regard to spending face the legal hurdle of this Act, which has made it mandatory for the Union government to show the revenue deficit as nil and the fiscal deficit as less than 3 per cent of GDP.
- This means new borrowing of the government in a financial year cannot exceed 3 per cent of the country’s GDP for that year.
- During the final stage of budget preparation, the revenue-earning ministries of the Union government provide the estimates for their revenue receipts in the current fiscal year (revised estimates) and next fiscal year (budget estimates) to the finance ministry.
- Subsequently, usually in the month of January, more attention is paid to finalisation of the estimated receipts.
- With an idea about the total requirement of resources to meet expenditures in the next fiscal year, the finance ministry focuses on the revenue receipts for the next fiscal.
- In the final stage of budget preparation, the finance minister examines the budget proposals prepared by the ministry and makes changes in them, if required.
- The finance minister consults the prime minister, and also briefs the Union Cabinet, about the budget at this stage. If there is any conflict between any ministry and the finance ministry with regard to the budget, the matter is supposed to be resolved by the Cabinet.
- In the final stage, the budget division in the finance ministry consolidates all figures to be presented in the budget and prepares the final budget documents.
- The National Informatics Centre (NIC) helps the budget division in the process of consolidation of the budget data, which has been fully computerised.
- At the end of this process, the finance minister takes the permission of the president of India for presenting the Union budget to Parliament.
- According to the Indian Constitution, the Union budget is to be presented in the Lok Sabha on such a day as the president may direct.
- By convention, Union budget has been presented in Lok Sabha by the finance minister on the last working day of the month of February every year.
- The finance minister, by convention, makes a speech while introducing the budget.
- The annual financial statement is laid on the table of Rajya Sabha only after the finance minister concludes his budget speech in Lok Sabha.
- The budget documents are made available to the members of Parliament after the finance bill has been introduced in Lok Sabha, and the House has been adjourned for the day.
- The Union Budget documents are treated with utmost secrecy, because any leak in official figures can have catastrophic effects. These documents are treated with so much secrecy that even the Finance Minister is not authorized to keep the Blue Sheet.
- The Union Budget is prepared on the basis of data and key numbers in the Blue Sheet. Only the Joint Secretary (Budget) is allowed to keep this important sheet.
- Until 1950, all important budget papers were printed inside the Rashtrapati Bhavan premises. However, an imminent data leak left the government with no option but to shift the process to a government-operated press in Minto Road till 1980.
- Post 1980, the printing of budget papers is done in a basement in the North Block, where the Finance Ministry is located.
- The Halwa Ceremony is a famous ritual, which marks the start of the printing of the budget documents.
- Understandably, officials who are directly in contact with the budget papers and data are locked down in the basement of the North Block.
- The Halwa ceremony marks the lockdown of the Finance Ministry. In this premise, even the Finance Minister is not allowed to carry a mobile phone.
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