23 January 2023

Explain Speaking: The nuts and bolts of a Union Budget

GS-3: Government Budgeting.

On February 1^st, the union Finance Minister will unveil the Union Budget for the 2023-24 financial year. As the upcoming general elections are scheduled for early 2024, this Budget is probably going to be the last one presented by this government.

An Annual Financial Statement

• The Union Budget, also known as the annual financial statement, is a document that lays out the Indian government's estimated revenues and expenditures for a given fiscal year, as outlined in Article 112 of the Indian Constitution. 
• The fiscal year for the Union Budget runs from April 1^st to March 31^st. 
• It is divided into two categories: Revenue Budget and Capital Budget. 

• Budget essentially provides three details –

1. Total Receipts:  The total amount of money that the government will raise in the coming year.
2. Total Expenditure: The total amount of money it will spend.
3. Fiscal Deficit: The total amount of money it will borrow from the market to plug the gap between what it spends and what it earns.

• A fiscal deficit happens when the overall government spending is greater than its total revenue.
• On the other hand, a revenue deficit occurs when the government's expenses surpass its income from revenue.

Forces that shape a Budget

• The budget is the compromise solution between the pulls and pressures of following demands.
• All demands can be placed in three different categories – 

Demand for lower rate of taxation and/or a higher rate of exemptions for reducing tax burdens.

• For example, Salaried taxpayers may be demanding that income tax exemption levels should be raisedin order to tackle high inflation rate. Because even if there is a significant improvement in income, its purchasing power remains same due to high inflation in the economy.

Demand for higher or newer subsidies

• For examples, a firm indulge in a cleaner fuel or green energy wants more subsidies to help India transition to a cleaner environment in the coming years. On the other side, sectors — such as travel and tourism — that have been most severely hit by the pandemic want some special help from the government.

   Demand by a very small but influential group for fiscal rectitude or prudence

• They demand that the government cuts down on its fiscal deficit, which is exact opposite of the demand by other two groups.

• Cutting down the deficit requires the government to maximise revenues and prune subsidies.

• The demand of first two groups arguments that in the absence of lower taxes or higher subsidies, such people/firms/sectors will struggle to grow, thus dragging down the overall growth of the economy.
• These demands are made not from the perspective of the Union Budget but from the demands of their individual budgets.

Scope of the Union Budget

• The Union Budget's growth is expected to drive the economy forward through increased government expenditure. 
• However, there are reasons to be cautious in these expectations.

• The Union Budget used to be the main driver of India's economy, but now states collectively spend more than the Union government. 

• This means the Union Budget's impact on the economy is decreasing, despite being the largest budget of the year.

• The Union government's expenditure of approximately Rs 40 lakh crore is not entirely new, with only 7% available for fresh allocation. The remaining 93% goes towards already committed expenses and existing schemes. 

• This means the Finance Minister has limited flexibility in allocating funds.

Preparation of a Union Budget: Key steps

• To plan its revenue and expenditure, the Union government needs to predict the economy's performance in the coming year. 
• This is crucial as revenues depend on the economy's size and growth rate. 
• To estimate this, the government must first determine the current year's economy size.

• It is important to note that the current fiscal year has not yet ended when the budget is presented.

Nominal GDP (or what will the size of the economy next year?)

• To begin the next year's Union Budget, the government must determine the current year's "nominal" GDP, which is the total value of all goods and services produced in India for that year. 
• This is used instead of "real" GDP, which adjusts for inflation. 
• This number is used to project the likely nominal GDP for the next fiscal year, which is stated in the "Budget at a Glance" document of the Union Budget.

    Fiscal Deficit (or how much money can the government borrow?)

• In India, like most developing economies, government spending exceeds revenue, requiring borrowing from the market. 
• However, India has set limits on government borrowing through the Fiscal Responsibility and Budget Management (FRBM) Act, limiting the fiscal deficit (total borrowings) to 3% of nominal GDP. 
• Once the government estimates the nominal GDP, it calculates the amount of money that can be borrowed. 
• Currently, the fiscal deficit exceeds 3% due to additional spending caused by the pandemic.

  Total Revenues (or how much money can the government raise on its own?)

• After determining the maximum borrowing amount, the government focuses on revenue. 
• The task is to estimate the amount of money that can be raised through various means including tax revenues, non-tax revenues, and proceeds from the disinvestment of public sector undertakings.

  Total Expenditure (or what is the maximum it can spend and where?)

• Having determined both the revenue and borrowing capacity, the government has a total budget for spending on various schemes. 
• The final step is to allocate this budget among different ministries and departments, which completes the budget-making process.

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