What is Union Budget of India?

The Union Budget of India contains a list of financial proposals and estimates and is generally referred to as the ‘Annual Financial Statement’ under Article 112 of the Constitution of India. As the name states, the country’s budget is prepared for a respective financial year which involves estimates of earnings from revenues and expenditures of the government. The Budget is seen as the financial roadmap and is a lengthy process as it requires months of gatherings from central and state ministries, authorities and departments. The performance of last year’s budget is taken into account while preparing for budgeted estimates and guidelines of the coming year.

Since Independence in 1947, the Indian government has presented a total of 73 annual budgets, 14 interim budgets and 4 special budgets.

An interim budget or a ‘vote of account’ announced generally during an election year. The interim budget comprises a complete set of accounts including both revenue and expenditure. However, after the success of an election, the winning government announces the full budget later on and changes are possible in the final document than those presented in the interim budget. The interim budget is the estimates of accounts for the next two to four months.

Who prepares the Budget?

Every year, the responsibility of mapping a fundamental budget for the country is carried out by a Budget division in the Department of Economic Affairs in the Ministry of Finance, however, the process is not done alone and many government ministries are involved in it.

Their task is to prepare detailed financial estimates of the government’s spending and expenses in the coming year. Revised estimates of the previous financial year are also taken into account to project considerable data.

The departments that are involved in the making of Union Budget are – Union Ministries; Financial Ministry departments like Department of Economic Affairs, Department of Expenditure, Department of Revenue, Department of Investment and Public Asset Management (DIPAM) and Department of Financial Services; other Government Departments; Autonomous bodies; States and Union Territories, Tax Department; and other forces.

These departments are in an extensive consultation to prepare the final budget.

Preparation of the Union Budget:

Until 2016, the Union Budget was presented on the last day of February, however, that has changed and the Finance Minister of Parliament now announces the final Budget statement on the first of February. Furthermore, the Railway Budget which was presented separately a day before the final Budget was merged with the Union Budget after 2016.

The process of preparing the Budget begins six months prior to the D-day of the outcome announcement, starting somewhere between August – September every year. Once the data and estimates are gathered and provided by the ground-level officials, it is sent to the top officials of the respective departments for scrutiny. Necessary revisions are made in the Budget before the final approval. The Budget document is then sent to the concerned ministries and once again they are inspected and modified if required. The final draft after approval is sent to the Finance Ministry officials.

The next step is important. The Finance Ministry surveys the draft and corresponds the estimates with the current economic state and available resources to ensure viability.

The ministry scrutinizes initial estimates of plan and non-plan expenditures; and assesses expected revenues which involves capital and current receipts. The estimates of revenue and expenditures are matched together to understand the estimated shortfalls in the receipts for meeting a projected expenditure. This leads to the decision of the optimum level of borrowings and further chalking down a fiscal deficit target for the respective year.

After finalizing the fiscal deficit target for the respective financial year, the overall Budget then takes into account any other shortfalls. Also, the Budget involves revision in tax rates if necessary, incentive structures and various other measures to boost different sectors.

The overall Budget document is presented before both the houses of the Parliament giving details of the financial accounts of the central government for the forthcoming fiscal year along with an overview of the current financial year.

The Budget’s printing process begins approximately one week before presenting it to the Parliament. The process begins with a ‘Halwa ceremony’ which signifies the country’s tradition of beginning something important by having sweet. The documents stay isolated in the North Block office in the capital, Delhi.

The Budget is presented by means of the Financial Bill and has to be passed by Lok Sabha before it can take effect from the starting day of the respective financial year – April 1.

The Finance Ministries carried the Budget in a leather briefcase till 2018. However, the tradition was changed by the current Finance Minister Nirmala Sitharaman who carried the Budget in a ‘Bahi-Khata’ which is a ledger wrapped in red cloth, on July 05, 2019.

However, the ‘Bahi-Khata’ process is also removed after the Finance Minister presented the Union Budget in a paperless manner for the first time on February 01, 2021, due to the Coronavirus pandemic. This was also done to strengthen Prime Minister Narendra Modi’s vision of ‘Digital India’.

How does the Budget impact stock markets?

The Union Budget of India plays a major role in the country’s economy, the interest rates and the stock markets. In general terms, the stock market performance does reflect the conditions of the economy. Further, there is a long-term relationship between stock prices and interest rates. The estimated funds that the Finance Minister announces to invest and spend, impact the country’s fiscal deficit. This sways the money supply, economy and interest rates in India.

Generally, if the interest rates are high, this leads to a rise in capital cost of the industry which weighs down on the profitability and hence a decrease in the stock prices. The situation is vice versa when the interest rates are low.

As per a study, the long-term interest rates are said to be negative for stock markets, while short-term interest rates impact stocks positively.

Long-term interest rates have a maturity period of 10 years in the government’s bonds. The rates are formulated taking into consideration the price charged by the lender, risk from the borrower and contraction in capital value. A lower long-term interest rate motivates further investments, while on the other hand, higher rates discourage it. These investments are vital for economic growth. Higher bond yields further lead to discomfort in stock markets.

During the preparation of the Union Budget, the Finance Minister will scrutinize the estimates of revenue and expenditure. Then, the government decides on the optimum level of borrowings to meet the deficit target, in consultation with the chief economic advisors. These are called external borrowings of the government and consist of bilateral and multilateral assistance. Notably, a part of the revenue gap is left unfilled to be met through the issue of ad hoc treasury bills.

The external borrowings depend upon the fiscal deficit target that the government seeks to achieve for itself in the forthcoming financial year.

The fiscal measures announced in the Union Budget gives an outline of the expenditure of the common man.

Take, for example, if there is an increase in the direct taxes, on a contrary, this will lead to a decrease in the disposable income which will further pull back the demand for various goods. With the decrease in demand, there would also be a drop in production which will impact the economic growth. On similar lines, if there is a spike in indirect taxes there would also be a decrease in demand because the rates are passed on to the consumers as higher prices. With the rise in prices and reduction in demand, the company's profit margins also contract and further affects the stock prices.

For stock markets, investors expect a change in the tax structures. They most likely expect the government’s decision on long-term capital gains tax, short-term capital gain tax and security tax transaction among others.

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