Budget 2024 Primer – Where the Rupee comes from?

5 Jan 2024 , 02:34 AM

Budgets are much beyond the Finance Minister’s speech

When we talk of the Union Budget in India, the enduring image is that of the Finance Minister addressing the house for nearly 2 hours, while business heads and tax payers await the outcome in anticipation. The speech is actually a very small part of the entire budget making process. Remember, the budget is essentially a statement of anticipated receipts and expenditure for the upcoming financial year. The government needs to money for meeting its routine expenses like salaries, administrative expenses, and pensions as well as for capital spending in infrastructure and defence. All that needs money and the money comes from a number of sources; taxation being one of the major sources of revenues for the central government. The budget presents an outline of the capital and revenue spends as well as the projected revenue and capital receipts. The effort of the government is each year is to maximize revenues and ensure that these revenues are productively spent.

Understanding revenue and capital receipts

Before we understand where the rupee comes from, we need to understand the complete gamut of receipts of the central government. Broadly, the has revenue receipts and capital receipts. The revenue receipts are further broken up into tax revenues and non-tax revenues. The capital receipts, on the other hand, are broken up into debt receipts and non-debt receipts. Here is what these 4 heads of receipts comprise of.

• Tax revenue receipts include receipts from direct taxes like income tax, corporate taxes, and securities transaction tax (STT). Technically, there is also wealth tax and gift tax in special cases, but they are very small portion of the tax flow. Then there are indirect tax revenues which is dominated by Goods & Services Tax (GST), Customs duty on selected imports and excise duty on select products like petrol, diesel, and liquor.

   

• Non-tax revenue receipts are largely in the form of interest and dividends received by the government. The interest earned is on loans given to states, union territories, foreign governments and to PSU companies. This segment also includes the dividend received from PSU companies as well as the dividend receive each from the RBI in the form of capital transfer to the government.

   

• Let us now turn to the capital receipts part of the story. We first look at the non-debt capital receipts, which broadly includes disinvestment proceeds, strategic sale of companies, monetization of assets etc. This segment also includes any recovery from loans already given out in the previous years.

   

• Lastly, we come to the debt related capital receipts. These are the borrowings and is used to fill the budget deficit gap. This gap is also called the fiscal deficit and is made up by borrowing in the market. The government typically borrowers via dated securities for the long term and via treasury bills for the short term (up to 1 year).

Having seen the heads of receipts for the government of India, let us look at how these numbers look like as of the last Union Budget presented in February 2023.

Receipts – Actuals, Budget estimates and revised estimates

When you talk about where the rupee comes from, you must be familiar with three things. The budget presents the actual numbers of last financial year, budget estimates & revised estimates for the ongoing year and the budget estimates for the upcoming financial year. Let us first look at the revenue receipts in the table below.

REVENUE RECEIPTS	Actuals Numbers	Budget Estimates	Revised Estimates	Budget Estimates
1. Tax Revenue	FY21-22	FY22-23	Fy22-23	FY23-24
Gross Tax Revenue	27,09,315	27,57,820	30,43,067	33,60,858
a. Corporation Tax	7,12,037	7,20,000	8,35,000	9,22,675
b. Taxes on Income	6,96,243	7,00,000	8,15,000	9,00,575
c. Wealth Tax	12	..	..	..
d. Customs	1,99,728	2,13,000	2,10,000	2,33,100
e. Union Excise Duties	3,94,644	3,35,000	3,20,000	3,39,000
f. Service Tax	1,012	2,000	1,000	500
g. GST	6,98,115	7,80,000	8,54,000	9,56,600
-CGST	5,91,227	6,60,000	7,24,000	8,11,600
-IGST	2,119	..	..	..
-GST Compensation Cess	1,04,769	1,20,000	1,30,000	1,45,000
h. Taxes of Union Territories	7,524	7,820	8,067	8,408
Less – NCCD transferred to the NCCF/NDRF	6,130	6,400	8,000	8,780
Less – State’s share	8,98,393	8,16,649	9,48,406	10,21,448
Less- States’ Share Adjustment for prior years	…	…	32,607	…
Centre’s Net Tax Revenue	18,04,794	19,34,771	20,86,662	23,30,631
2. Non-Tax Revenue	3,65,113	2,69,651	2,61,751	3,01,650
Interest receipts	21,874	18,000	24,640	24,820
Dividends and Profits	1,60,646	1,13,949	83,953	91,000
External Grants	1,306	620	2,580	2,135
Other non-Tax Revenue	1,79,540	1,34,276	1,48,343	1,81,382
Receipts of Union Territories	1,745	2,807	2,236	2,313
Total- Revenue Receipts (1a + 2)	21,69,905	22,04,422	23,48,413	26,32,281

Data Source: Ministry of Finance (All figures are ₹ in crore)

The above table represents the actual budget numbers as presented in the February 2023 Union Budget for the financial year 2023-24. Out of the Rs33.61 trillion that the government collected by way of tax receipts, the central government has passed on Rs10.21 crore as the state share of tax revenues and only the balance has been retained with the centre. The budget receipts for FY23-24 from non-tax revenues is Rs3.02 trillion taking the total budgeted receipts for FY23-24 to Rs26.32 trillion. This is higher than the revised estimates of FY23 by 12.09% and it is higher than the actual receipts of FY22 by 21.31%. Let us now look at the capital receipts for the last few years.

3. CAPITAL RECEIPTS	Actuals Numbers	Budget Estimates	Revised Estimates	Budget Estimates
	FY21-22	FY22-23	FY22-23	FY23-24
A. Non-debt Receipts	39,375	79,291	83,500	84,000
(i) Recoveries of loans and advances@	24,737	14,291	23,500	23,000
(ii) Disinvestment Receipts	14,638	65,000	60,000	61,000
B. Debt Receipts*	15,81,978	16,60,444	17,58,560	17,98,604
Total Capital Receipts (A+B)	16,21,353	17,39,735	18,42,061	18,82,603
4. Draw-Down of Cash Balance	2,543	752	-3,241	-11,787
Total Receipts (1a+2+3)	37,91,258	39,44,157	41,90,474	45,14,884

Data Source: Ministry of Finance (All figures are ₹ in crore)

The above table represents the actual budget numbers of capital receipts as presented in the February 2023 Union budget. The non-debt receipts have been very small for FY24 at Rs84,00 crore; comprising of Rs61,000 crore of disinvestment receipts and Rs23,000 crore of loan recoveries. The chunk of the capital receipts is from borrowings to the tune of Rs18.82 trillion, which is also roughly the fiscal deficit of the government of India and is used to fill the gap since the revenue and capital expenses are substantially higher than the revenue and capital receipts during any fiscal year. That gap is met by borrowings. The borrowings are also shown as receipts so as to balance the budget and make the revenue and expenditure sides balanced.

Explaining the items of receipts of the central government

Having seen a practical example of how the capital receipts and the revenue receipts look like, let us turn to what various headers actually mean.

Here are some key components of tax revenues:

1. Income Tax is the tax that is levied on income earned by individuals, proprietorships, partnership firms etc. This includes companies, which goes under the next header of corporate taxes. Income heads include income from salary, pensions, interest, dividends, house rent, capital gains, other income, and speculative income. All these are taxed at their respective rates applicable.

    

2. Corporate tax is levied on joint stock companies; both private limited companies and public limited companies in India. In the year 2019, the Finance Minister had sharply cut the rates of corporate taxes and allowed them to make a shift to the lower tax regime and forego exemptions. 

    

3. Another important direct tax revenue source is the securities transaction tax (STT). This is levied on the stock exchange which is eventually passed on to the broker and subsequently to the trader in the market.

    

4. Goods and Services Tax  or GST is the most popular and largest source of indirect tax for the government. In July 2017, this tax was introduced to subsume a number of other taxes like excise duty, sales tax, VAT, state taxes, levies etc. 

    

5. Customs Duty is selectively levied on the international trade of goods and is charged at the point of the goods landing or taking off. Taxes can be levied on imports and exports.

    

6. Excise Duty is the levy that is imposed on the manufacture of goods. Since the introduction of GST in July 2017, excise duty is levied only on the manufacture of goods not covered by GST like petrol, diesel, liquor etc.

    

7. Wealth tax and gift tax do exist in parts but they are to small to make any material difference. 

Here are the non-tax revenues of the central government:

1. Interest Receipts is the income that the central government earns on the loans that the centre has made to States and Union Territories. It also includes interest on international loans as well as on loans to banks and PSU companies.

    

2. Dividends and Profits include the amount that the government receives when public sector enterprises declare dividend or when the Reserve Bank of India transfer part of its capital each year to the central government as dividend. The latter has been quite substantial in recent years.

    

3. In addition, the government also gets other sources of revenues like rendering of economic services, general services, etc. This is largely by way of user fees levied on various services provided by utilities.

Let us finally turn to the capital receipts:

1. Disinvestment revenues come from 3 sources. Firstly, it comes from the sale of minority stake in PSU companies. Secondly, it also comes from the strategic sale of a government company to a private party along with ownership and management control. Air India is a case in point and IDBI could be the next example. Lastly, the government also gets revenues from monetization of some of the key infrastructure assets like roads, highways, toll-ways, power infrastructure, telecom infrastructure etc. 

    

2. Another form of capital non-debt receipt is Loan Recovery. This refers to the recovery of loans that the union government normally provides to State governments and Union Territories. The interest is a revenue receipt while the recovery of the loan is a capital receipt.

When all this is completed, you are still left with a gap, which is called the Budget deficit or the fiscal deficit. That fiscal deficit has to be bridged with borrowings. This is the amount that the government borrows and hence needs to repay in future. It is also known as a debt receipt and the government borrows through treasury bills, dated securities as well as through innovative structures like green bonds.