Budget Gyan: What is Union Budget and its components

30 Jan 2023 , 04:36 PM

The eminent jurist Nani Palkhivala used to conduct the post budget discussion for many years and it was almost like a pilgrimage for serious students of macroeconomic finances. He was one of the first ones to correctly mention that “India was the only country where the Union Budget was an event”. That is the way it continues to this day. Union Budget in India is constitutionally mandated under Article 112 of the Indian Constitution. 

In the years since Independence in 1947, there have been a total of 73 full budgets, a total of 14 interim budgets and 4 mini-budgets. The Union Budget is divided into the Revenue Budget and the Capital Budget.

Understanding the Revenue Budget

The Union Budget in India is not just a statement of the previous year’s actual revenues and outflows, but also provides an estimate of the coming fiscal year. Broadly, the Union Budget is divided into the Revenue Budget and Capital Budget. Revenue receipts and revenue expenditure are routine flows, by default. Revenue receipts are principally direct and indirect taxes while revenue expenditures constitute salaries, pensions, interest, defence maintenance expenditure, among others. When the revenue expenditure exceeds the revenue receipts, it is called a revenue deficit. More colloquially, the revenue deficit is loosely referred to as borrowing for your morning breakfast.

While direct taxes (like income tax, corporate tax, STT) are the main component of revenue receipts, it also includes other receipts like fees earned, royalty earned, interest and dividend on investments, dividend from the RBI etc. Revenue expenditure are in the nature of interest, salaries, pensions, subsidies, grants and dividends paid out on in-bound investments. The revenue receipts and the revenue expenditure combine to form the Revenue Budget.

Understanding the Capital Budget

The capital budget is the combination of the Capital Receipts and Capital Expenditure. What do these actually constitute. Capital receipts or inflows include funds raised from the public, loans from RBI or sovereign bonds, sale of treasury bills, disinvestment receipt and recoveries of loans from the states and other parties. On the other hand, the capital expenditure comprises of asset creation outlays like acquisition of building, machinery, investment in shares or other instruments, granting loans to the state or UTs etc. 

Normally, the borrowings that we see here is the residual portion of the Union Budget. The way the borrowings are calculated is to add up the estimated revenue receipts and capital receipts (other than borrowings) on one side and then put all the revenue and capital spending on the other side. In India, the expenditure side has always exceeded the revenue side, which is called the budget deficit or the fiscal deficit. This fiscal deficit has to be funded through borrowings. Such borrowings can be raised through government securities, sovereign bonds, sovereign green bonds etc.

What is the Annual Financial Statement (AFS)

The Annual Financial Statement represents the actual expenditure and the budget estimates juxtaposed with each other to give a clearer picture. If we are talking about the proposed budget to be presented for FY23-24 by the finance minister on 01st February 2023, then the key components of the AFS would be:

1. Actual expenditure of the previous year i.e. for financial year FY22
2. Estimates of the current financial year i.e. financial year FY23
3. Budget estimates of the coming financial year i.e. for financial year FY24

The estimates for the current fiscal year that FY22-23 is broken up into 3 parts.

• The Consolidated Fund of India (CFI) is the summation of all the revenues received by the government as well as amounts raised by loans or via recovery of loans. Government expenditure is done from the CFI and withdrawals are subject to authorisation by Parliament. 

   

• The Contingency Fund of India is purely meant to handle unforeseen expenditure due to exigencies under Article 267 of the Indian constitution. Withdrawals from the fund required presidential assent followed by parliament approval. Withdrawals from the Contingency Fund have to be replenished from the Consolidated Fund of India.

   

• Public Account refers to monies allocated for specified purposes like PFs, primary health, primary education etc. Any expenditure from the Public Account also needs parliament approval. 

Budget Presentation Schedule

Normally, the Budget session of parliament starts a couple of days prior to the Union Budget presentation. A day prior to the budget presentation the Economic Survey is presented giving an overview of the previous year and critical areas of interest as well as projections for the coming fiscal year. Till 1998, the Union Budget was presented on the last working day of February at 5 PM in the evening, a relic of the British era. Effective the 1999 Union Budget, the presentation happens at 11.00 am. From the year 2017 two more changes were made. Firstly, the date of the Union Budget presentation was pulled back from 28ths February to 01sts February each year. Also, effective the year 2017, the railway budget was merged into the Union Budget and the practice of separate railway budget was done away with. 

Union Budget and the impact on the economy?

There are several stakeholders for the Union Budget. It impacts the overall economy, specific industries, companies, individual tax liability, family budgets, banks etc. What the industry typically looks for in the Budget is how the government will enhance revenues, how it curtails spending and how the fiscal deficit is funded. Most of the industry leaders and markets also are keen to see if the revenue spending predominates or the capital spending predominates; since the latter is more value accretive to business. In the past, the indirect tax section used to be huge, but with GST decisions being shifted to the monthly GST Council meet. 

Are the tax changes announced in the budget effective immediately

The date of implementation would depend on whether it is a direct tax or an indirect tax. The treatment is different for both. For instance, in case of direct taxes pertaining to income taxes and corporate tax, the tax changes will be applicable effective from the financial year immediately following the Union Budget announcement. So, any income tax or corporate tax change announced on 01st February 2023, would be applicable from the financial year (previous year) extending from April 01st 2023 to March 31st 2024. However, any indirect tax change proposals are effective with immediate effect from the day after the budget presentation.

Halwa ceremony and what it signifies

That is just an age-old practice that has come down over the years. The “halwa’ event is a pre-budget custom that flags off the printing of budget-related documents. Over the next 10 days after the halwa ceremony, key budget related officials are kept under round-the-clock surveillance. They literally camp at North Block till the Budget presentation. Any information leak can lead to volatility in the markets and finance minister would be held accountable. That is why utmost secrecy has to be maintained.