Budget Gyan: What is Union Budget and what are its components

14 Jan 2022 , 12:42 PM

The legendary George Bernard Shaw once said “Budget is an attempt to equate your earning capacity with your yearning capacity”. That is true of all budgets, be it household budgets, corporate budgets or Union Budgets presented by the Finance Minister each year.

The late Nani Palkhivala famously remarked that “India is the only country where the Union Budget is an event”. It is not just the industry leaders, CEOs and CFOs, but every analyst, traders and investor wants to understand and have her take on the budget. Have you ever wondered what this Union Budget is all about?

Look at Union Budget like India’s annual report

If you have attended an AGM or read the annual report of a company, you would know what this means. An annual report reviews the performance of the previous financial year and gives you guidance of the next year. The Union Budget does the same, but it does it for the Indian economy as a whole. In addition, to a review and preview, the Union Budget is also a broad policy statement and a platform for financial reforms.

When we refer to “year” in the context of Union Budget, we always mean the Financial Year extending from April 01st to March 31st. Before we get into what the Union Budget comprises of, here is an interesting sidelight. Till the 2017 Union Budget, it was presented on 28th February. However, since Budget 2017, it has been presented on 01st of February.

What are the major parts of the Union Budget

The Union Budget is presented each year by the finance minister and it is one of the most important events during the Annual Budget Session of Parliament.

a) The first part of the  Budget is the Annual Financial Statement (AFS). This section outlines the estimated receipts and expenditure of the government for the coming fiscal year. For example, the budget presented on 01-Feb 2022 will show estimated receipts and expenditure for financial year 2022-23. AFS breaks up the expenditure into revenue account and capital account.

b) When we talk of Budget, there are 3 important accounts. The first is the Consolidated Fund of India (CFI), comprising all inflows of the central government including revenue receipts, capital receipts, borrowings and recoveries. The second is the Contingency Fund of India which is always kept at the disposal of the President of India and is meant only for unforeseen emergencies. Lastly, the Public Account holds trust funds like PF collections, small savings etc.

c) The next critical segment to know about is the “Demand for Grants”. The Demand for Grants section covers all withdrawals from the Consolidated Fund of India. Individual items are presented to the Lower House and explained in detail. Generally, Demand for Grants is presented Ministry-wise to simplify allocations.

d) Before we go ahead, let us look at one section of the Budget that ever investor is interested in; Finance Bill. The Finance Bill contains key changes pertaining to direct and indirect taxes. This segment has major implications for investors, corporates and stock markets. The Union Budget provides a detailed memorandum for interpreting the various provisions of the Finance Bill; also called the fine print.

e) The next important section is the FRBM section. Under the Fiscal Responsibility and Budget Management (FRBM) Act, the finance minister has to clearly lay out fiscal deficit targets for next year, review progress of fiscal deficit target in the current year and inform the house of any discrepancy with appropriate justifications.

f) Then the Expenditure Budget outlines allocations for various schemes and programs on a net basis. The expenditure budget further breaks up outflows into revenue expenditure and capital expenditure to give a clearer picture.

g) The Receipts Budget estimates inflows from direct tax, indirect tax, disinvestments etc with a game plan and justification. Here again, receipts are broken up into revenue and capital and also whether flows are equity or debt in nature.

h) Since Union Budget 2007, government started the practice of presenting an Outcome Budget ministry-wise. It is finally presented in a consolidated manner. The outcome budget evaluates the deliverables compared to the estimates and gives an idea of whether targets were achieved; with the financial implications.

When the Budget document starts, you find “Budget at a Glance”. That is your summary of the full budget, and the ideal place to start your budget reading.