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What is a Budget and Components

What is a Budget and Components

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Published by Abhishek Avate

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Published by: Abhishek Avate on Apr 14, 2012
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What is a Budget ?

Meaning and Concept

Government has several policies to implement in the overall task of performing its functions to meet the objectives of social & economic growth. For implementing these policies, it has to spend huge amount of funds on defence, administration, and development, welfare projects & various other relief operations. It is therefore necessary to find out all possible sources of getting funds so that sufficient revenue can be generated to meet the mounting expenditure. Planning process of assessing revenue & expenditure is termed as Budget. The term budget is derived from the French word "Budgette" which means a "leather bag" or a "wallet". It is a statement of the financial plan of the government. It shows the income & expenditure of the government during a financial year, which runs generally from 1stApril to 31st March. Budget is most important information document of the government. One part of the government's budget is similar to company's annual report. This part presents the overall picture of the financial performance of the government. The second part of the budget presents government's financial plans for the period upto its next budget. So, every citizen of a nation from the common man to the politician is eager to know about the budget as they would like to get an idea of the :Financial performance of the government over the past one year. To know about the financial programmes & policies of the government for the next one year. To know how their standard of living will be affected by the financial policies of the government in the next one year. Definitions of Budget

According to Tayler, "Budget is a financial plan of government for a definite period". According to Rene Stourm, "A budget is a document containing a preliminary approved plan of public revenues and expenditure".

Components of Government Budget The main components or parts of government budget are explained below. .

g. services tax. excise duties. are indirect taxes. etc. Income tax. Direct Taxes and Indirect Taxes. property tax. Every citizen. etc. Revenue receipts are further classified as tax revenue and non-tax revenue.. It also contains the items of expenditure met from such revenue. There is no direct benefit to the tax payer. Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person through their consumption expenditure. estate duty. Direct taxes are those taxes which have to be paid by the person on whom they are levied. These receipts do not create a liability or lead to a reduction in assets. Non-Tax Revenue :Apart from taxes. Here the burden can be shifted to some other person. Its burden can not be shifted to some one else. Custom duties.e. revenue collected by way of taxes & other receipts. by law is bound to pay them and non-payment is punishable. i. The non-tax sources of public revenue are as follows :- . Taxes are of two types. sales tax.g. (a) Revenue Receipts ↓ These are the incomes which are received by the government from all sources in its ordinary course of governance. viz. E.1. are direct taxes. Tax Revenue :Tax revenue consists of the income received from different taxes and other duties levied by the government. E. governments also receive revenue from other non-tax sources. ii. corporation tax. It is a major source of public revenue. Revenue Budget This financial statement includes the revenue receipts of the government i.

The profit generated by them is a source of revenue to the government. E. Air India. 5. India's Revenue Receipts :The tax revenue provides major share of revenue receipts to the central government of India. iii. Profits from public sector enterprises : Many enterprises are owned and managed by the government. The profits receives from them is an important source of non-tax revenue. In 2006-07 tax revenue (direct + indirect taxes) of central government was Rs. It includes both development and non-development expenditure of the Central government. usual and normal day to day running of government departments and provision of various services to citizens. the Indian Railways. donate during times of natural calamities. births. 3. For example in India. Fees : The government provides variety of services for which fees have to be paid. UNESCO. floods. etc.1. What is Revenue Expenditure ? Revenue expenditure is the expenditure incurred for the routine. 4. famines.205 crores while non-tax revenue was Rs. The Property owners in that locality will benefit due to the appreciation in the value of property. fees paid for registration of property. 2. etc. Special assessment duty : It is a type of levy imposed by the government on the people for getting some special benefit. . For example. 3.27. are owned by the Government of India. in a particular locality. Gifts and grants : Gifts and grants are received by the government when there are natural calamities like earthquake. deaths.260 crores. foreign governments and international organisations like the UNICEF. Therefore the government imposes a levy on them which is known as special assessment duties. (b) Revenue Expenditure ↓ i.g. Indian Airlines. Usually expenditures that do not result in the creations of assets are considered revenue expenditure. if roads are improved. 76. Oil and Natural Gas Commission. etc. property prices will rise. etc. Fines and penalties : Fines and penalties are imposed by the government for not following (violating) the rules and regulations. Citizens of the country.

Capital budget consists of capital receipts & Capital expenditure. 2. 4. education. health and social services. Expenditure on agricultural and industrial development. 7. Expenses included in Revenue Expenditure :In general revenue expenditure includes following :1. Payment of interest on loans taken in the previous year. 2. Items included in Capital Receipts :The main items of Capital receipts (income) are :- . (a) Capital Receipts ↓ i. recovery of loans and disposing of assets. 5. 51. Expenditure on subsidies. They are obtained by the government by raising funds through borrowings. Grants given to State governments even if some of them may be used for creation of assets.542 crores. iii. scientific research. Expenditure on exports and external affairs. Capital Budget This part of the budget includes receipts & expenditure on capital account projected for the next financial year. What are Capital Receipts ? Receipts which create a liability or result in a reduction in assets are called capital receipts. Expenditure by the government on consumption of goods and services.ii. Expenditure on defence and civil administration. India's Defence Expenditure :In 2006-07. Defence expenditure of the central government of India was Rs. ii. 3. 6.

expenditure on land. Loans and aids received from foreign countries and other international Organisations like International Monetary Fund (IMF). Conclusion On Budget Thus. etc. Recoveries of loans granted to state and union territory governments and other parties. Borrowings by government from RBI and other financial institutions through the sale of Treasury bills. . World Bank. 3. 5. irrigation projects. Thus. etc. machines. (b) Capital Expenditure ↓ i. 4. Loans raised by the government from the public through the sale of bonds and securities. What is Capital Expenditure ? :Any projected expenditure which is incurred for creating asset with a long life is capital expenditure. Provident fund.1. equipment. Receipts from small saving schemes like the National saving scheme. we see that the budget mirrors projected receipts and expenditures. 2. oil exploration and expenditure by way of investment in long term physical or financial assets are capital expenditure. They are called market loans.

The expansion in government activities during the planning period has resulted in a huge rise in the public expenditure.Rise in Government Expenditure ↓ Public expenditure is also referred as Government expenditure. . there was no planning in India and hence no effort was made on the part of the government to provide welfare services but the accelerating growth of government expenditure began in late seventies. and to service debts.Causes for the Growth of Public Expenditure In India ntroduction . It is incurred by the government to provide public goods & services. Growth of the Public Expenditure ↓ Before independence.

99. But in India as a sizeable proportion of population is living below the poverty line. The ratio of public expenditure to GDP has increased steadily from 9. The growth in population requires massive investment in health and education. law and social order. The ratio of Public Expenditure to national income in India is one of the highest in developing countries.2. A young population requires increasing expenditure on education & youth services. the population of India has increased from 36. 2.1% in 1950-51 to 28.3 in 2005-06.631 crores in 1960-61 to Rs. According to Economic Survey 2006-07 the defence expenditure of central . Many people fail to obtain even necessaries for human survival.563 crores in 2005-06. whereas the aging population requires transfer payments like old age pension.9. it has crossed over 102 crore in 2001. There has been tremendous increase in total public expenditure during the perioc 196061 to 2005-06. The total public expenditure increased from Rs. They hardly derive any benefit from the public expenditure.1 crore in 1950-51. Defence Expenditure There has been enormous increase in defence expenditure in India during planning period. Causes for Increase In Government Expenditure ↓ 1. social security & health facilities. Population Growth During the past 50 years of planning.The table shows the rapid rise in public expenditure over the years. etc.

interest to priority sector. The government has been borrowing heavily both from the domestic market and from foreign sources. Government Subsidies The Government of India has been providing subsidies on a number of items such as food. navy and airforce.10.51. the Government is not only expected to expand its traditional activities but it also undertakes new activities. 4.government was Rs. 5. . the public expenditure has increased. The defence expenditure has increase tremendously due to modernisation of defence equipment used by army. As a result of which. As a result of which the government Expenditure also increased because under the circumstances.44. etc.9581 crores which has increased significantly to Rs. Because of the massive amounts of subsidies.542 crores in 2006-07.792 crores in 2005-06. to meet its expenditure. Increase in National Income The increase in national income also resulted in more income to the government by way of tax revenue and other income. India cannot postpone modernisation in defence specially when its neighbouring countries are buying the latest defence equipments from developed countries of the world.874 crores in 1990-91 which has increased significantly to Rs. According to Economic Survey 2006-07 the expenditure on subsidies by central government in 1990-91 was Rs. Debt Servicing The internal debt as well as external debt is on the iocrease. exports. 3. fertilizers. the government has to make huge amounts of money towards interest payments. education.

electricity. Industrialisation Setting up key and basic industries requires a huge capital and profit may arise only in the long run.1. etc. Urbanisation There has been an increase in urbanization.39. 6. civil amenities like drinking water housing. The development projects require lot of capital and revenue expenditure.The interest payment of the central government has increased from 21. 7. Expansion of Administrative Machinery There has been an increase in the administrative machinery in the country with the rapid growth of population and also economic development. The public sector has created a strong infrastructure as a support base . etc. power. education.500 crore in 1990-91 to Rs. fuel. In 1950-51 about 17% of the population was urban based. iron and steel. Now the urban population has increased to about 28%. It is the government which starts such industries in a planned economy. heavy machinery. India needs a strong network of infrastructure including transport. communication. telecommunications. 8.823 crores in 2006-07. 9. Development Projects The government has been undertaking various development projects such as irrigation. etc. The increase in urbanization requires heavy expenditure on law and order. power. administration of public sector enterprises. tax administration. There are more than 23 cities above one million population. Heavy expenditure is to be incurred on administrative machinery in respect of police. etc.

Economic Incentives Economic incentives such as subsidies. 11. 13. 12. 10. tax concession. The grant in aid to states and union territories has increased significantly both for developmental purposes like construction of roads. tackling terrorism and naxalite activities. etc. etc. cheap electricity. given by the Government to the agriculturists and industrialists have caused monetary burden on the Government whereas recoveries in respect of both economic and social services have been insignificant.3982 crores in 1990-91 which has increased to Rs. New Responsibilities Several new responsibilities have been assumed by the Indian Government in the post independence period. The government has not only improved the rail. Increase in grant in aid to state and union territories There has been tremendous increase in grant in aid to state and union territories during planning period. According to Tata Statistical Outline 2004-2005 the Grant in aid to states and Union Territories was Rs. air and sea transport but has also expanded them manifold. and for nondevelopmental purposes like police administration.15. Education . railways. etc. cheap credit. Provisions of justice and constitutional remedies also require expenditure.669 crores in 2003-2004. Defence. In a Complex Multi Caste Indian Society there are frequent occasions of social tensions which require greater amount of public services like Law and Order. etc.for our industrial sector by investing huge capital.

Conclusion ↓ There is a tremendous rise in total public expenditure in India during the period 19612007 without adequate increase in revenues. . The state has made attempts to create various types of educational facilities.Education not only contributes to mental development of man but also raises productivity. Moreover mass education is necessary condition for the success of democracy. Government has also set up specialised institutes for medical & technical education which involves heavy expenditure. Hence there is a need to manage public expenditure in India to control and reduce fiscal deficit during future period of time. In order to meet growing demand for skilled labours. This has resulted in huge deficit in budget in India.

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