You are on page 1of 30

Unit- 3

Components of the
national budget and
how these impact on
the business world.

Budget

Planning process of assessing revenue & expenditure


is termed as Budget.
An estimation of therevenue and expenses over a
specified future period of time, usually a year.
Budget is of two types-a)Deficit budget, b)Surplus
budget

Surplus budget means revenue exceeds expences .

Deficit budget means expenses exceeds revenues.

Balanced budget means thatrevenuesare expected


toequal expenses
Adjustments are made to budgets based on the goals
of the budgeting organization.
Budgets are usually compiled and re-evaluated on a

Objective of the Government


Budget
I. Reallocation of resources:-It means managed and
proper distribution of resources. As private sector can not
provide all the goods and services the government has to
provide these goods.

II. To reduce inequalities in income and wealth:Through budget government tries to reduce the gap
between Rich and poor. This is achieved through taxing the
rich and subsidizing the needs of poor people.
III. To achieve economic stability :-During depression
government reduces rate of tax and borrowing and increases
public expenditure. During inflation government increases
the rate of tax and borrowing and decreases public
expenditure.

IV. Management of Public Enterprises :Governmentt has many public sector companies to manage
and run

Budget process in India


The budget process in India, like in most other
countries, comprises four distinct phases.
Step 1:-Budget formulation: the preparation of
estimates of expenditure and receipts for the ensuing
financial year;
Step 2:-Budget enactment: approval of the proposed
Budget by the Legislature through the enactment of
Finance Bill and Appropriation Bill;
Step 3:-Budget execution: enforcement of the
provisions in the Finance Act and Appropriation Act by the
governmentcollection of receipts and making
disbursements for various services as approved by the
Legislature; and
Step 4:-Legislative review of budget
implementation: audits of governments financial

Budget process in India


Process starts August-September:

Step 1 :-In the Union government, there is a Budget


division in the department of economic affairs under
the Ministry of Finance.
Step -2:-This division starts the process of formulation
of the next financial years Union budget in the
months of AugustSeptember every year.
Step -3:-Budget Division coordinates with various
ministries and departments with regard to their
revenue receipt budgets during October and
November months.
Step-4:-The Finance Minister also began his
consultations with sectoral representatives in January
and meet economists, trade unions, industry leaders

Budget process in India


Process starts August-September:

Step -5:-In the Union government, there is a Budget


division in the department of economic affairs under
the Ministry of Finance.
Step -6:-This division starts the process of
formulation of the next financial years Union budget
in the months of AugustSeptember every year.
Step -7:-Budget Division coordinates with various
ministries and departments with regard to their
revenue receipt budgets during October and
November months.
Step -8:-The Finance Minister also began his
consultations with sectoral representatives in January
and meet economists, trade unions, industry leaders

Estimates, revised estimates and actual

Step -9:-Ministries are required to provide three different


figures relating to their expenditures and receipts during
this process of budget preparation.
Step 10:- budget estimates, revised estimates and
actual
For instance, the case of budget preparation in the second
half of the calendar year 2013-14. The Union government
would prepare the budget for 2015 during the time period
of September 2013 to February 2014.
Approval of Parliament would be sought for the estimated
receipts/expenditures for 2014-15, which would be called
budget estimates( next year)
At the same time, the Union government, in its budget for
2014-15, would also present revised estimates for the
ongoing (2013-14) year

Planning Commission's
role
Step -11:-The ministries
would provide budget
estimates for plan expenditure for budget estimates for
the next financial year, only after they have discussed
their respective plan schemes with the Central
Planning Commission.

Step -12:-The Planning Commission depends on


the finance ministry to first arrive at the size of the
gross budgetary support, which would be provided in the
budget for the next annual plan of the Union
government.In principle, the size of each annual plan
should be derived from the approved size of the overall
Five-Year Plan (12th Five-Year Plan, 2012-13 to 2016-17,
in the present instance). However, in practice, the size
of the gross budgetary support for an annual plan also
depends on the expected availability of funds with the
finance ministry for the next financial year.

Budget Process- Final stages

Step -13:-In January, Revenue-earning ministries of the


Union government provide the estimates for their
revenue receipts in the current fiscal year (revised
estimates) and next fiscal year (budget estimates)
Step -14:-In the final stage of budget preparation, the
finance minister examines the budget proposals
prepared by the ministry and makes changes in them,
if required.
Step -15:-The finance minister consults the prime
minister, and also briefs the Union Cabinet, about the
budget at this stage.
Step -16:-If there is any conflict between any ministry and the
finance ministry with regard to the budget, the matter is
supposed to be resolved by the Cabinet.
Step -17:-In the final stage, the budget division in the finance

Budget process in India

Step-18:-At the end of this process, the finance minister


takes the permission of the president of India for
presenting the Union budget to Parliament.
Step -19:-As per the Constitution, the Union budget is to
be presented in the Lok Sabha on such a day as the
president may direct.By convention, Union budget has
been presented in Lok Sabha by the finance minister on
the last working day of the month of February every year.
Step-20:-The finance minister, by convention, makes a
speech while introducing the budget.
Step -21:-The annual financial statement is laid on the
table of Rajya Sabha only after the finance minister
concludes his budget speech in Lok Sabha.

Components of Government Budget

Components of Government
Budget:1. Revenue Budget Amount of money allocated to

maintenance and growth. It is estimated on two


components:-a. Revenue receipts b. Revenue
expenditure.
a. Revenue receipts:-This is called as governments
earning. They are divided into Tax and non tax
receipts(interest, profit of public sector enterprises)
b. Revenue expenditure -It is day to day expenditure
done by the government.Revenue expenditure includes
expenditure on administration, salaries, subsidies,
interest payments day to day expenditure

Components of Government
Budget:-

a. Revenue receipts:- It is of two types- Tax and Non tax


revenue:i. Tax Revenue:Tax revenue consists of the income received from different
taxes and other duties levied by the government.
Taxes are of two types, viz., Direct Taxes and Indirect
Taxes.
Direct taxes are those taxes which have to be paid by the
person on whom they are levied. Its burden can not be shifted
to some one else. E.g. Income tax, property tax etc. are direct
taxes.
Indirect taxes are those taxes which are levied on
commodities and services. E.g. Custom duties, sales tax,
services tax, excise duties, etc. are indirect taxes.

Components of Government
Budget:-

ii Non-Tax Revenue:

Fees : The government provides variety of services for


which fees have to be paid. E.g. fees paid for
registration of property, births, deaths, etc.
Fines and penalties : Fines and penalties are
imposed by the government for not following (violating)
the rules and regulations.
Profits from public sector enterprises : T he
government owned companies like - Indian Railways,
Oil and Natural Gas Commission, Air India, Indian
Airlines, etc. earn profits and that becomes revenue.
Gifts and grants : Gifts and grants are received by
the government when there are natural calamities like
earthquake, floods, famines.

Components of Government
Budget:-

(b) Revenue Expenditure

Revenue expenditure is the expenditure incurred for the routine,


usual and normal day to day running of government
departments and provision of various services to its residents.
An expenditure which do not creates assets or reduces liability
is called Revenue Expenditure.
Examples are Salaries of government employees, interest
payment on loan taken by the government, subsidies,

Expenditure by the government on consumption of goods and


services.
Expenditure on agricultural and industrial development,
scientific research, education, health and social services.

Expenditure on defense and civil administration.

Expenditure on exports and external affairs.

Payment of interest on loans taken in the previous year.

Components of Government
2.Budget:Capital Budget
(a) Capital Receipts :-Receipts which create a liability or result in a
reduction in assets are called capital receipts. They are obtained by the
government by raising funds through borrowings, recovery of loans and
disposing of assets .
For Example-Loans raised by the government from the public through the
sale of bonds and securities.
Borrowings by government from RBI and other financial institutions through
the sale of Treasury bills.
Loans and aids received from foreign countries and other international
Organizations like International Monetary Fund (IMF), World Bank, etc.
Receipts from small saving schemes like Provident fund, etc.
Recoveries of loans granted to state and union territory governments and
other parties.

Components of Government
Budget:-

(b) Capital Expenditure

Capital Expenditure:-It refers to the expenditure


which leads to creation of assets and reduction in
liabilities eg. Expenditure incurred on construction
of building, roads, bridges etc.

Any projected expenditure which is incurred for creating


asset with a long life is capital expenditure.

Expenditure on land, machines, equipment, irrigation


projects, oil exploration and expenditure by way of
investment in long term physical or financial assets are

Components of Government
Plan and non-plan
Budget:-expenditure

Plan expenditures are estimated after discussions


between each of the ministries concerned and the Planning
Commission.
Plan expenditure forms a sizeable proportion of the total
expenditure of the Central Government.
The Demands for Grants of the various Ministries show the
Plan expenditure under each head separately from the
Non-Plan expenditure.
Non-plan expenditure is accounted for by interest
payments, subsidies (mainly on food and fertilisers), wage
and salary payments to government employees, grants to
States and Union Territories governments, pensions, police,

Capital Expenditures

Its effect is long term i.e., it is not


1 exhausted within the current year. Its benefit
is enjoyed in future years also. In a word, its
effect is reduces gradually.

Revenue Expenditures

Its effect is temporary, i.e., it is


exhausted within the current accounting
year.

Neither an asset is acquired nor the


value of an asset is increased.

2 An asset is acquired or the value of an asset


is increased as a result of this expenditure.

3 It does not occur again and again - it is nonrecurring and irregular.

It occurs repeatedly - It is recurring and


regular.

It reduces revenue. Payment of salaries


to employees decreases revenue.

It does not reduce the revenue of the


concern. Purchase of fixed assets does not
effect revenue.

Capital Receipts

(a) Receipts derived from activities


which are not part of the normal
trading activities of the business

(b) Examples: receipts of cash brought


in by partners, shareholders,
debenture holders and bank loans

Revenue Receipts

(a) Receipts related to normal activities of the


business

(b) Examples: receipts from sales of goods


and services, rent, commission and interest
on bank deposits received by the business.

Budget Deficit
Budget deficit is commonly known as the national debt.
Budget deficit means that a country has more money going out
when compared to the money its earning.
Budget deficits can usually be resolved by raising taxes, cutting
spending or a combination of both.
Unlike fiscal deficit, while calculating budget deficit, the countrys
borrowings are taken into consideration.
Indias budget deficit last fiscal year was 4.9 percent of gross
domestic product.

TYPES OF DEFICIT

Fiscal deficit-Difference between


govts total expenditure and receipts.
Revenue deficit-Difference between
revenue expenditure and revenue
receipt
Primary deficit- Subtraction of
interest paid from fiscal deficit.
Budget deficit- Subtraction of fiscal
deficit from government borrowings

FISCAL DEFICIT

Fiscal deficit is when the Government's total expenditure


surpasses the revenue generated .
Government spending, inflation and lower revenue and
subsidies are among some of the main factors that point
to fiscal deficit. from 4.9 percent last year to 4.8 percent
of the GDP in 2013-14.
A large fiscal deficit is an indication that the economy is
in trouble and will have reasons to worry.
A high fiscal deficit could pose an inflation risk, minimize
the growth of the economy, doubt the governments
abilities; it could affect the countrys sovereign rating,
which in turn will limit foreign investors from looking at
India as one of the investment hubs.
high fiscal deficit is that it leads to higher interest rates,
disturbing the entire economy as money
Government spends less- money becomes scarce-

Impact of budget on
The Budget impacts the followingBusiness

Economic policies-Fiscal, monetary

The interest rate of banks

Stock markets.
How the budget spends and invests money
affects the fiscal deficit.

The fiscal measures undertaken by the


government affect public expenditure.

Economic growth

GDP

Tax collection

Features of Budget 2014


Key Features of Budget 2014-2015
The Current economic situation and the challenges:
The state of world economy has been the most decisive
factor affecting the fortunes of every developing country.
1. Growth:- The world economy has been witnessing a
sliding trend in growth, from 3.9 percent in 2011 and 3 per
cent in 2013.
2. US/ Euro zone contribution:-The economic situation of
major trading partners of India, who are also the major
source of our foreign capital inflows, continues to be under
stress. United States has just recovered from long recession,
Euro zone, as a whole, is reporting a growth of 0.2 per cent,
and China's growth has also slowed down.

Features of Budget 2014

State of economy

3.Deficit and Inflation :-The fiscal deficit for 2013-14


contained at 4.6 per cent.
4. CAD:-The current account deficit projected to be at USD
45 billion in 2013-14 down from USD 88 billion in 2012-13.
5. Foreign exchange reserve to grow by USD 15 billion in
this Financial Year.
6. Inflation:-WPI inflation down to 5.05 per cent and core
inflation down to 3.0 per cent in January 2014. Food
inflation down to 6.2 per cent from a high of 13.8 per cent

Features of Budget 2014


7.

Agriculture :-Food grain production estimated for the current year


is 263 million tonnes compared to 255.36 million tonnes in 2012-13.
Agriculture export likely to cross USD 45 billion higher from USD 41
billion in 2012-13. Agricultural credit to exceed the target of Rs 7 lakh
crore.
8.Investment :-Savings rate at 30.1 per cent and investment rate of
34.8 per cent in 2012-13. Government set up a Cabinet Committee
on investment and the Project Monitoring Group to boost investment.
By end of January 2014, Projects numbering 296 with an estimated
project cost of Rs 660,000 crore cleared.
9. Foreign Trade :-Despite a decline in growth of global trade, our
export have recovered sharply. The estimated merchandise export is
estimated to reach USD 326 billion indicating a growth rate of 6.3 per
cent in comparison to the previous year.
10.Manufacturing :-The sluggish import is a matter of concern for
manufacturing and domestic trade sector. Due to deceleration in
investment, the manufacturing sector has witnessed a sluggish

Features of Budget 2014

11.Growth:-GDP expansion in 2013/14 third and fourth


quarters will be at least 5.2 per cent
12.Fiscal Deficit:* Fiscal deficit projected at 4.1 per cent of GDP in 2014/15
* Fiscal deficit seen at 4.6 per cent of GDP in 2013/14
* Says need to bring down fiscal deficit to 3 per cent of GDP
by 2016/17
13.Current Account Deficit
* Current account deficit for 2013/14 projected at $45 billion
* Forex reserves to rise by $15 billion by end of 2013/14
14.Borrowing
* Gross market borrowing seen at 5.97 trillion rupees in
2014/15
* Net market borrowing at 4.07 trillion rupees
* Debt repayment in 2014/15 seen at 1.897 trillion rupees
spending
* Plan expenditure for 2014/15 seen at same level as previous
year

Features of Budget 2014


15.Subsidies
* Total spending on food, fertilisers and fuel at 2.5 trillion rupees in
2014/15
16.Defence
* Spending raised to 2.24 trillion rupees in 2014/15, up 10 percent
year on year
17.Exports
* Merchandise exports seen at $326 billion in 2013/14, up 6.3 per cent
year on year.
* Agriculture exports expected to touch $45 billion in 2013/14, up from
$41 billion in 2012/13
18.Tax Proposals
* No major change in tax rates
* Cut excise duty on small cars, two wheelers, commercial vehicles to
8 percent from 12 per cent
* Recommends excise duty reductions on larger vehicles
19.Banks Restructuring
* Govt to provide 112 billion rupees capital infusion in state run banks
in 2014/15
* Propose to set up public debt management office to start5 work from
2014/15