BUDGET FORMULATION

PROCESS

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 Session Overview
• The financial year of India being from 1st
p to 31st March,, the Union Budget
April g is
presented to Parliament on the last day of
y, i.e. a month before the financial
February,
year begins.

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 Session Overview
• The Union Budget, as presented in
Parliament,, is the result of a strenuous
exercise of estimated, as correct as possible,
receipts
p and expenditure
p for the next year.
y

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 Session Overview
• In this session we will discuss the Budget
Formulation Process in the Union
Government.
• The process is more or less similar in the
case of Budget formulation Process of State
Governments.
Governments

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 Learning Objective

• At the end of the session

session, the trainees will
be able to state all the steps in the Budget
Formulation Process.
Process

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 Budget Formulation Process
• The budget formulation process for the ensuing
financial year (April-March) starts in the month of
September of the current year.
• The Budget Division in the Department of
Economici Affairs,
ff i Ministry
i i off Finance,
i issues
i a
‘Budget Circular’ seeking statement of budget
estimates from the various Ministries and other
organizations concerned in specified proformas.

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 Budget Formulation Process
• Simultaneously, the Planning Commission
also addresses letters to different Union
Ministries and State Governments seeking
their annual p
plan pproposals.
p

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 Budget Formulation Process
• The Planning Commission, through a
pprocess of detailed discussions,, finalizes the
plan allocations for different Ministries, in
g support
which budget pp component
p is clearly
y
specified so as to fix the budgetary outgo
for the ‘Plan Schemes’ of the Central
Ministries/Departments.

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 Budget Formulation Process
• In the case of States, the Planning
Commission,, after detailed reviews and
discussions, finalizes the magnitude of
Central Assistance to be extended to the
States which is an outgo from the Union
Budget.
g

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 Budget Formulation Process
• Special attention is also given to the budgetary
support to be given to Central Ministries and
assistance to be given to the States for
programmes/ projects which are financed through
e ternal assistance
external assistance.
• For which, there is a continuous interaction
between the External Finance Division of the
Department of Economic Affairs and the Planning
Commission.
C
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 Expenditure Estimates
• The process for preparation of expenditure
estimates for the budget
g starts with the issue
of the ‘Budget Circular’ from the Budget
Division of the Ministryy of Finance as
shown in the figure in the next slide..

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 Budget Circular from Financial Adviser of each
Budget Division of Ministry Ministry
1
of Finance

Ministries obtain the estimates of expenditure

p for the current yyear
(revised estimates) and for next year (budget estimates from
organizations and units under their control

Study of the estimates by the Ministry

Further examination and processing by FA

Discussion
between 3 CAA&A estimates on
Secretary external debt repayments
Expenditure Budget Division and other payments
and FA 2
of Ministry of
Finance Planning Commission
discussion on plan size
Ceilings
g communicated to
FAs by Budget Division
3 4
Ceilings on details of
FAs prepare SBE for non-
approved plan outlays to
plan and plan expenditure FAs prepare SBE for plan
Ministries/Departments
expenditure
p

FAs: Financial Advisers

CAA&A: Controller of Aid Accounts and Audit
SBEs: Statement of Budget Estimates
(1) September, (2) November, (3) December, (4) January
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 Expenditure Estimates
• The Financial Advisers forward this circular to the
Ministry/Department and subordinate offices
• The Ministries in turn collect the estimates from
the organizations/ subordinate offices under their
controll andd also
l prepare the
h same forf their
h i own
activities
• Theses
Th estimates
ti t are scrutinized
ti i d by
b the
th ‘Budget
‘B d t
Units’ of the Ministries and submitted to their
Financial Advisers.
Advisers
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 Expenditure Estimates
• The Financial Advisers review and examine
the estimates before consolidatingg them and
sending the consolidated estimates, under
different heads of expenditure,
p , to the
‘Budget Division’ of the Ministry of
Finance.

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 Expenditure Estimates
• These estimates classified under separate
‘Demands for Grants’ in details upto the
‘Object Head of Classification’ and labeled
as the ‘Statement of Budget Estimates’ are
di
discussedd bby th
the S
Secretary
t E
Expenditure
dit
(Ministry of Finance) with each Financial
Adviser in a series of meetings where
Ministry’s ‘Budget Division’ is also
represented.
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 Expenditure Estimates
• the ‘Budget Division’ in the Ministry of
Finance conveys
y budget
g ceilings
g to each
Financial Adviser for revising all the
estimates within the ceilings
g and obtainingg
‘Statement of Budget Estimates’ in the final
form.

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 Expenditure Estimates
• The final ‘Statement of Budget Estimates’ are to
be sent to the ‘Budget Division’ in two stages.
In the first stage, the ‘Statement of Budget
Estimates’ ‘includes:
• Revised
i d non-planl expenditure
di for
f the
h current
year and budget estimates for the next year; and
• R i d plan
Revised l expenditure
dit for
f the
th currentt year.

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 Expenditure Estimates
• At the second stage of the ‘Statement of
Budget
g Estimates’ Financial Advisers sent
to the Budget Division of the Ministry of
Finance,, the budget
g estimates for pplan
expenditure for the next year as approved
byy the Planningg Commission.

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 Expenditure Estimates
• Meanwhile, the Controller Aid Accounts
and Audit ((CAA&A)) also send the
estimates on external debt, repayment of
external loans and other payments.
p y

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 Revenue Estimates
• The ‘Budget Division’ of the Ministry of
Finance obtains revenue estimates for the
next year from a large number of
organizations
g as indicated in the Figure
g in
the next slide.

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Budget Formulation Abbreviations used:
CBDT: Central Board of Direct Taxes
Process (Receipts) CBEC: Central Board of Excise and Customs
UTs: Union Territories
Department RBI Reserve
RBI: R Bank
B k off India
I di
of Revenue

CBEC
CBDT
Chief
Controller of Estimates of Direct and Controller of
Accounts and Indirect taxes Aid Accounts
Accounting and Audit
Officers

Budget
Taxes and Receipts of Division of External
UTs Ministry of Assistance
Finance

State
Reserve bank
Accountants
of India
General

Financial
Recoveries from Advisers of
States Central
Ministries Estimates of
Public Debt
Various receipts including transactions
non-tax revenue, non-debt
capital receipts and receipts
in public account

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 Revenue Estimates
‰ These organizations and estimates
collected are as under:
¾ Central Board of Direct Taxes in the
Department of Revenue of Ministry of
Finance – Estimates of Direct Taxes;
¾ Central Board of Excise and Customs in
the Department of Revenue of Ministry of
Finance – Estimates of Indirect Taxes;

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 Revenue Estimates
¾ Controller of Aid Accounts and Audit –
Estimates of External Assistance;
¾ Reserve Bank of India – Estimates of
Public Debt transactions;
¾ Financial Advisers of Central Ministries –
Estimates of various receipts including
those of non-tax revenue, capital receipts
and receipts of account of public account;

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 Revenue Estimates
¾ State Accountants General – Estimates of
recoveries from States on account of
Loans and Advances from the Union
Government;;
¾ Chief Controller of Accounts and
Accounting Offices – Estimates of taxes
and receipts of the Union Territories.

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 Revenue Estimates
• The estimates of direct taxes and indirect
taxes received from the Central Board for
Direct Taxes
• Central Board for Excise and Customs
furnishes revenue estimates for the current
year and also budget estimates for the next
year.

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 Revenue Estimates
• For external aid receipts, the Chief
Controller of Aid Accounts and Audit
prepares the estimates for external
assistance after obtaining information from
th different
the diff t credit
dit units
it off the
th External
E t l
Finance Division of the Department of
Economic Affairs (Ministry of Finance) and
sends the same to the ‘Budget Division’ of
the Ministry of Finance
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 Revenue Estimates
• Budget division also obtains from the Reserve
Bank of India estimates on possibilities as well as
sources of market borrowings which may be
required by the Government
• This
hi process continues
i over a long
l period
i d from
f
September till the time of giving a final shape to
the budget as the various alternatives to fill the
gap between receipts and disbursements are to be
worked out till the end.
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 Budgetary Process
Process-Flow
Flow of
Estimates
• The various estimates on receipts and
expenditure
p keepp flowingg in the Budget
g
Division of the Ministry of Finance from
October till budget
g is ggiven a final shape
p
towards the end of February

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 Budgetary Process
Process-Flow
Flow of
Estimates
• The annual plan discussions in the Planning
Commission with the Central Ministries and the
State Governments continue, at times till the end
of January, and it is only after finalization of these
estimates that the Financial Advisers
Ad isers of different
Ministries can send final ‘Statement of Budget
Estimates’ for the Central Plan expenditure to the
Estimates
Budget Division in the Ministry of Finance

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 Budgetary Process
Process-Flow
Flow of
Estimates
• In working out these estimates, Planning
Commission associates the Plan Finance
Division of the Department of Expenditure,
the External Finance Division of the
Department of Economic Affairs, etc.

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 Budgetary Process
Process-Flow
Flow of
Estimates
• The flow process of budget formulation is
ppresented in a diagrammatic
g form in figure
g
III on succeeding page.

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 Figure III-Overview of Budgetary Process

Planning Commission Ministry of Finance (4) Parliament

(3)

Plan discussions with Plan outlay

Ministries and States and Central Budget
Assistance Presentation
for States

Plan Budget Formulation (3)

Proposals (2) Parliamentary
Standing
Plan Formulation Estimates Revenue simulations Committees
Letter (1) for BS for
Centre and
(1) to (3)
CA for
Central States (1) Budget
Ministries, Debate
Revenue Non Plan estimates
Department,
RBI, etc.
Approval

Budget Circular (1)

Discussions
Central Ministries

Non-Plan Estimates (2)

BS: Budget support

CA: Central Assistance
(1) September, (2) October to December, (3) January to February, (4) March

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 Budgetary Process
Process-Flow
Flow of
Estimates
• From December onwards the estimates are
reviewed,, discussed and simulated under
the overall guidance and supervisions of the
Additional Secretary y ((Budget),
g ), who obtains
guidance from Secretary (Expenditure),
Secretary
y ((Revenue)) and the Finance
Secretary. The group receives an overall
gguidance from the Finance Minister.
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 Budgetary Process
Process-Flow
Flow of
Estimates
• the Finance Minister invites the groups of
leading
g economists,, representatives
p of
industry and trade, labour and trade unions,
consumer organizations,
g , small scale sector,,
science and technology sector, etc. for pre-
budget
g discussions and receives their
suggestions for the budget.

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 Budgetary Process
Process-Flow
Flow of
Estimates
• The Finance Minister also consults the members
of the Consultative Committee of Parliament for
the Ministry of Finance.
• All these consultations lead to the Government
fi i up its
firming i expenditure
di policy,
li taxation
i policy
li
and debt policy for the next year for giving a final
shape to the budget.
budget

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Budget-Presentation
Budget Presentation in Parliament
and approval
• An elaborate procedure has been prescribed in the
rules of business and also by convention for
presentation of budget in Parliament and its
approval
• The
h rules
l off procedure
d require
i that
h the
h budget
b d is i
presented to Lok Sabha on such day as the
President directs.
directs (The budget is usually presented
on the last day of February).

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Budget-Presentation
Budget Presentation in Parliament
and approval
• To enable discussion on the budget, a time
table is drawn by
y the Business Advisoryy
Committee of the Parliament.
• Presentation of the Budget: By convention
the budget is presented on the last working
day of February every year.
year

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Budget-Presentation
Budget Presentation in Parliament
and approval
• Discussion on the Budget: Immediately
after p
presentation,, some period
p is
specifically allotted for a general discussion
on the budget.
g

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Budget-Presentation
Budget Presentation in Parliament
and approval
• Vote on Account: Pending voting of the
final demands for g
grants which take a
longer time and may extend beyond the
commencement of the new financial year,
y ,
the Constitution empowers Lok Sabha to
ggrant ‘Vote on Account’ so that necessaryy
expenditure on Government , etc. can be
incurred.
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Budget-Presentation
Budget Presentation in Parliament
and approval
• By convention, therefore, ‘Vote on Account’ is
treated as formality and passed by Lok Sabha
without any discussion at this stage.
• The ‘Vote on Account’ normally covers one
month’s
h expenditure
di requirements
i (or
( suchh longer
l
period as may be considered necessary by the
Finance Ministry),
Ministry) or till the Appropriation Bill is
passed.

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Budget-Presentation
Budget Presentation in Parliament
and approval
• Parliamentary Standing Committees for
consideringg demands for grants
g
• the Standing Committees of Parliament
consider the demands for grants of
concerned Ministries /Departments and
make a report to the Parliament to have a
more satisfactory scrutiny of demands for
grants
grants,
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Budget-Presentation
Budget Presentation in Parliament
and approval
• The ‘Guillotine’: In the schedule for budget
discussion made by the Business Advisory
Committee, provision for ‘Guillotine’ is included
by which if all the demands have not been
considered by
b Parliament within
ithin the time frame
prescribed, the speaker applies the ‘Guillotine’
and all outstanding Demands are put to the Vote
of the House without further discussion.

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Budget-Presentation
Budget Presentation in Parliament
and approval
• The Appropriation Bill: After passing the
Demands for Grants,, the appropriation
pp p Bill
is introduced
• This is to authorize the Government to draw
money from the Consolidated Fund.
• After the Bill is passed,
passed it becomes the
Appropriation Act.

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Budget-Presentation
Budget Presentation in Parliament
and approval
• The Finance Bill: After voting on the
Appropriation
pp p Bill,, the Finance Bill is taken
up for consideration.
• The proposals of the Government for levy
of new taxes, modification of existing taxes
or continuation of the existing tax structure
beyond the period approved by Parliament
are submitted to the Parliament.
Parliament
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 Supporting and Explanatory
Documents
• Apart from the documents prescribed by the
Constitution like ‘Annual Financial
Statement’, ‘Demands for Grants’,
‘Appropriation
pp p Bill’ and ‘Finance Bill’,,
following documents are also presented
with the budget
g

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 Main
•Annual Financial Statement;
•Demands for Grants;
•Appropriation Bill;
•Finance Bill

B
Supporting and Explanatory U
•Finance Ministers Speech; D
•Budget at a Glance;
G
•Memorandum
Memorandum explaining the provisions of Finance Bill;
•Receipts Budget; E
•Expenditure Budget T

D
O
C
Supporting and Explanatory U
•Finance Ministers Speech;
•Budget at a Glance;
M
•Memorandum explaining the provisions of Finance Bill; E
•Receipts Budget; T
•Expenditure Budget S

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 Supporting and Explanatory
Documents
• Finance Minister’s
• g Speech
Budget p Budget
g at a Glance
• Receipt Budget
• p
Expenditure Budget
g
• Performance Budgets
• Annual Reports
• Economic Survey
• Public Enterprises Survey
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 Principles underlying the
preparation of budgets
• the principles observed generally are ;
• The budgets should be balanced
• The estimates should be on cash basis;
• There should be only one budget for all
fi
financial
i l transactions.
t ti
• Budgeting should be on gross basis and not on
net basis.
basis
• Estimating, both for receipts and for expenditure
should be accurate.
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 Principles underlying the
preparation of budgets
• Budget should be on annual basis.
• The rule of lapse should apply.
apply
• All appropriations expire at the close of the
financial year.
year
• The form of estimates should correspond to
the
h fform off accounts.

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 Budget Formulation-Guidelines
• While the Central budget is presented to the
Parliament by the Finance Minister, a separate
statement of receipts and expenditure relating to
Railways is similarly presented to the Parliament
b the Ministr
by Ministry of railways
rail a s in advance
ad ance of the
‘Annual Financial Statement’
• The figures (receipts and expenditure) are also
included in lump in the ‘Annual Financial
Statement’.
S
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 Budget Formulation-Guidelines

• The expenditure figures in the ‘Annual

Financial Statement’ shall show separately
p y
the charged expenditure and expenditure on
revenue account and expenditure
p under
Plan.
• Estimates should include suitable provision
for liabilities of the previous years left
unpaid during the relevant year.
year
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 Budget Formulation-Guidelines

• The estimates of Plan expenditure will be

pprocessed in consultation with the Planningg
Commission.

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 Budget Formulation-Guidelines

• The estimates (for both receipts and

expenditure)
p ) will also include
• actual expenditure for the past year,
• estimates for the current year,
year
• revised estimates for the current year and
• budget estimates for the budget year.

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 Budget Formulation-Guidelines
• The Demands for Grants will be presented to Parliament at
two levels.
• The main Demands for Grants are presented to parliament
by the Ministry of Finance along with the Annual
Financial Statement,
• the
th Detailed
D t il d Demands
D d for
f Grants,
G t after ft consideration
id ti by b
the ‘Departmentally Related Standing Committee) of the
Parliament, are laid on the Table of the Lok Sabha by the
concernedd Ministry/
Mi i t / Department,
D t t a few
f days
d in
i advance
d off
the discussion of the respective Ministry’s Demands in the
House.

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 Budget Formulation-Guidelines

• The Form of Annual Financial Statement

and for Demands for Grants is laid byy the
Finance Ministry and no alteration of
arrangement
g or classification will made
without the formal approval by the Finance
Ministry.
y

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 Budget Formulation-Guidelines
• After the Appropriation Bill relating to Budget is
passed, the Ministry of Finance communicates
Budget Provisions to the Ministries/departments
which, in turn, shall distribute the same to their
s bordinate formations.
subordinate formations
• The distribution so made shall also be
communicated to the respective Pay and Accounts
Officers who shall exercise checks against the
allocation made to each subordinate authority. y
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