Every person on this planet requires money for their day-to-day sustenance and expenditures. To keep a check on the expenses and savings, most of us create a monthly, weekly, or daily budget so that we are aware of our expenses and we can plan our savings in a way that we can meet our desired goals. Similarly, even the government needs to prepare a yearly budget to make sure that the expenses are not out of hand and that the savings are in check.
The government budget is an annual financial statement that has an item-wise estimate of expected revenue and anticipated future expenditures of the next fiscal year. On Feb 1, 2022, the Indian Government and its finance ministry led by Nirmala Sitharaman are going to present the Union budget 2022-23 in the Parliament.
Parts of the Budget
The Budget has two broad parts:
Capital Budget
- Capital Expenditure
- Capital Receipts
Revenue Budget
- Revenue Expenditure
- Revenue Receipts
Expenditure
The expenditure in the government budget includes all the expenses that are projected to be incurred in the next fiscal year by the government according to their goals. These expenses can further be of two types:
- Revenue Expenditure
- Capital Expenditure
Basis | Revenue Expenditure | Capital Expenditure |
Meaning | An expenditure that does not create any assets and does not create any reduction of liability. | An expenditure that creates assets for the government or creates a reduction of liability for the government |
Purpose | Incurred for the normal functioning of the government departments and other provisions | Incurred for the prepayment of borrowing, acquisition of assets, grants, etc. for the development of the country |
Example | Expenditure in Civil administration, defense of the country, healthcare sector, and education | Expenditure in Construction of a building, roads, dams, etc. |
Occurrence | Recurring Expenditure | Non-Recurring expenditure |
Category | Non-developmental expenses | Developmental expenses |
Receipts
Budget receipts refer to the revenue that the government is projected to earn in the next fiscal year. These receipts are also of two types
- Revenue Receipts
- Capital Receipts
Basis | Revenue Receipts | Capital Receipts |
Meaning | The Receipts that do not create any liability for the government and do not create any reduction of assets | These receipts either create a reduction of assets or create liabilities for the government |
Purpose | Generated from the operating cycles of the business in the country | Generated from the investment and financing activities of the government |
Example | These can be generated from tax revenue (by charging direct and indirect charges) or can be generated from interests on loan grants, fees charged, administrative revenue, etc. | These are generated from activities like Recovery of loans, disinvestments of government properties, borrowing, and other liabilities, etc. |
Occurrence | Recurring | Non-recurring |
Important terms used in the Union Budget
Union Budget is the most comprehensive report of the finances of the government, source of funding, expenditures, and revenue projections. In these, certain terms are tossed up. It is important to know its meaning. They are
1. DEFICIT: When there is a shortage of revenue and retained earnings for conducting all the expenditures, there is a deficit in the budget.
Fiscal Deficit: When the government’s non-borrowed receipts are less than its entire expenditure, there exists a fiscal deficit.
Revenue Deficit: The difference between the revenue expenditure and the revenue receipts is known as the revenue deficit and it shows the shortfall of the government to meet the current expenses with its current revenue.
Primary Deficit: The fiscal deficit minus the interest payments give us the primary deficit and it tells us how much of the government borrowing is going for the payment of meeting expenses other than interest payments
2. POLICY: Policies are a course of action or principle that are adopted by an organization to meet its goals and follow a due essence for the method of action.
Fiscal Policy: It is the government’s actions that are formulated to meet the aggregate levels of revenue and spending. It is also the primary mean by which the government can influence the economy
Monetary Policy: The actions taken by the central bank of the country (in India, the RBI) for the regulation of money levels or liquidity in the economy, or changing the interest rates.
3. Finance Bill: The Bill with the course of action to meet the imposition, abolition, or regulation of taxes as proposed.
4. Vote on Account: A grant made in advance by the parliament concerning the estimated expenditure for the next fiscal year. This vote decides the passing of appropriations and subheads under a grant or policy as formulated to meet the goals of the next year.
5. Outcome Budget: Every ministry presents an outcome budget to the Finance Ministry of India. Finance Mistry compiles these presentations and prepares a progress report of the same as the form of the outcome budget which outlays the progress with the outlays of the previous year’s.
6. Funds of India: There are various funds that the country has to keep in order to meet various expenses that have to be covered.
- Consolidated Fund of India: All the sources of the government’s finances and revenues come into this fund. All expenditures of the government except certain exceptional items and Public Accounts are made from this fund of India. No money can be appropriated from this fund except in the accordance with the law.
- Contingency Fund of India: This fund is regulated by the President of India to enable the officeholder to make advances to meet urgent unforeseen expenditures.
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Impact of Budget on the Market and the Economy
How the finance ministry spends the money impacts the interest rates and the stock markets. Hence affecting the entire economy. With all the eyes on the budget, and its fiscal deficit, Nirmala Sitharaman will be presenting the budget in Parliament on Feb 1, 2022. Biggest impacts that are observed:
- The departmental allocated budgets show the emphasis of the government’s goals in different sectors of the economy for the upcoming fiscal year. For example, a higher budget allocated to the roads and travel industry can lead to affecting a bullish trend in the automobile, infrastructure development, and construction industries.
- Increased interest rates lead to a higher cost of capital for the industries and lead lower stock market prices
- Increased direct taxes lead to decreased disposable income with the public. This leads to reduced demand for goods and services. This further leads to reduced production and affects economic growth
- Increased indirect taxes would increase the per good price. This will lead to lower disposable income with people, which further leads to lower production and negatively affects economic growth.
