Union Budget

Union Budget

Union Budget, in the language of a financial analyst, is the estimated sources and application of funds for a particular fiscal year. It is normally placed before the House of Parliament in the last week of February.

To the common citizens, budget is all about rise or fall in the prices of goods and services due to change in rate of taxes and duties. The purpose of Union budget is, however, much broader. It is a plan of the central Government for optimal allocation of the country’s resources so as to achieve higher growth rates and make the economic development.

Two Broad Components

Two Broad Components of Union Budget are Revenue Budget and Capital Budget. Former is an estimate of short-term sources and applications of fund and the later is an estimate of long-term sources and application of funds.

Revenue budget comprises of revenue receipts and revenue expenditure. Sources of Revenue receipts are tax and non-tax revenues. Centre’s Net Tax Revenue is gross tax revenue net of the amount transferred to the National Calamity Contingency fund/ NDRF and State’s share. Gross tax revenue are collected from corporation tax, income tax, other taxes and duties (including wealth tax, securities transaction tax, banking cash transaction tax and wealth tax), customs dutes, union excise duties, service tax and taxes of the union territories. Non-tax revenue are collected from interest receipts, dividends and profits, external grants, other non-tax revenue and receipts of union territories.

Revenue expenditure is of two types – plan and non-plan. Plan revenue expenditure includes central plan, central assistance for State and Union territory plans. Non-plan revenue expenditure includes interest payments and pre-payment premium, defence services, subsidies, grants to state and union territory governments, pensions, police services, assistance to states from National Calamity Contingency Fund, economic services (including agriculture, industry, power, transport, communications, science and technology etc), other general services (education, health, broadcasting etc), postal deficit, expenditure of union territories without legislature, amount met for National Calamity Contingency fund, grants to foreign governments etc.

Capital budget comprises of capital receipts and expenditure. Capital receipt includes non-debt receipts and debt receipts. Non-debt part comprises of recoveries of loans and advances and miscellaneous capital receipts and the debt receipts include market loans, short-term borrowings, external assistance, securities issued against small savings, state provident funds (net) and other receipts (net).

Like revenue expenditure, capital expenditure is also of two types – plan and non-plan. Plan capital expenditure refers to expenses on central plan and central assistance for state and union territory. Non-plan part includes defence services, other non-plan capital outlay, loans to public enterprises, loans to state and union territory governments, loans to foreign governments and other non-plan capital expenditures.

To sum up, one could understand a budget if it is presented in horizontal form as: SHORT TERM SOURCES OF FUND (Revenue receipt) +LONG TERM SOURCES OF FUNDS (Capital receipt) = SHORT TERM APPLICATIONS OF FUND (Revenue expenditure) + LONG TERM APPLICATIONS OF FUND (Capital expenditure). Like accounting equation, sources of fund have to be equal to application of fund. If this is not so, it is balanced from ‘draw-down of cash balance’.

Impact of Union Budget on the India

The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. High interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices.

The fiscal measures undertaken by the government affect public expenditure. For instance, an increase in direct taxes would decrease disposable income, thus reducing demand for goods. This decrease in demand will translate into a decrease in production, therefore affecting economic growth.

Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially or completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce profit margins of companies, thus slowing down production and growth.

How to understand and interpret Union Budget

Union budget can be analysed in the same way as financial statement of a company is analysed. Revenue receipts are real income generated from internal sources of the country during a particular year. Revenue expenditures are those which a government is required to meet during the same year. In an ideal situation, there should be surplus of income over expenditure. This surplus could then be utilized either for increase in capital expenditure for long term development or for reduction of debt burden of the government.

In practice, it does hardly happen. What we see is ‘revenue deficit’ (revenue expenditure exceeds revenue receipts). To finance such a deficit, government needs an increase in capital receipts over capital expenditure by borrowings and from market loans. A revenue deficit thus causes more debt burden of the government.

Any government would aim at meeting its total application of fund (i.e. both revenue and capital expenditure) in a year from its entire revenue receipts and from the amount recovered from loans given by it and receipts of capital nature other than borrowings and other liabilities. This means, entire short term sources and a part of long term sources should be either equal to or exceeds its total application of funds. If this is not so, there will be another kind of deficit, which in the language of an economist, is ‘fiscal deficit’. Now, arithmetically, ‘fiscal deficit’ occurs when [Revenue expenditure (RE) + Capital expenditure (CE)] is > [Revenue receipt (RR) + Loan recoveries (LR) + other receipts (OR)]. Knowing that both sources and application of fund has to be equal, we can write: [(RE + CE) – (RR + LR + OR0] = [Borrowings (B) + Draw-down of cash balance (DDCB)]. Or Fiscal deficit = B + DDCB. Thus, one could understand that fiscal deficit is met from additional borrowings and DDCB.

Primary deficitwhich is less than the fiscal deficit by the amount to be paid on account of interest on borrowings is also met from additional borrowings and DDCB.

An analyst would not be interested only in finding out various types of deficit and how such deficit is financed. He would relate various kinds of deficit with core economic parameters, namely, estimated GDP and GNP. He would also calculate the amount of fiscal deficit and revenue deficit as percentage of estimated GDP and whether the estimated increase in revenue receipt in the coming years resulting from the estimated increase in GDP growth rate would be able to contain the incremental portion of both the deficit. Other important parameters which one must calculate are:

(a) the debt servicing capacity (DSC) and

(b) interest servicing capacity (ISC) of the government.

If revenue receipts are divided by sum of ‘repayment of debt and total interest payments’, one would get DSC. More would be the ratio (ideal ratio being 2) it is better. If revenue receipt is divided by only the amount of total interest payments, one would get ISC. Ideal ratio is 3. More is better. Other important issues which need to be addressed are:

(a) nature and amount of allocation of fund and whether these allocation of funds would ensure inclusive growth with equitable and fair distribution of funds for various sections of citizens of the country and

(b) variance analysis.

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