The Budget making process

IN NEWS:

• Finance Minister Nirmala Sitharaman will present the Union Budget for the next financial year beginning April 1, 2022, on Tuesday February 1.

BUDGET:

• The budget is a statement of the estimated receipts and expenditure of the Government of India in a financial year, which begins on 1st April and ends on 31st March of the following year.
• The Indian Constitution refers to the budget as the ‘Annual financial statement’ (Article 112). In other words, the term ‘budget’ has nowhere been used in the Constitution.
• It gives item wise details of government receipts and expenditure for three consecutive years:
  • Actuals for the preceding year
  • Revised estimates for the current year and
  • Budget estimates for the ensuing (coming) year
• The Budget is presented in Parliament on a date fixed by the President.

COMPONENTS OF BUDGET:

The budget consists two parts:

1. Revenue Budget:
   • The Revenue Budget comprises revenue receipts and expenditure met from these revenues.
     1. The revenue receipts include both tax revenue (like income tax, excise duty) and non-tax revenue (like interest receipts, profits).
     2. Revenue expenditure is expenditure for the normal running of government departments and various services, interest charges on debt incurred by government, subsidies etc.
2. Capital Budget:
   • Capital budget is an account of assets and liabilities of the government which takes into consideration changes in capital.
     1. Capital receipts are receipts of the government which create liabilities or reduce financial assets, e.g., market borrowing, recovery of loan, etc.
     2. Capital expenditure is the expenditure of the government which either creates assets or reduces liability.

BUDGET MAKING PROCESS:

The budgetary process in any country involves four different operations:

1. Preparation of the Budget
2. Enactment of the budget

• In Parliament the Budget goes through five stages, namely:

1. Introduction
2. The General Discussion
3. The voting of Demands for Grants
4. The Consideration and Passing of Appropriation bill, and
5. The Consideration and Passing of the taxation proposals, i.e. the Finance Bill.

3. Execution of the Budget by the executive
4. The Legislative Control of the Budget, i.e. Supervision and Control of Financial operations by Audit on behalf of the Legislature.

CRITICISM OF BUDGET MAKING PROCESS:

• Dynamic policy-making environment:
  • Several significant economic policy announcements take place throughout the year, outside the purview of the budget speech day. This reduces the significance of the budget.
  • Eg: fiscal announcements like demonetization and tax cuts for the corporate sector in 2019 were announced outside the purview of the budget.
• Budgetary gap:
  • India recorded a fiscal deficit of 9.3% of GDP in 2020-21. This creates difference between what is promised in the budget and the budgetary allocations to back up the announcements, thereby reducing the credibility of the budget.
• More political, less economical:
  • Today, budget presentations have become a political vision of the government. As a result, inefficient economic decisions are being taken to satisfy political ambitions.
• Constrains by FRBM Act:
  • The Fiscal Responsibility and Budget Management (FRBM) Act imposes a pre-determined borrowing limit by the government, which has been restricting gross capital formation.
• Insufficient data:
  • The centre starts preparing the budget by early October. Hence, it has to rely on data from April. Also, data collection system in India is largely obsolete (Eg: based on cohort group surveys). To go by less than six months of such data and making projections for the full year and the next year leads to inefficiencies.
• Weak scrutiny mechanisms:
  • The standing committees of Parliament are established to examine the justification allocations and funding included in the Budget during a two to three-week gap within the budget session period, when the houses are adjourned. However, the committees lack the capacity and expertise to do the same.
  • https://www.ilearncana.com/details/Parliamentary-Committees/2520
• Limited parliamentary control:
  • Indiscipline and disruptions, instruments like anti defection law and the frequent use of voice votes and the guillotine closure of proposals inhibits effective debating of budget proposals in the Parliament.
• Transparency vs. secrecy:
  • Secrecy in budget making process makes it prone to crony capitalism. However, given that major government announcements including indirect tax rates (GST) are not part of the budget anymore, some experts view that high level of secrecy isn't needed.

WAY FORWARD:

• Develop a strong database which also involves the till-date unaccounted sections of the economy like the informal sectors.
• Use technology, such as Artificial intelligence and big data analytics, for effective policy formulation and fiscal predictions.
• Enhance transparency in the process, by publishing pre-budget discussions, simplifying the budget documents etc.
• Focus of financial efficiency over political interests
• Adopt modern fiscal management practices, such as accrual accounting and digitization.

PRACTICE QUESTION:

Q. Write a note on the budget making process in India. Should India continue the present budgeting process. Substantiate your view?

PREVIOUS YEAR QUESTION:

Q. Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets? (10 Marks) (GS 3, 2021)

Q. One of the intended objectives of Union Budget 2017-18 is to ‘transform, energize and clean India’. Analyse the measures proposed in the Budget 2017-18 to achieve the objective? (15 Marks) (GS 3, 2017)