The Making of India’s Union Budget: Process, Classification, and Outcomes

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  • 30 Jan 2024
The Making of India’s Union Budget: Process, Classification, and Outcomes

The Union Budget of India is not just an annual financial statement but a reflection of the nation's aspirations, challenges, and socio-economic priorities.

Prepared by the Department of Economic Affairs (DEA) in the Ministry of Finance and presented by the Finance Minister, the budget outlines the government's estimated earnings and expenditures for the upcoming fiscal year.

Ever wondered what goes behind crafting the Union Budget?

Well, the budget-making process in India is a meticulous exercise. It combines economic forecasting, detailed planning, strategic policymaking, and many other factors that aim to steer India towards growth and stability.

Let’s have a look at how the budget is prepared – right from the planning to its announcement.

The budget-making process commences in the third quarter of the financial year. It begins with the finance minister, aided by advisors and bureaucrats, initiating consultations and gathering suggestions from various sectors.

This stage involves issuing budget circulars to ministries and departments, collecting data on current and past fiscal years, and estimating future financial needs.

Expenditure Assessment

At this stage, ministries provide estimates of expenditures, which are crucial in resource allocation.

Financial advisors prepare these estimates, and after intense discussions and scrutiny, the expenditure secretary consolidates them into a budget estimate for the upcoming fiscal year.

Revenue Projections

An assessment of expected revenues is made alongside expenditure assessment.

Revenue projections are vital to the Union Budget as they determine the government's capacity to fund its activities for the upcoming fiscal year.

This process involves assessing various income streams and balancing economic trends with fiscal strategies.

These could be capital receipts or current receipts.

• Capital Receipts

Capital receipts, which include loan recoveries, proceeds from divestments, and borrowings, are significant but non-recurring sources of revenue. They reflect the government's asset management and borrowing strategies, impacting long-term financial health.

• Current Receipts

Current receipts, mainly comprising tax revenues and non-tax revenues, form the backbone of regular government income. Tax revenues, including direct taxes and indirect taxes, are projected based on economic trends, existing tax policies, and potential reforms. Non-tax revenues, such as dividends from public enterprises and fees, offer a more stable income source to the government.

• The Process of Revenue Estimation

Revenue estimation involves analysing economic indicators, assessing the impact of policy changes, and reviewing historical data to project future trends.

This exercise requires careful consideration of economic growth, inflation, and consumer behaviour, along with an understanding of how policy shifts might affect revenue streams.

These estimates are critical in projecting the government's financial capacity for the upcoming year.

Here, the Finance Ministry compares the projected expenditures against the expected revenues.

This comparison reveals the initial fiscal deficit - the gap between what the government earns and what it plans to spend.

With inputs from the Chief Economic Advisor, the government decides the optimal level of borrowing to finance this deficit, keeping in mind the impact on the economy.

In this stage, the government fine-tunes its fiscal strategy.

If the deficit is larger than desired, it might consider revising tax rates or finding new revenue sources.

However, often the adjustments are made in planned expenditures due to the rigid nature of non-plan expenditures, like subsidies and interest payments, which are politically sensitive and less flexible.

The final budget is prepared in adherence to constitutional requirements.

The finance minister presents the budget in Parliament, usually on the first working day of February.

This presentation is mandated by Article 112 of the Constitution, which requires the government to present an annual financial statement.

• The Legislative Process

After the presentation, the budget goes through the legislative process, involving the introduction and passage of the Appropriation Bill (authorising expenditure) and the Finance Bill (detailing tax proposals).

The Appropriation Bill is also known as supply bill or spending bill and it is a proposed law that authorises the expenditure of government funds.

The Finance Bill specifies all legal amendments required for the changes in taxation proposed by the Finance Minister.

Both of these bills need approval from both houses of Parliament and the President's assent to become law.

• The Vote-on-Account

In the case of Interim Budget, where the formal approval of the budget extends beyond the beginning of the fiscal year, the government seeks a vote on account.

This allows the government to meet essential expenses and keep the administration running until the full budget is passed.

So, the heart of the budget-making process involves the allocation of revenues to administrative ministries and the drafting new public welfare schemes.

If there are any disputes over resource allocation, they are often sent to the Union Cabinet or the Prime Minister for a final decision.

Simultaneously, the Finance Ministry collaborates with the taxation departments to project future tax revenues. These projections, coupled with expenditure plans, form the Union Budget.

Importantly, the Ministry also engages with public stakeholders like farmers and entrepreneurs, ensuring a budget that resonates with diverse needs.

The Halwa Ceremony, traditionally conducted before the commencement of the budget printing process, brings together India's rich cultural heritage and its modern bureaucratic practices.

This ceremony is an annual ritual in which traditional desert Halwa is prepared and served to officials and staff members of the finance ministry involved in the preparation of the Budget.

This ritual, dating back several decades, signifies the beginning of the lockdown period for the officials involved in budget printing, ensuring the document's confidentiality.

The culmination of this process is the presentation of the Union Budget in Parliament, typically on February 1.

In election years, the Budget is presented twice.

Initially, an Interim Budget, known as a vote on account, is presented, which provides an estimate of expenditures and receipts for the next two to four months. After the election, the new government presents the final Budget for the remaining fiscal year.

So, there you have it - the important steps involved in the development of the Union Budget and how they play a significant role in shaping the country's financial landscape.

As we look ahead, the Union Budget will continue to play a pivotal role in shaping India's economic and social trajectory.

It's not just a financial statement but a reflection of the country's priorities and a blueprint for its future.

The challenges and opportunities that lie ahead in budget formulation, especially in the face of current global economic uncertainties and technological advancements, are significant.

India's budget process must adapt to these changes, balancing fiscal prudence with the need for growth and development.

To know more about the budget and how it impacts your life, click here for all the Budget 2024 Updates.

Sources: Kotak Securities, Economic Times, Moneycontrol, Business Today

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

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