Union Budget: When, what, how and why?

31st January 2017
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The budget announcement for many seems like a once in a year ‘ritual’ event that must be done with, like any other annual event.

Is the Union Budget as routine as its made out to be or is there a deeper meaning behind it?

When

The Union Budget is declared by the Ministry of Finance. The Finance Minister walks up to the podium every year, same month, almost same day (last week or last day of February, usually) and delivers the budget in an hour long speech.

The speech is usually not a very exciting affair for the lay individual. And in this age of 140 alphabets and insta images, not many would be patient enough to sit through the entire speech.

But once you cut through the seemingly ‘boring’ speech, the Budget unravels some serious implications for individuals, families and businesses.

What

First, let us invest some time in understanding the budget basics.
Any systematic plan for the expenditure of a fixed amount of money over a given period, usually a year, can be loosely defined as a budget.

  1. When it relates to an individual, it’s a personal budget.
  2. For a family, it’s a household budget.
  3. For a country, it’s a union budget.

The Union Budget is a detailed account of the government`s finances. It is a statement that aggregates total income and expenses of the government both in revenue and capital.

Think of the Union Budget as an annual report of a company with revenue and capital statements. Only difference is that while an annual report is backward looking, the budget aims to gaze into the future.

How

The Union Budget is a compilation of two underlying budgets:

a.       Revenue Budget

The revenue budget is a combination of the government’s revenue receipts – from tax and non-tax avenues and the expenditure earmarked against the revenue.

Tax revenues consist of taxes such as income tax, excise, customs and corporate tax among other government levies.

The interest and dividend income on investments of the government, fees and other receipts for services rendered by the government fall under the broad head of non-tax revenue.

The day-to-day functioning of the government, the servicing cost of government borrowings as also subsidies are met from the revenue expenditure.

b.      Capital Budget

The country’s capital receipts and expenses form part of the Capital Budget. The difference between capital and revenue is that capital results in asset creation.

Capital receipts are a combination of:

  • loans raised by the government from the public
  • borrowings from the central bank and others
  • loans received from foreign governments and international bodies like the IMF
  • recovery of loans granted by central government to states and union territories

Capital expenditure is the sum of all money that goes towards acquisition of assets like land, buildings, equipment, machinery, investments in shares, etc. as also loans and advances granted by the central government to state and union territories, public sector companies, corporations and others.

Three categories of Budgets

When the Budget is prepared / announced, it will fall in one of the three categories:

  • When the government’s entire revenue equals proposed expenditure we have a balanced budget.
  • When the revenue exceeds expenditure, there is a budget surplus.
  • When expenditure exceeds revenue – there is a budget deficit.

Of the three, a budget deficit is most common.

Why

You are likely to have an idea by now of what constitutes the Budget and why it’s important to have one every year.

Put simply:

  • A well-planned Budget, preferably with mild to reasonable deficit is critical for the economic well-being of the nation.
  • The nation’s economy, its citizens, its banks and financial institutions inspire much confidence from a well-thought-out Budget that covers all bases – social as also economic.
  • Credit rating agencies are quick to assess the strength of the economy going forward and assign ratings accordingly, so the government is keen to be seen as responsible and forward-looking in its Budget announcement.
  • Investors both domestic as also international keenly track the Budget for the same reasons.
  • Country’s capital markets take cues from the Budget.

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