The Budget process stages
STAGE 1: Estimates. Part
A – Expenditure-The Indian Constitution requires the
government to present to Parliament a statement that shows separately the
expected revenues and expenditures, both current and capital by heads of account.
The Budget-making process, in normal times,
gets set in motion by the third quarter of the financial year.
On the expenditure side, initial estimates
are provided by the various ministries. There are two components of expenditure
- plan and non-plan. Of these, plan expenditures are estimated after
discussions between each of the ministries concerned and the Planning
Commission.
Apart from allocations for continuing plan
programmes initiated in earlier fiscal year, the Planning Commission decides on
the new programmes that can be undertaken on the basis of a tentative estimate
or resources available for plan expenditure that is provided to it by the
finance ministry.
Non-plain expenditure for various ministries
are prepared by their financial advisors. These are sent to the expenditure
secretary who, after exhaustive discussions with financial advisors, makes an
assessment of the likely expenditures for the ensuing fiscal year.
In one sense, the assessment of likely
non-plan expenditure is comparatively simple. Nearly 90 per cent of the
non-plan expenditure is accounted for by interest payments, subsidies (mainly
on food and fertilisers) and wage payments to employees.
STAGE
1: Estimates. Part B – Revenue-Parallel
to the exercises on the expenditure side, an assessment is made of the revenues
which are likely to flow into the government kitty. Revenue receipts, like
expenditure, are of two types - capital and current receipts.
Capital receipts include repayment of loans
made by the federal government, receipts from divestment of public-sector
equity and borrowings - both domestic and external.
Current receipts, by and large, include tax
revenues, receipts by way of dividends from public-sector units and interest
payments on loans given out by the federal government.
While both dividends from public-sector units
and interest receipts are fairly easy to assess, the amounts received by way of
tax revenues is estimated on the basis of existing rates of taxation and an
assessment of the likely growth and inflation rate over the ensuing fiscal
year.
On the capital receipts side, targeted
amounts to be realised through divestment of public sector equity and amounts
to be realised by way of repayments of loans is made. All the estimates flow to
the revenue secretary.
STAGE
2: First estimates of deficit-Once
this exercise is completed expenditure estimates are matched with revenue
estimate to arrive at a first estimate of the shortfall in revenue to meet
projected expenditure.
Following this the government, in tandem with
its chief economic advisor, determines the optimum level of borrowings that the
government can resort to.
The level of external borrowings is an easily
estimated figure because much of the external borrowing on government account
consists of bilateral and multilateral assistance which is known by the time
budget exercises are undertaken.
The level of domestic borrowing depends
partly on the desired level of fiscal deficit that the government targets for
itself. A part of the revenue gap is left unfilled to be met through the issue
of ad hoc treasury bills. Over the past few years, this gap, called the overall
budget deficit, is government by an understanding between the Reserve Bank of
India and the finance ministry on the maximum level of ad hoc treasury bills
that can be issued during a fiscal year.
This has been done to ensure that the issue
of ad hoc treasury bills to fill revenue gaps does not lead to problems of
monetary management.
STAGE
3: Narrowing of the deficit-After
the targets for the fiscal deficits and the overall budget deficit have been
decided by the government, any remaining shortfall is filled through a revision
in tax rates where considered feasible and in keeping with fiscal incentive
structure the government wishes to put in place to stimulate the growth in
different sectors.
Subsequently adjustments are made in
expenditures, should it be required, to ensure that the fiscal and overall
deficit remain at targeted levels.
Such adjustments in expenditure are usually
made on the plan side - the only item of expenditure that offers any scope for
adjustments. With nearly 90 per cent of non-plan expenditure being accounted
for by interest payments, subsidies and administrative expenditure and the
political sensitivities involved in reducing subsidies, non-plan expenditure of
the Indian government is characterised by an extraordinary degree of rigidity.
Inevitably, therefore, plan expenditures are
determined as a residual after pre-emptions have already been made for non-plan
expenditure.
STAGE
4: The BudgetThe presentation of the Budget for the
ensuing fiscal year (beginning April 1) is usually done on the last working day
of February. Parliamentary scrutiny of proposals and the passage of the budget
does not normally get completed until the second week of May, well after the
commencement of the new fiscal year.
Since expenditures cannot be incurred in a
new fiscal year without Parliamentary approval, the government usually seeks an
interim approval to meet emergent expenditures that have to be incurred pending
the approval of the budget.
This is called the vote-on-account and the
sanctions given by the passage of the vote-on-account get automatically
overridden once the Budget is approved by Parliament.
It's
that time of the year when conversation veers round to the topic of the
forthcoming Budget.
The
Budget is a huge fiscal exercise and it is interesting to find out how India
goes about the budget process and how it balances its books.
Flow
along this chart to find out how India goes about balancing its books:
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