Updated Mar 24, 2022

What is the Union Budget?

What is the Union Budget?

The Union Budget of India, also known as the Annual Financial Statement, describes the government's estimated receivables, payables, and receipts for the following fiscal year. As per Article 112 of the Indian Constitution, the government must present a budget at the Parliament before the financial year begins. Accordingly, the budget division of the DEA in the finance ministry produces it. This article consists of details about the Union Budget, its work structure, and its importance.

Components of the Annual Budget Statement

The Union Budget has two parts -

1. Capital budget

It is a detailed account of the government’s capital payments and receipts. Capital payments include the money spent on infrastructure development, healthcare, long-term assets, etc., while capital receipts account for the loans taken from the public or the RBI.

1. Revenue budget

It consists of revenue expenditure and receipts. A ‘revenue deficit’ is seen when revenue expenditure overtakes revenue receipts.

Who develops and announces the Union Budget?

The Finance Minister is in charge of preparing the Union Budget with assistance from various bureaucrats and advisors. Further, the ministers consider the views of economists and industry captains. Accounting and finance-related companies also opine during the budgeting exercise.

The third quarter of the financial year marks the onset of the budget-making process. Generally, it consists of five phases:

1. Estimating expenditures

Various ministries put forward their initial estimates of plan and non-plan expenditures. They further discuss the plan expenditures with the Planning Commission, which allocates resources for their completion. The finance ministry provides them with a tentative estimate of the available supplies and finalises the programs.

Food and fertiliser subsidies, interest payments, and wage payments account for non-plan expenditures. The expenditure secretary consolidates and discusses them with financial advisors. Ultimately, a budget estimate is set for the preceding fiscal year.

1. Estimating revenues

Predicting the revenues which flow into the government treasury works simultaneously with estimating the expenditures. Revenue receipts are bifurcated into two - capital and current.

Capital receipts include reimbursement of government loans by public sector equities and borrowings. Current payments are tax revenues and interest payments on the loans. The estimates based on existing tax and interest rates are provided to the revenue secretary.

1. First deficit estimation

The revenue and expenditure estimates are matched, providing the expected shortfall in revenue. The government consults the chief economic advisor and decides on the optimum borrowing level to compensate for the shortage. Bilateral and multilateral budget exercises are undertaken.

1. Shrinking the deficits

If feasible, tax rates are revised to fill the shortfalls. The committee adjusts the plan expenditures as the non-plan expenditures are inflexible.

1. Presenting the budget

The Union government lays down the Annual Financial Statement before both houses of the Parliament. The new taxes or funds need to be approved by Lok Sabha and Rajya Sabha. Therefore, the government drafts an Appropriation Bill and the Finance Bill. The approved bills can levy new taxes and modify existing ones.

The Rajya Sabha then comments on both the bills, which the Lok Sabha may or may not agree with. Then, the President signs the bills, and they become laws.

The budget comes into effect from April 1 and terminates on March 31 of the next year.

When is the Union Budget announced?

Traditionally until 1999, the Union Budget was announced at 5:00 pm on the last working day of February. However, Yashwant Sinha, the then Finance Minister of India, changed the announcement time to 11:00 am.

From 2016, the budget is presented on the first of February, a practice started by Arun Jaitely. Moreover, the Rail Budget was merged with the Union Budget.

Role of the Union Budget in the Indian economy

As a parliamentary democracy, the government cannot randomly borrow, spend, or tax money. The budget checks the government's efficient functioning and improves the economic framework. Moreover, it brings about rapid but balanced growth through the following:

1. Ensuring adequate resource allocation.
2. Developing efficient fiscal policies.
3. Narrowing income and wealth disparities.
4. Foreseeing inflation and deflation of commodities.
5. Reducing unemployment and poverty.
6. Modifying taxation.

Conclusion

Understanding the Union Budget is central to comprehending the Indian economy. Besides determining the financial development, the budget serves as a blueprint for the government's plans in the subsequent year. Moreover, the general public can also estimate the reliability of the current political party through its financial statement.