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Importance of Government Budgeting in India
Government budgeting is crucial for the development and growth of any country. In India, the government’s budget is the most critical economic policy tool used to achieve social and economic objectives. The government’s expenditure policy can impact economic growth, inflation, employment, and income distribution.
The Indian government’s budget is prepared through a consultative process involving various stakeholders, including the public, industry associations, and state governments. The budget is based on a comprehensive assessment of the country’s economic situation, revenue collection, and expenditure needs.
What is Budget?
A budget is a financial plan that outlines an individual or an organization’s expected income and expenses over a specific period, typically a month, quarter, or year. The main purpose of a budget is to help individuals or organizations to manage their money effectively, prioritize their spending, and ensure that they do not overspend or run out of money.
A budget can be created for personal finances, businesses, non-profit organizations, or governments, and typically includes projected income, expenses, savings, and investments. The budgeting process involves identifying income sources, tracking expenses, and setting financial goals to ensure that financial resources are used efficiently and effectively.
Data in Budget
The budget provide the data of three years.
- The actual revenue and expenditure of the previous year.
- The provisional revenue and expenditure of the current year
- The expected revenue and expenditure of the coming year.
Revenue Collection
The Indian government generates revenue through various sources, such as direct and indirect taxes, duties, fees, and other charges. The government’s revenue collection policies are designed to ensure a stable and predictable source of income to fund its developmental and welfare programs.
In recent years, the Indian government has been focusing on increasing tax compliance and broadening the tax base to increase revenue collection. The introduction of the Goods and Services Tax (GST) has streamlined the tax system and reduced tax evasion, resulting in increased tax collections.
Difference between Revenue Receipt and Capital Receipt
| Basis of Differentiation | Revenue Receipts | Capital Receipts |
|---|---|---|
| Meaning | Receipts of income from day-to-day operations of the business or government. | Receipts from the sale of assets, borrowings, or other capital transactions. |
| Nature of Income | Recurring income | Non-recurring income |
| Source | Normal business or government operations | Sale of assets, borrowings, or other capital transactions |
| Purpose | Used for day-to-day expenses and operational requirements | Used for long-term investments or to pay off debts |
| Examples | Tax revenue, interest on investments, fees, charges, grants | Proceeds from the sale of land, borrowing from financial institutions, capital contributions from partners or shareholders |
For instance, in the case of the Indian government, revenue receipts include income tax, excise duty, customs duty, GST, and dividends from public sector enterprises, while capital receipts include loans raised by the government, sale of shares in public sector companies, and disinvestment proceeds.
In the context of a business, revenue receipts may include sales revenue, interest earned on investments, and fees collected from customers, while capital receipts may include proceeds from the sale of property, plant, and equipment, or funds raised through long-term loans.
Expenditure
The government’s expenditure policy focuses on meeting its developmental and welfare objectives. The expenditure is broadly divided into two categories: capital expenditure and revenue expenditure. Capital expenditure is used to create long-term assets such as roads, bridges, and power plants. Revenue expenditure is used for day-to-day operations such as salaries, pensions, and subsidies.
Difference between Capital Expenditure and Revenue Expenditure
| Aspect | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Definition | Expenditure on assets with long-term benefits | Expenditure on routine operations and maintenance activities |
| Nature of expenditure | One-time or infrequent | Recurring |
| Purpose | Investment in long-term assets for future growth | Funding of day-to-day operations and social welfare programs |
| Examples | Purchase of machinery, construction of a new building | Salaries, subsidies, pensions, interest payments, grants |
| Funding | Often financed through borrowing or revenue surplus | Funded through revenue generated by taxes and other sources |
| Impact on the economy | Stimulates economic growth and job creation | Can impact fiscal deficit and inflation rates |
What is revenue deficit
Revenue deficit is a term used in economics and finance to describe a situation in which a government’s total revenue is less than its total expenditure, excluding capital expenditures. In other words, it is the excess of a government’s revenue expenditure over its revenue receipts.
A revenue deficit indicates that the government is spending more money than it is earning from its primary activities, such as taxes, fees, and other non-debt sources. This can be a cause for concern as it may indicate that the government is unable to finance its current expenses through its own revenue sources, and may need to borrow or use other resources to make up the shortfall.
In India’s government budget, revenue deficit is an important metric that is closely monitored. The government aims to reduce or eliminate revenue deficits in order to maintain fiscal stability and avoid excessive borrowing or reliance on external sources of financing. However, revenue deficits may occur due to various factors such as economic slowdown, lower tax collections, or increased expenditure on social welfare programs, which may require the government to take steps to address the underlying causes of the deficit.
Effective Revenue Deficit
Effective Revenue Deficit (ERD) is a more refined measure of revenue deficit, which takes into account the government’s capital expenditure as well. ERD is the difference between the government’s revenue expenditure and its revenue receipts, minus the government’s capital expenditure.
ERD provides a more accurate picture of a government’s financial position as it considers the impact of capital expenditure on the overall deficit. Capital expenditure is spending on long-term assets such as buildings, machinery, and infrastructure that are expected to provide benefits for many years. By subtracting capital expenditure from the overall deficit, ERD reveals the true shortfall of revenue to meet the recurring expenses of the government.
What is Capital Deficit?
Capital deficit is a term used in economics and finance to describe a situation in which a government’s total capital expenditure is greater than its total capital receipts. In other words, it is the excess of a government’s capital expenditure over its capital receipts.
Capital deficit indicates that the government is spending more on long-term investments and assets than it is receiving from its sources of capital, such as loans, sale of assets, or other non-recurring sources. This can be a cause for concern as it may indicate that the government is relying heavily on borrowing or other external sources of financing to fund its long-term investments, which could lead to a high debt burden and lower economic growth prospects in the future.
In India’s government budget, capital deficit is an important metric that is closely monitored. The government aims to reduce or eliminate capital deficits by increasing its capital receipts and/or reducing its capital expenditures. This is important for maintaining fiscal stability and avoiding excessive borrowing, which could negatively impact the country’s overall economic growth and development.
Comparison between Revenue Deficit and Capital Deficit
| Basis of Comparison | Revenue Deficit | Capital Deficit |
|---|---|---|
| Definition | Excess of revenue expenditure over revenue receipts | Excess of capital expenditure over capital receipts |
| Focus | Short-term financial position of the government | Long-term financial position of the government |
| Sources of funds | Revenue receipts such as taxes, duties, and fees | Capital receipts such as loans, disinvestment proceeds, and asset sales |
| Purpose of expenditure | Day-to-day expenses and operational requirements | Long-term investments in infrastructure and assets |
| Implications | Indicates borrowing for recurring expenses | Indicates borrowing for long-term investments |
| Impact on debt | Increases the government’s debt burden in the short term | Increases the government’s debt burden in the long term |
| Target for reduction | Reduction of revenue deficit is a priority for the government | Reduction of capital deficit is a priority for the government |
Overall, revenue deficit and capital deficit are both important measures for assessing a government’s financial position. While revenue deficit reflects the government’s short-term borrowing for recurring expenses, capital deficit reflects the government’s long-term borrowing for investments in infrastructure and assets. Both deficits have implications for the government’s debt burden and overall economic growth, and therefore, reducing them is a priority for the government.
What is Primary Deficit?
Primary deficit is a measure of a government’s budgetary position that indicates the difference between its current expenditure, excluding interest payments on past borrowings, and its current revenue. In other words, it is the excess of current expenditure over current revenue, excluding interest payments.
Reducing primary deficit is often a priority for governments, as it helps to stabilize the economy, reduce debt, and promote long-term growth. In India, the government has set targets for reducing the primary deficit as a percentage of GDP, as part of its fiscal consolidation efforts.
It is important to note that primary deficit is different from overall fiscal deficit, which includes interest payments on past borrowings. By excluding interest payments, primary deficit provides a more accurate picture of a government’s ability to manage its current expenses without relying on further borrowing.
Monetised Deficit
Monetized deficit refers to the process by which a government borrows money from the central bank to finance its budget deficit. In other words, the government issues bonds or securities that are bought by the central bank, which creates money to finance the purchase.
The process of monetizing the deficit is usually done when the government is unable to raise enough revenue through taxes or borrowing from the public to finance its budget deficit. It can lead to an increase in the money supply and inflation if the amount of money created is not matched by an increase in goods and services produced in the economy.
Monetized deficit is generally considered a last resort option for governments, as it can have negative consequences for the economy over the long run. It can also be seen as a form of financial repression, as the central bank effectively finances the government’s budget deficit, which may not be desirable from a governance or accountability perspective.
In India, the Reserve Bank of India (RBI) has in the past monetized the government’s fiscal deficit to some extent, although it has become less common in recent years due to concerns about inflation and macroeconomic stability.
Deficit and Surplus Budget
| Deficit Budget | Surplus Budget |
|---|---|
| Government’s total expenditure exceeds its total revenue in a given period. | Government’s total revenue exceeds its total expenditure in a given period. |
| Government is spending more money than it is earning in revenue. | Government is earning more money than it is spending. |
| Government needs to borrow funds to finance its expenses. | Government has extra funds that can be used for various purposes. |
| Can lead to an increase in debt levels and higher interest payments. | Can be used to pay off debt, invest in infrastructure or social programs, or provide tax relief. |
| Can lead to inflation if the government has to rely on borrowing from the central bank. | Can lead to inflation if the excess funds are not invested productively or if they lead to an increase in demand beyond what the economy can produce. |
| Part of fiscal consolidation efforts to reduce deficits over time. | Not always feasible or desirable, as it can lead to underinvestment in critical areas. |
What is Deficit financing?
It is a method of financing a government’s budget deficit, which occurs when government expenditures exceed its revenue. In deficit financing, the government typically borrows funds from various sources, including the public through bond sales or loans from banks and other financial institutions.
Deficit financing can be either internal or external. Internal deficit financing involves borrowing from domestic sources such as banks, financial institutions, and the public, while external deficit financing involves borrowing from foreign sources, such as other governments or international financial institutions.
Deficit financing can have both positive and negative effects on the economy. On the positive side, it can help finance government spending on critical areas such as infrastructure, education, and healthcare. This can stimulate economic growth and improve living standards. Deficit financing can also help stabilize the economy during a recession, by increasing government spending and supporting demand for goods and services.
On the negative side, deficit financing can lead to an increase in the government’s debt burden and interest payments. This can lead to higher taxes and reduced public spending in the future, which can have a negative impact on economic growth. Deficit financing can also lead to inflation if the government borrows from the central bank, leading to an increase in the money supply.
In India, the government has relied on deficit financing to fund its budget deficits in the past. However, it has been working to reduce its reliance on borrowing and promote fiscal discipline, as part of its efforts to achieve sustainable economic growth. The government has also been exploring new sources of revenue and increasing tax compliance, to reduce the need for deficit financing.
Ways of deficit financing in India
Deficit financing refers to the practice of borrowing funds by the government to finance its budgetary requirements when its revenue is insufficient to meet its expenses. Here are some ways in which deficit financing is done in India:
- Borrowing from the Reserve Bank of India (RBI): The government can borrow money from the RBI, which is the central bank of India. The RBI lends money to the government through various instruments such as treasury bills, government bonds, and other market instruments.
- Issuing government securities: The government can issue securities such as bonds and debentures to borrow money from the public. These securities are sold to the public through auctions and the funds raised are used to finance the budgetary requirements.
- External borrowing: The government can borrow funds from international financial institutions and foreign governments to finance its budgetary requirements. The funds are typically used for infrastructure development and other long-term projects.
- Printing currency: The government can print more currency to finance its budgetary requirements. However, this can lead to inflation if the increased money supply exceeds the growth of goods and services in the economy.
It is worth noting that deficit financing can lead to a high level of public debt, which can have adverse effects on the economy. Therefore, it is important for the government to ensure that the deficit is kept under control and the borrowed funds are used effectively to promote economic growth and development.
Effects of Deficit Financing
Deficit financing can have both positive and negative effects on the economy. Here are some of the effects of deficit financing:
- Inflation: One of the negative effects of deficit financing is inflation. If the deficit is financed by printing more currency, it increases the money supply in the economy, which can lead to an increase in prices of goods and services.
- Public Debt: Deficit financing leads to an increase in public debt, which can have adverse effects on the economy in the long run. A high level of public debt can lead to a reduction in private investment, higher interest rates, and lower economic growth.
- Crowding out of private investment: When the government borrows funds to finance its budgetary requirements, it competes with private borrowers for the available funds, which can lead to an increase in interest rates and a decrease in private investment.
- Economic growth: Deficit financing can also have positive effects on the economy if the borrowed funds are used effectively to finance infrastructure development and other long-term projects that promote economic growth.
- Exchange rate: Deficit financing can also lead to a depreciation of the currency as a result of increased money supply and inflation, which can affect the country’s international trade.
It is important for the government to use deficit financing judiciously and ensure that the borrowed funds are used effectively to promote economic growth and development while keeping the negative effects under control.
Fiscal consolidation refers to a set of measures taken by a government to reduce its budget deficit and stabilize its finances. It involves a combination of policies aimed at increasing revenue and reducing expenditure, with the goal of achieving a sustainable fiscal balance over the medium to long term.
Fiscal consolidation measures can include a wide range of policies, such as tax reforms, public expenditure cuts, wage freezes or reductions, privatization of state-owned enterprises, and reduction of subsidies, among others. The aim is to reduce the government’s borrowing needs, debt levels, and interest payments, while maintaining or improving public services and economic growth.
Impact on Indian Economy
Government budgeting has a significant impact on the Indian economy. The budget’s policies can influence economic growth, inflation, employment, and income distribution. The government’s fiscal policies can also impact the investment climate, as it creates a stable and predictable business environment.
The Indian government’s recent budgetary policies have been focused on increasing public investment in infrastructure, boosting demand, and supporting the vulnerable sections of society. These policies have helped to stimulate economic growth and reduce income inequality.
FRBM Act, 2003
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is an Indian law enacted by the Parliament of India to ensure fiscal discipline and accountability of the government in managing public finances. The FRBM Act aimed to reduce the fiscal deficit, which is the gap between the government’s expenditure and revenue, and to bring it down to a sustainable level.
The FRBM Act, 2003 set targets for the government to reduce its fiscal deficit and debt levels. The Act required the government to bring down the fiscal deficit to 3% of GDP by 2008-09 and reduce the debt-to-GDP ratio to 60% by 2005-06. The Act also mandated the establishment of a Fiscal Responsibility and Budget Management (FRBM) Committee to provide fiscal policy recommendations to the government.
The FRBM Act, 2003 was amended in 2018 to provide greater flexibility to the government in achieving its fiscal targets. The amended Act allows the government to deviate from the fiscal deficit targets in certain circumstances, such as during times of economic slowdown or natural disasters. The amended Act also introduced a debt-to-GDP ratio target of 40% for the central government and 20% for the state governments.
The FRBM Act, 2003 has been a significant step towards ensuring fiscal discipline and accountability in India. However, there have been criticisms of the Act for being too rigid and inflexible, which has hindered the government’s ability to respond to economic shocks and emergencies. Despite these criticisms, the FRBM Act remains an important tool for promoting sound fiscal management in India.
Zero-Based Budgeting (ZBB)
It is a budgeting process that requires organizations to justify all expenses for each new period, regardless of whether the expenses were included in the previous period’s budget. In other words, in a ZBB process, every expense item must be justified, reviewed and approved, starting from a zero base.
In traditional budgeting processes, the previous year’s budget is often used as a starting point for the next year’s budget, with only incremental changes being made. This can result in inefficiencies and unnecessary expenses being carried forward from year to year. ZBB, on the other hand, requires every expense to be evaluated and justified, leading to a more efficient allocation of resources.
The ZBB process typically involves several steps, including:
- Identifying the objectives and goals for the upcoming period.
- Evaluating each activity and program that contributes to those goals and determining the cost of each activity.
- Prioritizing the activities and programs based on their contribution to the goals and the cost of each activity.
- Preparing the budget based on the prioritized activities and programs, starting from zero.
ZBB has advantages and disadvantages. On the one hand, it can lead to a more efficient allocation of resources and encourage greater accountability and transparency. On the other hand, it can be time-consuming and resource-intensive to implement.
What is Charged Expenditure in India?
In India, charged expenditure refers to government expenses that are charged on the Consolidated Fund of India (CFI) or the Consolidated Fund of a State. The CFI is the primary account of the government, into which all revenues received and all loans raised by the government are credited, and from which all government expenses are incurred.
Charged expenditures are distinct from voted expenditures, which are expenses that are approved by the Parliament or State Legislature through a vote. Charged expenditures, on the other hand, are mandated by the Constitution or by other laws, and do not require an annual approval.
The following expenses are typically considered charged expenditures in India:
- Salaries and allowances of the President, Vice-President, Governors, Judges, and other constitutional authorities.
- Debt charges, which include interest payments on loans raised by the government, and repayment of the principal amount of loans.
- Expenditures incurred by the Election Commission of India in conducting elections.
- Administrative expenses of the Supreme Court, High Courts, and other courts.
Charged expenditures are usually regarded as non-discretionary expenses, as they are mandated by the Constitution or other laws, and cannot be altered without a constitutional amendment or legislative change. As a result, the government has limited flexibility in reducing or altering charged expenditures to address fiscal deficits.
Debt on Government of India
The Government of India incurs debt when it borrows money to finance its expenses, such as infrastructure projects, social welfare programs, and defense expenditures. The government can borrow money by issuing various types of securities, such as treasury bills, government bonds, and other marketable securities.
The debt on the Government of India is typically divided into two categories: internal debt and external debt.
- Internal debt: This refers to the debt incurred by the government from sources within the country, such as banks, financial institutions, and individuals. Internal debt is issued in the form of government securities, which can be held by banks, institutional investors, and retail investors.
- External debt: This refers to the debt incurred by the government from sources outside the country, such as international financial institutions, foreign governments, and commercial lenders. External debt is typically denominated in foreign currencies and is subject to exchange rate risks.
The Government of India’s debt is managed by the Ministry of Finance through the Department of Economic Affairs. The government’s debt management strategy aims to maintain a balance between the need for borrowing and the need for fiscal sustainability.
As of September 2021, the Government of India’s total outstanding debt was around INR 105 lakh crore, which is approximately 56% of the country’s GDP. The government’s debt-to-GDP ratio is considered to be moderate by international standards, although it has increased in recent years due to the economic impact of the COVID-19 pandemic. The government has been taking various measures to manage its debt, including reducing its fiscal deficit, diversifying its sources of financing, and encouraging foreign investment.
Conclusion
In conclusion, government budgeting in India is a crucial process that plays a significant role in the country’s economic development. The budget’s policies can influence economic growth, inflation, employment, and income distribution. The Indian government’s recent budgetary policies have been focused on increasing public investment in infrastructure, boosting demand, and supporting the vulnerable sections of society. The government’s expenditure policy must be designed to achieve its developmental and welfare objectives while ensuring a stable and sustainable fiscal position.
Government Budgeting : Summary
- Government budgeting in India involves planning and allocation of public resources.
- The Union Budget is presented by the Finance Minister and outlines the government’s revenue and expenditure for the fiscal year.
- Government budgeting is crucial for the development and growth of the country.
- The budget is prepared through a consultative process involving various stakeholders.
- Revenue is generated through direct and indirect taxes, duties, fees, and other charges.
- The government’s revenue collection policies ensure a stable and predictable source of income.
- The introduction of GST has streamlined the tax system and increased tax collections.
- Expenditure is broadly divided into capital expenditure and revenue expenditure.
- Capital expenditure is used to create long-term assets, and revenue expenditure is used for day-to-day operations.
- The government has been increasing its expenditure on social welfare programs.
- The budget’s policies can influence economic growth, inflation, employment, and income distribution.
- The government’s fiscal policies can impact the investment climate.
- Recent budgetary policies have focused on increasing public investment in infrastructure.
- Policies have also aimed to boost demand and support vulnerable sections of society.
- These policies have helped to stimulate economic growth and reduce income inequality.
- The government’s expenditure policy must achieve developmental and welfare objectives.
- The fiscal position must be stable and sustainable.
- Government budgeting in India is a crucial process for the country’s economic development.
- It plays a significant role in achieving economic growth and reducing income inequality.
Government Budgeting : Questions
Q. Who presents the Union Budget in India?
a) The President
b) The Prime Minister
c) The Finance Minister
d) The Governor of RBI
Answer: c) The Finance Minister presents the Union Budget in India.
Q. Which of the following is NOT a source of revenue for the Indian government?
a) Direct taxes
b) Indirect taxes
c) Subsidies
d) Fees and charges
Answer: c) Subsidies are not a source of revenue for the Indian government, they are a form of expenditure.
Q. What is the difference between capital expenditure and revenue expenditure?
a) Capital expenditure is used for day-to-day operations, while revenue expenditure is used to create long-term assets.
b) Capital expenditure is used to create long-term assets, while revenue expenditure is used for day-to-day operations.
c) Both are used for creating long-term assets.
d) Both are used for day-to-day operations.
Answer: b) Capital expenditure is used to create long-term assets, while revenue expenditure is used for day-to-day operations.
Q. What is the impact of government budgeting on the Indian economy?
a) It has no impact on the economy.
b) It can influence economic growth, inflation, employment, and income distribution.
c) It can only influence income distribution.
d) It can only influence economic growth.
Answer: b) Government budgeting can influence economic growth, inflation, employment, and income distribution.
Q. Which policy tool does the Indian government use to achieve social and economic objectives?
a) Monetary policy
b) Fiscal policy
c) Industrial policy
d) Trade policy
Answer: b) The Indian government uses fiscal policy to achieve social and economic objectives.
Q. What has been the focus of recent budgetary policies in India?
a) Increasing public investment in infrastructure
b) Reducing tax compliance
c) Cutting government spending
d) Privatizing public sector enterprises
Answer: a) Recent budgetary policies in India have focused on increasing public investment in infrastructure.
Q. Which tax reform has streamlined the tax system and reduced tax evasion in India?
a) Value-added tax (VAT)
b) Income tax
c) Goods and Services Tax (GST)
d) Corporate tax
Answer: c) The Goods and Services Tax (GST) has streamlined the tax system and reduced tax evasion in India.
Q. What must be the goal of the government’s expenditure policy?
a) To achieve developmental and welfare objectives while ensuring a stable and sustainable fiscal position
b) To increase revenue collection without regard to other objectives
c) To prioritize capital expenditure over revenue expenditure
d) To prioritize revenue expenditure over capital expenditure
Answer: a) The government’s expenditure policy must aim to achieve developmental and welfare objectives while ensuring a stable and sustainable fiscal position.
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