BUDGET

Article 112 of the Indian constitution, the union budget of the year is referred to as the Annual Financial Statement. Nodal body for budget preparation-Department of Economic Affairs in the Finance Ministry. There is a need therefore to have two accounts- those that relate to the current financial year only are included in the revenue account (also called revenue budget) and those that concern the assets and liabilities of the government into the capital account (also called capital budget).

1. Redistribution function of Budget 

The government sector affects personal disposable income by making transfers and collecting taxes. It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function.

1. 1. Classification of Receipts

Revenue Receipts

• Revenue receipts are those receipts that do not lead to a Claim on the government. They are therefore termed non-redeemable.
• They are divided into tax and non-tax revenues. Tax revenues, an important component of revenue receipts, have for long been divided into direct taxes (personal income tax) and firms (corporation tax), and indirect taxes like excise taxes (duties levied on goods produced within the country), customs duties (taxes imposed on goods imported into and exported out of India) and service tax.
• Other direct taxes like wealth tax, gift tax and estate duty (now abolished) have never brought in large amounts of revenue and thus have been referred to as ‘paper taxes. 
• Non-tax revenue of the central government mainly consists of interest receipts. On account of loans by the central government, dividends and profits. 
• Investments made by the government, fees and other receipts for services rendered by the government. Cash grants-in-aid from foreign countries and international organizations are also included.

• The government also receives money by way of loans or from the sale of its assets. Loans will have to be returned to the agencies from which they have been borrowed. Thus they create liability.
• The sale of government assets, like the sale of shares in Public Sector Undertakings (PSUs) which is referred to as PSU disinvestment, reduces the total amount of financial assets of the government. All those receipts of the government which create liability or reduce financial assets are termed capital receipts.
• When the government takes fresh loans it will mean that in future these loans will have to be returned and interest will have to be paid on these loans. Similarly, when the government sells an asset, then it means that in future its earnings from that asset will disappear. Thus, these receipts can be debt-creating or non-debt-creating. 
• Progressive Tax is a tax that takes a larger percentage of income from high-income groups than from low-income groups.
• A proportional Tax is a tax that takes the same percentage of income from all income groups.
• A regressive Tax is a tax that takes a larger percentage of income from low-income groups than from high-income groups.

1. 2. Classification of Expenditure 

 Revenue Expenditure 

• Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government.
•  It relates to those expenses incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the government, and grants given to state governments and other parties (even though some of the grants may be meant for the creation of assets).
• Budget documents classify total expenditure into plan and non-plan expenditure
• A distinction is made between plan and non-plan.
• According to this classification, plan revenue expenditure relates to central Plans (the Five-Year Plans) and central assistance for State and Union Territory plans.
• Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items of non-plan expenditure are interest payments, defence services, subsidies, salaries and pensions.
• Interest payments on market loans, external loans and from various reserve funds constitute the single largest component of non-plan revenue expenditure.
• Defence expenditure is committed expenditure in the sense that given the national security concerns, there exists little scope for drastic reduction. Subsidies are an important policy instrument which aims at increasing welfare.
• Apart from providing implicit subsidies through under-pricing of public goods and services like education and health, the government also extends subsidies explicitly on items such as exports, interest on loans, food and fertilizers. 

Capital Expenditure 

• There are expenditures of the government which result in the creation of physical or financial assets or a reduction in financial liabilities.
• This includes expenditure on the acquisition of land, buildings, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments, PSUs and other parties.
• Capital expenditure is also categorised as plan and non-plan in the budget documents.
• Plan capital expenditure, like its revenue counterpart, relates to the central plan and central assistance for state and union territory plans.
• Non-plan capital expenditure covers various general, social and economic services provided by the government. 

2. Balance, Deficit, Surplus Budget 

• The government may spend an amount equal to the revenue it collects. This is known as a balanced budget. If it needs to incur higher expenditures, it will have to raise the amount through taxes to keep the budget balanced.
• When tax collection exceeds the required expenditure, the budget is said to be in surplus.
• However, the most common feature is the situation when expenditure exceeds revenue. This is when the government runs a budget deficit. 
• The 2005-06 Gender Budgeting- Indian Budget introduced a statement highlighting the gender sensitivities of the budgetary allocations.
• Gender budgeting is an exercise to translate the stated gender commitments of the government into budgetary commitments, involving special initiatives for empowering women and examination of the utilization of resources allocated for women and the impact of public expenditure and policies of the government on women

3. Measure of Government Deficit 

Revenue Deficit

• The revenue deficit refers to the excess of the government’s revenue expenditure over revenue receipts.
• Revenue deficit = Revenue expenditure – Revenue receipts
• The revenue deficit includes only such transactions that affect the current Income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the Savings of the other sectors of the economy to finance a part of its consumption expenditure.
• This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a buildup of stock of debt and interest liabilities and force the government eventually, to cut expenditure.
• Since a major part of revenue expenditure is a committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.

Fiscal Deficit

• A fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.
• Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).
• Nondebt-creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt.
• The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.
• Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad. 

Primary Deficit

• The goal of measuring primary deficit is to focus on present fiscal imbalances. To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the Primary deficit.
• Gross primary deficit = Gross fiscal deficit – Net interest liabilities Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.
• The proportional income tax, thus, acts as an automatic stabilizer – a Shock absorber because it makes disposable income, and thus consumers.  Spending is less sensitive to fluctuations in GDP.
• When GDP rises, disposable income also rises but by less than the rise in GDP because a part of it is siphoned off as taxes. This helps limit the upward fluctuation in Consumption spending.
• During a recession when GDP falls, disposable income falls less sharply, and consumption does not drop as much as it otherwise would have fallen had the tax liability been fixed. This reduces the fall in aggregate demand and stabilises the economy.
• We note that these fiscal policy instruments can be varied to offset the effects of undesirable shifts in investment demand. That is, if investment falls from I0 to I1, government spending can be raised from G0 to G1 so that autonomous expenditure (C + I0 + G0 = C + I1 + G1) and equilibrium income remain the same. This deliberate action to stabilise the economy is often referred to as discretionary fiscal policy.

Deficit Reduction

Government deficit can be reduced by increasing taxes and reducing expenditure.

How the government is raising receipts

• By direct taxes
• By sale of shares of PSU
• Reducing expenditure by better planning of programmes and better administration
• Withdrawal of government from areas (right-sizing or downsizing government)

Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)

• It requires the reduction in fiscal deficit by 0.3 per cent of GDP each A year and the revenue deficit by 0.5 per cent. If this is not achieved through tax revenues, the necessary adjustment has to come from a reduction in expenditure.
• The actual deficits may exceed the targets specified only on grounds of national security or natural calamity or such other exceptional grounds as the central government may specify.
• The central government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess cash disbursements Over cash receipts.
• The Reserve Bank of India must not subscribe to the primary issues of Central government securities from the year 2006-07. Measures to be taken to ensure greater transparency in fiscal operations.
• The central government is to lay before both Houses of Parliament three Statements – the Medium-term Fiscal Policy Statement, The Fiscal Policy Strategy Statement, the Macroeconomic Framework Statement along the Annual Financial Statement.
• A quarterly review of the trends in receipts and expenditures about the budget be placed before both Houses of Parliament. 

GST: One Nation, One Tax, One Market

• Goods and Service Tax (GST) is the single comprehensive indirect tax, Operational from 1 July 2017, on the supply of goods and services, right from the Manufacturer/ service provider to the consumer. It is a destination-based Consumption tax with the facility of Input Tax Credit in the supply chain. It is applicable throughout the country with one rate for one type of goods/service.
• It has amalgamated a large number of Central and State taxes and cesses. It has replaced a large number of taxes on goods and services levied on the production/ sale of goods or provision of service.
• As there have been several intermediate goods/services, which Were manufactured/provided in the economy, the pre-GST tax regime Imposed taxes not on the value added at each stage but on the total value Of the commodity/service with the minimal facility of the utilization of Input Tax. 
• Under GST, the tax is discharged at every stage of supply and the credit of tax paid at the previous stage is available for set off at the next stage of supply of goods and/or services. It is thus effectively a tax on value addition at each stage of supply. Given our large and fast-growing economy, it addresses establishing parity in taxation across the country and extending principles of ‘value-added taxation’ to all goods and services
• Five petroleum products have been kept out of GST for the time being but with time, they will get subsumed in GST. State Governments will continue to levy VAT on alcoholic liquor for human consumption. Tobacco and tobacco products will attract both GST and Central Excise Duty.
• The 101st Constitution Amendment Act received assent from the President of India on 8 September 2016. The amendment introduced Article 246A in the Constitution cross empowering Parliament and Legislatures of States to make laws concerning Goods and Service Tax imposed by the Union and the States.
• Thereafter CGST Act, UTGST Act and SGST Acts were enacted for GST.
• GST has simplified the multiplicity of taxes on goods and services. The laws, procedures and rates of taxes across the country are standardized. It has facilitated the freedom of movement of goods and services and created a common market in the country. It is aimed at reducing the cost of business operations and the cascading effect of various taxes on consumers.
• It has also reduced the overall cost of production, which will make Indian products/services more competitive in the domestic and International markets. It will also result in higher economic growth as GDP Is expected to rise by about 2%.