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Deconstructing Union Budget
KS NARAYANAN | New Delhi, March 1, 2012 16:45
Tags : Deconstructing Union Budget | Union Budget | |
Tags : Deconstructing Union Budget | Union Budget | |
Like every family, or a business venture, governments need a budget. A budget for any country is a road map for meeting its security needs, fulfill welfare commitments and lay down infrastructure.
The budget process in India predates the Independence. Budget was first introduced on April 7, 1860, two years after the transfer of Indian administration from East-India Company to British Crown.
The first finance member, who presented the budget, was James Wilson. Liaquat Ali Khan, member of the interim Government presented the budget of 1947-48. The first budget of Independent India was presented by R.K. Shanmukham Chetty on November 26, 1947, in the backdrop of partition and riots. Since then India has had as many 80 budgets.
So if it is an annual event how come there have been 80 budgets instead of 64 till 2011? That is because there have been times when the government had to present a budget before elections or did not have adequate time to prepare for it.
Then the obvious question: Why can’t a budget wait and why present an interim budget? If a regular budget is not presented before March 31 and further approval for funds for expenditure is not set, the government can come to standstill. So an interim budget is needed to be presented to keep the government running until a regular budget is passed by Parliament.
The budget has to be passed by Parliament before it can come into effect on April 1, the start of India’s financial year. Much before the Union Budget is presented, the finance minister also tables in Parliament the Economic Survey.
Another mega event preceding the Union Budget is the Railway Budget presented by railway minister. Railway Budget figures relating to the receipt and expenditure of the railways are also shown in the general budget, since they are part and parcel of the total receipts and expenditures of the Government of India.
The Economic Survey acts as a report card-with a detailed analysis of the economic situation of the country. “This document is helpful for a better appreciation of the proposals for resource mobilisation and budgetary allocation for the ensuing year,” notes the Budget Manual.
Prez’ address to Budget Session
The Union Budget is presented during the budget session of Parliament that begins with an address by the President giving a broad contour of his/her government’s policies. Union Budget presentation is a constitutional requirement in India. Under 112 of the Constitution, the President is obliged to have an Annual Financial Statement of the ensuing financial year laid before Parliament.
Finance ministers cannot decide when he or she can present the Union Budget. Convention demands that they present the government’s annual financial statement on the last day of February. If the last day of February happens to be a Sunday, then the day of the Budget presentation is advanced by a day. And if Saturday is a public holiday, the Budget is presented a day before. Indeed, finance ministers had the freedom to choose their day of Budget presentation only on 16 occasions including India’s first finance minister.
They could do so mostly because of elections requiring some more time before the newly-formed government could present the budget. Thus, the convention of presenting budgets on the last day of February got bypassed in those years.
What comprises the annual financial statement called as ‘General Budget’? It would be good to recall what Union finance minister, Pranab Mukherjee had said while releasing the Budget Manual in September 2010. “The Budget is shrouded with mystery. Many of the functions and activities related to budget are not placed in any single document”.
It contains Key to Budget, Budget Highlights, Budget Speech (read by Union finance minister), Budget at a Glance, Finance Bill, Memorandum, Receipt Budget, Expenditure Budget, Customs and Central Excise, Implementation of Budget, Announcements, The Macro Economic Framework Statement, The Medium Term Fiscal Policy Statement, The Fiscal Policy Strategy Statement and The Outcome Budget. The nation’s General Budget has two major parts: Revenue and Expenditure. Assessing the revenues from different central taxes is the primary function of the Department of Revenue and the expenditure estimates for the current and the next year for various expenditure heads.
Process of budget making
Where does the process begin? It is a six to seven month long process that begins every year in September with a strict time line that starts with the budget division of the ministry of economic affairs issuing a circular to all the Union ministries, states, Union Territories, autonomous bodies and the three arms of the defence forces for preparing the budget estimate for the next financial year.
Soon after the ministries and departments send in their demands, extensive consultations are held between these ministries and the department of expenditure to arrive at the final budget for each of them. The financial adviser in every ministry is called by the ministry of finance and asked about the expenditure of the amount allocated to his ministry. Generally, ministries are not able to spend the allocated amount but some may overspend as well.
Different ministries are also asked to give their fund requirement, which forms a part of budget estimate. But based on the inputs of ministries, a revised estimate (RE) is prepared. Revised estimate is the means to know how much is actually required by the ministry.
Budget Advocacy or lobbying
As India is the world’s most populous democracy, the annual event like the process of making of Union Budget can ill-afford to ignore various interest and pressure groups in the country.
Realising this well, the Union finance minister holds luncheon meeting with various interest groups like farmers, industry, trade unions, banking and the financial sector, civil society and economists and hears their expectations.
Not all suggestions are considered. Even the industry chambers that are well organised in their lobbying efforts feel only one-fourth of their suggestions are considered. Says economist DH Pai Panandikar, “I would say hardly 20 to 25 per cent are given due importance by the government”.
One should not assume that Union Budgets are prepared in vacuum by mere discussions with government departments and interest groups. Union Budgets are a vehicle and instruments to achieve the goals set by the Planning Commission periodically. Set up in 1950, the Planning Commission looks at the efficient distribution of resources and revenue for states.
Currently India is in the 11th-Five year Plan that ends in 2012. After approving the plans prepared by the state governments, the Planning Commission too goes into stock-taking mode in the process of preparing for Union Budget. It starts meeting with ministries in the month of September-October and reviews ongoing schemes of the ministries and considers allocation for them. It may decide to stop some ongoing scheme or merge two similar schemes. This is how an estimate of Plan Budget is prepared.
The Planning Commission conveys to the ministry of finance that it requires an ‘X’ or ‘Y’ amount to run planned schemes for next financial year.
Another valuable input that goes into budget making is through the recommendations by Comptroller and Auditor General (CAG) of India that audits accounts of various schemes, projects and accounts of administrative ministries.
Soon after budget meetings are over a final call is taken on the tax proposals by the finance minister. In this, the department of revenue in finance ministry has two boards — Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). By mid-January, these boards give the figure of tax collection up to December 31.
The boards also estimate the tax revenue expected in the next financial year. The integrity of the budget making depends on the realistic nature of these estimates particularly in the face of the fiscal discipline imposed by the Fiscal Responsibility and Budget Management Act that limits its spending and borrowing.
In short the Planning Commission is responsible to set overall targets for the ministries, CAG checks the accounts, administrative ministries submit their requirement and priorities and in the finance ministry, the department of expenditure evaluates and prepares expenditure estimates, department of economic affairs prepares the estimates for non-tax revenue and deficits budgets, department of revenue prepares the tax revenue estimates.
Once these issues are fixed, the finance minister takes the budget to the Prime Minister who is head of the government for consultations before it is finalised. Time and again several Union finance ministers have consulted their Prime Minister on the issue.
While presenting the budget, the finance minister has to feel the people’s mood: if it is an election year, how to balance accounts, whether to introduce reforms, cut fiscal deficit or give stimulus package and widen tax net to fund social welfare schemes.
Actual Budget Presentation
Until 2000, the Union Budget was announced at 5 pm on the last working day of the month of February. This practice was inherited from the colonial era, when the British Parliament would pass the budget in the noon followed by India in the evening of the day.
The credit goes to Yashwant Sinha, finance minister in the Atal Behari Vajpayee-led NDA government who changed the ritual by announcing the 2001 Union Budget at 11 am.
Since then the Union Budget is presented at 11 AM on the last working day of February. But this year Union Budget 2012-13 will be presented on March 16 on account of assembly elections in five states: Uttar Pradesh, Uttarakhand, Punjab, Manipur and Goa.
Union finance minister Pranab Mukherjee had earlier stated that there is constitutional sanctity to two dates — one March 31, before which a vote on account should be taken so that there is no problem of withdrawal of money in the new financial year and the 75 days deadline after the presentation of taxation proposals to pass the Finance Bill.
The Budget session of Parliament will start on March 12, with the Railway Budget slated to be presented on March 14 and the government will table the Economic Survey 2011-12 on March 15.
The finance minister’s budget speech contains two parts-Part A deals with the general survey of the country and policy statements while Part B deals with receipts, expenditures and direct and indirect taxation proposals. After the budget speech, the annual financial statement is laid on the floor of the Rajya Sabha.
Legislative process
There is no debate or discussion after the finance minister has presented his budget.
A few days later the Lok Sabha discusses it for two to three days. At the end of the discussion, the finance minister replies to the queries raised by members.
A ‘Vote of Account’ for the expenditure in next two months of ensuing financial year is obtained from Parliament. The House is adjourned for a fixed period. The Demands for Grants of various ministries/departments, including Railways are considered by relevant standing committees. Reports by various Standing Committees are presented to the House. In the house these are discussed ministry-wise and votes on Demands of Grants.
The Lok Sabha Speaker puts all outstanding demands to vote in the House. This device is known as the ‘guillotine’. It cannot be assumed that just because budget has been presented, it is final.
The Lok Sabha has the power to assent or refuse to any demand or even to reduce the amount of grant sought by the government. After general discussion on the budget proposals and voting on Demands for Grants have been completed, the government introduces the Appropriation Bill. The Appropriation Bill is intended to give authority to the government to incur expenditure from and out of the consolidated fund of India.
However in the Rajya Sabha, there is only a general discussion on the budget. It does not vote on the Demands for Grants.
What happens if the Budget proposals are defeated in the Lok Sabha? Then the government has no option but to resign. So far this situation has not emerged in India. The Finance Bill is taken up for consideration after the Appropriation Bill is passed.
It gives effect to the government’s taxation proposals, which are introduced in the Lok Sabha immediately after the presentation of the budget. Once these are done, these bills get the President’s assent.
Notwithstanding this, there are certain provisions in the bill relating to levy and collection of fresh duties or variation in the existing duties which come into effect immediately on the day the bill is introduced by virtue of a declaration under the Provisional Collection of Taxes Act.
Indirect tax proposals come into force as soon as they are announced; direct tax proposals await approval by Parliament.
Shrouded in secrecy
The whole process of budget making is shrouded in secrecy and strict vigil. Once it is frozen, the Budget Division in the Finance Ministry gets on with the task of preparing all the budget documents and converts these documents into ready to print template formats in a Compact Disc.
Less than a week before the actual budget presentation, the finance minister hands over the CD to the press for printing of budget documents.
Earlier budgets were printed in the Rashtrapati Bhawan. From 1950s the printing venue was shifted to central Delhi-based Minto Road security press. In 1980, the Union Budget was printed at the special printing press in the basement of the North Block of the Central Secretariat in the National Capital.
The entire process of collecting data and preparation of the budget document is done by selected officials stenographers, legal officers, technicians working on computers which are de-linked from all networks, including NIC hot link and do not have access to their mobile phones. Still the Intelligence Bureau (IB) monitors every movement, phone calls and the security of all officials involved with budget preparation and production. All electronic storage devices are out of bounds.
All officials, technicians, legal experts on taxation, Press Information Bureau officials who prepare press notes in English, Hindi and Urdu on the budget and other workers involved with the printing are quarantined in the North Block. They all need to sleep in North Block and are allowed to walk out only after the Budget is tabled in the Lok Sabha on the budget day.
The Security arrangements for the entire budget period are made by the Intelligence Bureau, in consultation with the Budget Division in the ministry of finance. Such is the secrecy that even the Union Cabinet receives its budget summary only 10 minutes before the Parliament assembles for budget presentation.
UNION BUDGETS DOWN THE ROAD
l India’sfirstfinance minister
R.K. Shanmukham Chetty
Budget Day: November 26, 1947
Total budgets presented: Two
Significance: Inaugural Budget. It covered period of 7 1/2 months from August 15 1947 to March 31, 1948.
The budgeted revenue was Rs. 171.15 crores against a revenue expenditure of Rs. 197.39 crores. The cost of partition and refugees was unavoidable. “If these special factors are taken into account it will be seen that we have not been living beyond our means or heading towards bankruptcy,” Chetty told Parliament to explain the estimated fiscal deficit of Rs 24.59 crore.
New Tax: Export duty of three per cent on cotton cloth and yarn by an additional amount of four annas per square yard on cotton cloth and six annas a pound on cotton yarn.
l The first budget of the Republic of India
John Mathai February 28, 1950
Total budgets presented: Two
Significance: Road map for establishing the Planning Commission with Prime Minister Jawaharlal Nehru as its first chairman. Rest is history; the Commission has been producing five-year plans and approved the annual plans for the state and a key catalysing factor in India’s growth story.
l Taxes: Slashed the maximum rate of income tax from five annas per rupee, or 30 per cent, to four annas or 25 per cent. Incomes above Rs 1.21 lakh attracted a super-tax rate of 8.5 annas per rupee. The maximum rate of personal taxation was 12.5 annas or about 78 per cent.
l CDDeshmukh: February 28, 1951
Total Budgets presented: Nine including three
interim budgets
Significance: A high-powered Development Committee set up to devise ways and means for stepping up industrial production.
l Tiruvellore Thattai Krishnamachari May 15, 1958
Total Budgets presented: Four including one interim
Significance: Considered export credit and set up a corporation against payment risks while restricting imports through an import licensing system.
Tax: Widened income-tax base by reducing the taxable minimum from Rs.4, 200 to Rs.3,000. On the advice of the renowned Hungarian economist, Nicholas Kaldor, he imposed both wealth tax and expenditure tax but forgot to reduce the rates of income tax in what came to be known as the “Krishnamachari-Kaldor Budget”.
He also made a distinction between active income (salaries or business) and passive income (interest or rent) for the purpose of taxation. He also raised peak excise to 400 per cent and levied a tax on railway passenger fares.
TTK was instrumental in establishing the Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Unit Trust of India, Damodar Valley Corporation and Neyveli Lignite projects.
In the 1964-65 budget he proposed a Commission of Enquiries Act a Commission to enquire into monopolies and the concentration of economic power in the Indian economy that led to Monopolies and Restrictive Trade Practices Commission (MRTP Commission) a quasi-judicial body an important organ of the department of company affairs.
l Jawaharlal Nehru Prime Minister, Feb 28 1958
Total Budgets presented: Only one
Significance: First time a Prime Minister presented Union Budget.
TTK had resigned in mid-February his place in Nehru’s cabinet as finance minister after a parliamentary probe initiated by a question from Feroze Gandhi had established that a large number of LIC shares had been sold cheap to industrialist Haridas Mundhra, resulting in a loss of Rs. 1.24 crores to the Corporation. TTK had resigned on principle as the public sector insurance giant was under his ministry.
In the opening para of his budget speech Nehru had said … “According to custom, the budget statement for the coming year has to be presented today. By an unexpected and unhappy chain of circumstances the finance minister, who would normally have made this statement this afternoon is no longer with us. This heavy duty has fallen upon me almost at the last moment.”
Tax: Levied a tax on gifts
l Morarji Ranchhodji Desai Deputy Prime Minister and finance minister February 29, 1968
Total budgets presented: Ten including two interim budgets.
Significance: presented two budgets on his birthday-in 1964 and 1968.
To reduce the administrative burden on the excise department and the complaints of abuse associated with the existing system of physical control, Desai extended the system of self-assessment by manufacturers, to all manufacturers, big and small, making exception in respect of a few excisable commodities only which present complications in assessment or where there is substantial movement in bond.
Tax: Withdrew the spouse allowance where both the husband and the wife are tax-payers in their own right.
l Indira Gandhi Prime Minister Feb 28 1970
Total Budgets Presented: One
Significance: Increased on whisky, brandy, gin and wines to curb conspicuous consumption and as a modest gesture of personal, if not political, reconciliation.
l Yashwantrao B. Chavan,Feb 28, 1973
Total Budgets presented: Seven including two interim budgets.
Significance: Nationalisation of general insurance companies, cooking and non-cooking coal mines and the Indian Copper Corporation to the extent at an expense of Rs.56 crore. Accepted the proposal of KN Raj Committee that agricultural income should be taken into account in determining the rate of income tax.
l Hirubhai Mulljibhai Patel, June 17 1977
Total budgets presented: Three including one interim budget.
Significance: First Budget to be presented by a non-congress government. He changed many of India’s socialist economic policies, ending barriers to foreign investment and reducing tariffs while protecting home industries. He was responsible for the policy that all foreign companies must form corporations with an Indian company holding a 50 per cent stake, which caused Coca-Cola to pull out of India, but most others did not.
Asked all ministries and departments of government, and public sector agencies to observe the utmost economy in expenditure, keeping in view the government’s emphasis on austerity, and avoidance of all forms of ostentation.
A year later he proposed the implementation of recommendations of LK Jha Committee on Indirect Tax system, introduced a simplified scheme for the encouragement of the export of gold jewellery.
l Charan Singh Deputy Prime Minister, Feb 28 1979
Total budgets presented: One.
Significance: Introduced heavy excise duties on goods of mass consumption like prepared or preserved food, tea instant coffee, biscuits, processed cheese, cocoa powder, chewing gum and chocolate. Prices shoot up by 21 per cent.
On scooters, motor cycles and three-wheelers Singh imposed 20 per cent duty as against the existing rate of 13.13 per cent while cars were forced to pay duty at 25 per cent as against the existing rate of 18.38 per cent.
l R Venkatraman, June 18 1980
Total Budgets presented: Three including one interim
Significance: Abolished the irksome licence fee on radio. Loss to exchequer Rs 4 crore to popularise single and two band radio sets in rural areas, exempted life saving drugs, controlled clothes, cycles, sewing machines, pressure cooker etc from excise duty.
l V.P. Singh, February 28, 1986
Total Budgets presented: Two
Significance: Introduced Modified Value Added Tax (MODVAT) that allowed the manufacturer to obtain instant and complete reimbursement of the excise duty paid on the components and raw materials. It marked a new era indirect tax reforms.
l Rajiv Gandhi Prime Minister, February 28, 1987
Total Budgets presented: One
Significance: PM presented the budget as he had divested VP Singh of the finance portfolio on account on high-profile raids.
Tax: Introduced provisions related to minimum corporate tax, better known today as MAT or Minimum Alternate Tax.
l Prof Madhu Dandavate, 19 March 1990
Total Budgets presented: One
Significance: abolished major incentives like Investment Allowance and Investment Deposit Account with a view to closing the escape route for the corporate sector to go out of the tax net.
l Manmohan Singh, July 24, 1991
Total Budgets presented: Six including one interim budget.
Significance: Revised import-export policy, slashed import licensing, rationalisation of duty structures by pruning the peak customs duty from 220 per cent to 150 per cent and invited direct foreign investment in specified high priority industries. India faced a balance of payments crisis. Singh carried economic liberalisation policies with the backing of Prime Minister Narasimha Rao.
l Palaniappan Chidambaram, 27 July 1996
Total Budgets presented: Eight including one interim budget
Significance: Introduced a “Minimum Alternate Tax” (MAT) on companies and reducing the rate of surcharge on corporation tax from 15 per cent to 7.5 per cent. Made tax rates moderate for individuals as well as companies.
February 28, 1997: Dream Budget Launched the Voluntary Disclosure of Income Scheme or VDIS, to bring out black money.
He phased out ad hoc treasury bills used for financing the budget deficit. He became a darling of India Inc after he slashed the maximum rate of income tax to 30 per cent, reduced the corporate tax to 35 per cent and cut the average level of tariffs to just a shade over 25 per cent in his second budget.
l Yashwant Sinha February 29, 2000 
Total Budgets presented: Seven including two interim budgets.
Significance: First Budget of the millennium. He changed the timing of budget presentation from 5 PM to 11 AM. He phased out incentive for software exporters given by Manmohan Singh in 1991 budget and then extended the tax holiday to perpetuity in Union Budget 1995, establish a single rate Central Value Added Tax (CENVAT) at the Centre, reduce the customs duty for IT sector and introduced Transfer Pricing Regulations in 2001-02.
Ready Reckoner
Budget terms you should know
Budget estimate: It is the detailed estimates of receipts and expenditure of a financial year.
Central plan/Annual plan: The government’s Five-Year plans are split into Central Plans or Annual Plans. Necessary funds are allocated every year through the Union Budget to achieve the laid-out goals (social & welfare commitments).
Consolidated Fund of India: It is established under Article 266 (1) of the Constitution. This is the government’s savings account. All money received by government is placed here. All expenses are met from this account. Withdrawal is subject to Parliament’s approval.
Public account: It is an account referred to in Article 266(2) of the Constitution where money received through transactions not relating to consolidated fund is kept. Disbursements from the Public Account are not subject to vote by Parliament, as they are not moneys issued out of the Consolidated Fund of India.
Contingency Fund of India: Funds are utilised for national or natural calamities and is established under the Contingency Fund of India Act, 1950, with a corpus of Rs 500 crore at present.
Revenue account: It is sum of income and expenditure statement of the government containing details of revenue spent in comparison with revenue received.
Revenue receipts: Revenue earned by the government in the form of taxes (direct and indirect taxes), duties (excise, custom), interest, and other fees collected.
Revenue expenditure: Any expenditure other than for creation of capital asset. Example, interest payments on government borrowing programme, salaries to government staff, subsidies etc.
Capital account: Contains details of capital expenditure incurred vis-a-vis capital receipts.
Capital receipts: Money that the government make via loans — given to RBI, market advances, to foreign governments and other international organisations. Also, disinvestment proceeds fall into this category.
Capital expenditure: Refers to the money used up on creating capital assets (railways, express highways, airways, canals and dams, purchase of land, machinery and equipment), loans to state governments & government subsidiaries, and other investments made/incurred by the government.
Non-Plan expenditure: Money on defence, interest payments, subsidies and grants to states. This can be both revenue and capital in nature.
Plan expenditure: Incurred on five-year plans, social and welfare commitments of the government and are made on the basis of the approved plan allocations intimated by the Planning Commission.
Fiscal deficit: When the revenue receipts of the government falls short of its total expenditure, a fiscal deficit is created. So the Government is forced to borrow from the market.
Finance Bill: Introduced in Lok Sabha after the presentation of the General Budget to give effect to the financial proposals of the Government of India for the following financial year. Finance Bills are treated as Money Bills as they substantially deal with amendments to various tax laws. This consists of the proposed amendments to taxes (example, change in income tax slabs etc) and their impact on the Government’s revenue resources.
Direct Taxes: Taxes cut directly from salary, business income or income from other sources
Indirect Taxes: Taxes added to the price of goods and services are called indirect taxes- sales tax, import duty excise duty and service tax.
Subsidies: Concessions given to producers or consumers of specific goods in order to control prices and manage resources for better utilisation.
Issue Dated: Feb 5, 2017
