Union budget

The Union Budget, in the language of a financial analyst, is the estimated sources and application of funds for a particular fiscal year. It normally comes before the House of Parliament in the last week of February.

For ordinary citizens, budgeting is concerned with the rise or fall of the prices of goods and services due to the change in the rate of taxes and duties. However, the purpose of the Union budget is much broader. It is a central government plan for the optimal allocation of the country’s resources in order to achieve higher growth rates and achieve economic development.

two broad components

Two Broad Components of the Union Budget are the Revenue Budget and the Capital Budget. The first is an estimate of short-term sources and applications of funds and the second is an estimate of long-term sources and applications of funds.

Income budget made up of income receipts and income expenses. The sources of income receipts are tax and non-tax income. The Center’s Net Tax Revenue is the net gross tax revenue of the amount transferred to the National Disaster Relief Fund/NDRF and the State’s share. Gross tax revenue is collected from corporation tax, income tax, other taxes and duties (including wealth tax, securities transaction tax, bank cash transaction tax, and bank tax). patrimony), customs duties, excise taxes of the union, the tax on services and taxes of the territories of the union. Non-tax income is obtained from interest, dividend and profit receipts, foreign subsidies, other non-tax income and receipts from the union territories.

Income expenses are of two types: planned and unplanned. Plan income expenses include the central plan, central assistance for state and union land plans. Non-plan income expenses include interest payments and prepaid premiums, defense services, grants, grants to state and union territory governments, pensions, police services, assistance to states from the National Contingency Fund for Calamities, economic services (including agriculture, industry, energy, transportation, communications, science and technology, etc.), other general services (education, health, broadcasting, etc.), postal deficit, spending by union territories without a legislature , amount paid for the national contingency fund in the event of calamities, subsidies to foreign governments, etc.

Capital budget made up of capital revenues and capital expenditures. Capital receipts include non-debt receipts and debt receipts. The non-debt portion comprises loan recoveries and miscellaneous advances and capital receipts and debt receipts include market loans, short-term loans, foreign assistance, securities issued against small savings, state provident funds (net) and other receipts (net).

Like revenue expenditures, capital expenditures are also of two types: planned and unplanned. Capital plan expenditures refer to the expenditures of the central plan and central assistance for the state and union territory. The non-plan portion includes defense services, other non-plan capital outlays, loans to public enterprises, loans to state and union territory governments, loans to foreign governments, and other non-plan capital expenditures. plan.

In summary, a budget could be understood if it is presented horizontally as: SHORT-TERM SOURCES OF FUNDS (Receipt of income) + LONG-TERM SOURCES OF FUNDS (Receipt of capital) = SHORT-TERM APPLICATIONS OF FUNDS (Expenditures of income) ) + LONG TERM FUND APPLICATIONS (Capital Expenditures). Like the accounting equation, sources of funds must equal the application of funds. If not, it is balanced against the ‘disposition of cash balance’.

Impact of the Union budget in India

The extent of the deficit and the means to finance it influence the money supply and the interest rate in the economy. High interest rates mean a higher cost of capital for the industry, lower profits, and therefore lower share prices.

Fiscal measures undertaken by the government affect public spending. For example, an increase in direct taxes would decrease disposable income, thus reducing the demand for goods. This decrease in demand will translate into a decrease in production, thus affecting economic growth.

Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially or fully passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce the profit margins of companies, thus slowing down production and growth.

How to understand and interpret the budget of the Union

The Union budget can be analyzed in the same way that the financial statements of a company are analyzed. Income receipts are actual income generated from sources within the country during a particular year. Revenue expenditures are those that a government must meet during the same year. In an ideal situation, there should be a surplus of income over expenses. This surplus could then be used to increase capital spending for long-term development or to reduce the government’s debt burden.

In practice, it hardly happens. What we see is a ‘revenue shortfall’ (revenue expenditures exceed revenue receipts). To finance such a deficit, the government needs an increase in capital revenues over capital expenditures through borrowing and borrowing from the market. Therefore, a revenue shortfall causes a higher debt burden on the government.

Any government would try to meet its full application of funds (i.e., both revenues and capital expenditures) in one year from all its receipts of revenues and the amount recovered from loans granted by it and receipts of the nature of capital other than loans and other liabilities. This means that all of the short-term sources and a portion of the long-term sources must equal or exceed the total funding application. If not, there will be another type of deficit, which in economist’s language is ‘fiscal deficit’. Now, arithmetically, the ‘fiscal deficit’ occurs when [Revenue expenditure (RE) + Capital expenditure (CE)] is > [Revenue receipt (RR) + Loan recoveries (LR) + other receipts (OR)]. Knowing that both the fonts and the background application must be the same, we can write: [(RE + CE) – (RR + LR + OR0] = [Borrowings (B) + Draw-down of cash balance (DDCB)]. Or Fiscal deficit = B + DDCB. Thus, it could be understood that the fiscal deficit is covered with additional indebtedness and DDCB.

The primary deficit, which is less than the fiscal deficit by the amount to be paid on account of the interest on the loans, is also covered with additional loans and DDCB.

An analyst would not only be interested in knowing the different types of deficits and how the deficit is financed. He would relate various types of deficit to basic economic parameters, namely estimated GDP and GNP. It would also calculate the amount of the fiscal deficit and the revenue shortfall as a percentage of estimated GDP and whether the estimated increase in revenue receipts in the coming years as a result of the estimated increase in the rate of GDP growth could contain the incremental portion of both the deficit . Other important parameters that must be calculated are:

(a) the debt service capacity (DSC) and

(b) interest service capacity (ISC) of the government.

If the revenue receipts are divided by the sum of ‘debt repayment and total interest payments’, then DSC would be obtained. More would be the ratio (ideal ratio is 2) is better. If the receipt of income is divided only by the total amount of interest payments, ISC would be obtained. The ideal ratio is 3. More is better. Other important issues that need to be addressed are:

(a) the nature and amount of the funding allocation and whether this funding allocation would ensure inclusive growth with an equitable and fair distribution of funds for various sectors of the country’s citizens and

(b) analysis of variance.