Public Finance: Budget Making Process
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Questions and Answers

What is a government budget?

A government budget is a document presented for approval and legislation by a government that contains estimates of the proposed expenditure for a given period and the proposed means of financing them.

Which of the following is NOT an objective of the government budget?

  • Eliminate economic fluctuations
  • Redistribute income and wealth
  • Ensure maximum social welfare
  • Increase regional disparities (correct)

    • The budgetary process is only an administrative process.

    False

    The finance minister makes a detailed budget speech in the _____ house.

    <p>Lok Sabha</p> Signup and view all the answers

    What are capital receipts?

    <p>Capital receipts are receipts that lead to a reduction in the assets or an increase in the liabilities of the government.</p> Signup and view all the answers

    What is a deficit budget?

    <p>When estimated government receipts are less than government expenditure</p> Signup and view all the answers

    The Fiscal Responsibility and Budget Management (FRBM) act was passed to increase fiscal deficit.

    <p>False</p> Signup and view all the answers

    What does the Department of Expenditure oversee?

    <p>The Department of Expenditure oversees the public financial management system in the central government.</p> Signup and view all the answers

    Match the following sources of revenue with their categories:

    <p>Corporation tax = Direct tax Goods and services tax = Indirect tax Interest receipts = Non-tax revenue Market loans = Debt capital receipts</p> Signup and view all the answers

    What is meant by 'public debt'?

    <p>Public debt refers to the debt incurred by the government in mobilizing savings from the public, to be repaid at a future date with interest.</p> Signup and view all the answers

    The difference between the budget deficit of a government and its debt service payments is

    <p>Primary deficit</p> Signup and view all the answers

    The revenue deficit for country A is

    <p>5,000</p> Signup and view all the answers

    Fiscal deficit of country A is

    <p>24,000</p> Signup and view all the answers

    Primary deficit of Country A is

    <p>22,000</p> Signup and view all the answers

    In NITI Aayog, NITI stands for

    <p>National Institution for Transforming India</p> Signup and view all the answers

    The Appropriation Bill is intended to

    <p>Give authority to government to incur expenditure from and out of the Consolidated Fund of India</p> Signup and view all the answers

    Public debt management aims at

    <p>Raising the required amount of funding at the desired risk and cost levels</p> Signup and view all the answers

    The railway budget is

    <p>Part of the general budget from the budget for financial year 2017-18</p> Signup and view all the answers

    Outcome budgeting

    <p>Establishes a direct link between budgetary allocations and performance targets measured through output and outcome indicators</p> Signup and view all the answers

    Corporate tax

    <p>Is collected by the union government and is a revenue receipt</p> Signup and view all the answers

    Government borrowings from foreign governments and institutions

    <p>Any of the above depending on the purpose of borrowing</p> Signup and view all the answers

    The capital receipts are

    <p>23.5</p> Signup and view all the answers

    Revenue deficit is

    <p>7.0</p> Signup and view all the answers

    The non–debt capital receipts of this country is

    <p>16.7</p> Signup and view all the answers

    A budget is said to be unbalanced when

    <p>All the above</p> Signup and view all the answers

    Fiscal deficit refers to

    <p>The excess of total expenditure over total receipts excluding borrowings</p> Signup and view all the answers

    Budget of the government generally impacts

    <p>All the above</p> Signup and view all the answers

    Which of the following is a statement submitted along with the budget as a requirement of FRBM Act

    <p>(b) and (c) above</p> Signup and view all the answers

    Government borrowing is treated as capital receipt because

    <p>Both (a) and (b) above are correct</p> Signup and view all the answers

    ‘Retail Direct’ scheme is

    <p>Both (a) and (b) are correct</p> Signup and view all the answers

    Non-debt capital receipts

    <p>Are those that do not create any future repayment burden for the government</p> Signup and view all the answers

    Which of the following is a capital receipt?

    <p>Sale proceeds from disinvestment</p> Signup and view all the answers

    Grants given by the central government to state governments is

    <p>A revenue expenditure as it is meant to meet the current expenditure of the states</p> Signup and view all the answers

    Short-term credit from the Reserve Bank to state governments to bridge temporary mismatches in cash flows is known as

    <p>Ways and Means Advances (WMA)</p> Signup and view all the answers

    Study Notes

    Government Budget Overview

    • A government budget details revenue sources and expenditure plans.
    • It serves economic priorities, ensuring resource allocation for social welfare and stability.
    • Key objectives include income redistribution, reducing economic fluctuations, and promoting GDP growth.

    The Budget Making Process

    • The budget process involves the executive and legislative branches forming a cohesive financial proposal.
    • Prepared by the Ministry of Finance, it requires parliament's approval before the fiscal year (April 1 - March 31).
    • Article 112 of the constitution mandates presenting an "Annual Financial Statement" to parliament.

    Budget Preparation Steps

    • Preparation begins in August-September, culminating in a budget presentation on February 1.
    • Budgets are compiled from estimates provided by various ministries based on stakeholder consultations.
    • The budget speech outlines macroeconomic conditions, expenditures, taxation proposals, and government priorities.

    Types of Budget Documents

    • Annual Financial Statement (AFS)
    • Demands for Grants (DG)
    • Finance Bill: implements taxation proposals, must be passed within 75 days of introduction.

    Lok Sabha Budget Discussion

    • Initial general discussion occurs in Lok Sabha followed by ministry-wise voting on demands for grants.
    • The Rajya Sabha engages in a general discussion and has no voting authority on demands for grants.

    Sources of Government Revenue

    • Revenue receipts include tax and non-tax revenue; capital receipts are categorized into debt and non-debt.
    • Major tax sources: corporation tax, income tax, wealth tax, customs duties, indirect taxes (CBEC, GST).
    • Non-tax revenues stem from interest receipts, dividends, and other miscellaneous sources.

    Public Expenditure Management

    • Efficient public expenditure management is vital for economic growth, especially in developing economies.
    • Responsible allocation prevents larger deficits, higher taxation, and economic stagnation.
    • The Ministry of Finance oversees public financial management, expense evaluations, and financial audits.

    Public Debt Management

    • Governments, particularly in developing markets, are often the largest borrowers to fund fiscal needs.
    • Effective management of public debt is crucial for economic stability and future fiscal health.### Public Debt in India
    • Public debt includes internal and external sources contracted in the Consolidated Fund of India, primarily from the domestic market.
    • The government finances its fiscal deficit by mobilizing public savings through loans, incurring debt to be repaid with interest.
    • Debt servicing is continuous; instead of cutting expenditures or raising taxes, the government refinances maturing debt by selling new bonds.

    Importance of Public Debt Management

    • Effective public debt management is essential for macroeconomic stability and economic growth.
    • Sustainability of sovereign debt is a key indicator of a country's macroeconomic health, dependent on debt levels and government capacity to service it.

    Public Debt Management Process

    • Public debt management involves fiscal and monetary authorities determining the size, composition, maturity pattern, interest rates, and redemption of debt.
    • The central government's debt management policy aims to meet financing needs at the lowest long-term borrowing costs while keeping total debt sustainable.
    • The strategy emphasizes low borrowing costs, risk mitigation, and market development.

    Institutions Involved in Debt Management

    • Reserve Bank of India (RBI) manages domestic marketable debt, including treasury bills and dated securities.
    • Ministry of Finance handles external debt, primarily sourced from multilateral agencies.
    • Internal Debt Management Department (IDMD) of the RBI manages domestic debt of the central and state governments.

    Current Debt Statistics

    • As of March 31, 2023, India’s internal and other liabilities stood at approximately ₹147.78 lakh crores, while the external debt was around ₹4.83 lakh crores.
    • Total public debt reached approximately ₹152.61 lakh crores and is projected to rise to ₹169.47 lakh crores by March 31, 2024.

    Legislative Framework and Policies

    • The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 aims to reduce fiscal deficits sustainably.
    • Public Debt Management Cell (PDMC) established in 2016 works under the Department of Economic Affairs for effective debt management.
    • The Medium Term Debt Management Strategy (MTDS) 2021-24 focuses on efficient debt raising at the lowest costs without disruption.

    Budget Concepts

    • Balanced Budget: Revenue equals expenditure (Revenue = Expenditure).
    • Surplus Budget: Earnings exceed expenditures (Revenue > Expenditure).
    • Deficit Budget: Expenditures exceed earnings (Expenditure > Revenue) leading to increased government liabilities.

    Receipts and Expenditures

    • Capital Receipts: Reduce government assets or increase liabilities (e.g., loan recoveries).
    • Revenue Receipts: Do not create liabilities or reduce assets (includes tax and non-tax revenues).
    • Revenue Expenditure: Covers normal government functioning costs; does not create assets.
    • Capital Expenditure: Investments leading to asset creation or liability reduction.

    Deficit Types

    • Budget Deficit: Total estimated expenditure exceeds total estimated revenue.
    • Revenue Deficit: Excess of revenue expenditure over revenue receipts; indicates resource diversion.
    • Fiscal Deficit: Total expenditure exceeds total receipts, excluding borrowings. Indicating total borrowing needs.
    • Primary Deficit: Fiscal deficit minus interest payments, reflecting borrowing for non-interest purposes.

    Legislative and Budgeting Mechanisms

    • Finance Bill: Introduced post-union budget detailing tax regulations.
    • Outcome Budget: Links budget allocations to performance indicators, assessing government program effectiveness.
    • Guillotine: Parliamentary mechanism for voting on outstanding grant demands after limited discussion time.
    • Cut Motions: Used to propose reductions in requested grants, reflecting fiscal concerns or policy disagreements.

    Special Funds

    • Consolidated Fund of India: Holds all government revenues and expenditures, requiring parliamentary appropriation.
    • Contingency Fund of India: Enables the executive to meet urgent expenditures without prior legislative approval.
    • Public Account: Deals with fund flows where the government acts as a banker, including provident funds.### Corporate Tax
    • Collected by the union government; classified as either capital or revenue receipt.
    • State governments may also collect corporate tax; classified as revenue receipts.
    • Options for collection by either the center or state governments, falling under revenue receipts.
    • Primarily, corporate tax is a revenue receipt collected by the union government.

    Government Borrowings

    • Foreign borrowings from governments and institutions can be classified as:
      • Capital receipts
      • Revenue receipts
      • Fiscal deficit contributors
      • Varies based on the purpose of borrowing.

    Revenue and Expenditure Overview

    • Specific figures for hypothetical economy in lakh crores:
      • Recovery of loans: 5.1
      • Salaries of government servants: 41.1
      • Capital Expenditure: 45.0
      • Interest payments: 1.3
      • Payments towards subsidies: 3.2
      • Other receipts (including disinvestment): 11.6
      • Tax revenue (net of states’ share): 26.3
      • Non-tax revenue: 12.3
      • Borrowings and other liabilities: 6.8
      • States' share in tax revenue: 11.9

    Capital Receipts and Revenue Deficit

    • Calculation of capital receipts can yield various values; potential candidates include:
      • 23.5
      • 19.7
      • 11.3
      • Correct answer among these needs to be determined.
    • Revenue deficit can similarly yield possible values:
      • 23.6
      • 13.0
      • 7.0
      • 2.6

    Non-Debt Capital Receipts

    • Speculated values for non-debt capital receipts might include:
      • 45.1
      • 16.7
      • 15.8
      • Correct answer among them needs clarification.

    Budget Definitions

    • An unbalanced budget occurs when:
      • Government revenue exceeds expenditure (surplus).
      • Government expenditure exceeds revenue (deficit).
      • Both conditions can characterize an unbalanced budget.

    Fiscal Deficit

    • Defined as:
      • Excess of government expenditure over revenue receipts.
      • Excess of total expenditure over total receipts (excluding borrowings).
      • Primary deficit minus interest payments.

    Government Budget Impacts

    • Influences resource allocation within the economy.
    • Aims to redistribute income and enhance equity.
    • Strives for economic stability by controlling price fluctuations.

    Required Statements for Budget Submission

    • Annual Financial Statement
    • Macro-Economic Framework Statement
    • Medium-Term Fiscal Policy Strategy Statement
    • The last two must be submitted as per the FRBM Act.

    Government Borrowing as Capital Receipt

    • Treated as capital receipt because:
      • Used mainly for creating government assets.
      • Creates a liability for the government.

    Retail Direct Scheme

    • Initiated by the Reserve Bank of India.
    • Facilitates individual investment in government securities.
    • Does not involve direct sales of goods and services.

    Non-Debt Capital Receipts Characteristics

    • Do not add to government assets, hence not treated as capital receipts.
    • Do not create a future repayment burden for the government.

    Classification of Information

    • Capital receipt examples:
      • License fee received.
      • Sale proceeds from disinvestment.
      • Assistance for specific projects.
      • Public sector enterprise dividends.

    Central Government Grants to States

    • Classified as revenue expenditure, assisting in current state expenditures without creating assets.

    Short-Term Credit from Reserve Bank

    • Known as Ways and Means Advances (WMA).
    • Used to bridge temporary cash flow mismatches for state governments.

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