Public Finance: Budget Making Process

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.

Lok Sabha Signup and view all the answers

What are capital receipts?

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

What is a deficit budget?

When estimated government receipts are less than government expenditure Signup and view all the answers

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

False Signup and view all the answers

What does the Department of Expenditure oversee?

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

Match the following sources of revenue with their categories:

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

What is meant by 'public debt'?

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. Signup and view all the answers

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

Primary deficit Signup and view all the answers

The revenue deficit for country A is

5,000 Signup and view all the answers

Fiscal deficit of country A is

24,000 Signup and view all the answers

Primary deficit of Country A is

22,000 Signup and view all the answers

In NITI Aayog, NITI stands for

National Institution for Transforming India Signup and view all the answers

The Appropriation Bill is intended to

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

Public debt management aims at

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

The railway budget is

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

Outcome budgeting

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

Corporate tax

Is collected by the union government and is a revenue receipt Signup and view all the answers

Government borrowings from foreign governments and institutions

Any of the above depending on the purpose of borrowing Signup and view all the answers

The capital receipts are

23.5 Signup and view all the answers

Revenue deficit is

7.0 Signup and view all the answers

The non–debt capital receipts of this country is

16.7 Signup and view all the answers

A budget is said to be unbalanced when

All the above Signup and view all the answers

Fiscal deficit refers to

The excess of total expenditure over total receipts excluding borrowings Signup and view all the answers

Budget of the government generally impacts

All the above Signup and view all the answers

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

(b) and (c) above Signup and view all the answers

Government borrowing is treated as capital receipt because

Both (a) and (b) above are correct Signup and view all the answers

‘Retail Direct’ scheme is

Both (a) and (b) are correct Signup and view all the answers

Non-debt capital receipts

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

Which of the following is a capital receipt?

Sale proceeds from disinvestment Signup and view all the answers

Grants given by the central government to state governments is

A revenue expenditure as it is meant to meet the current expenditure of the states 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

Ways and Means Advances (WMA) 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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Description

Learn about government budget, its need and objectives, budget concepts and terminologies, and the process of budget making, including sources of revenue and expenditure management.