Budget its types and its formulation in PDF

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“BUDGET, its types and its formulation inIndia”:A budget is a balanced estimate of expenditures and receipts for a given period of time. In the hands of the administration, the budget is record of past performance, a method of current control and a projection of future plans.Meaning : Government’s r...

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“BUDGET, its types and its formulation in India”: A budget is a balanced estimate of expenditures and receipts for a given period of time. In the hands of the administration, the budget is record of past performance, a method of current control and a projection of future plans. Meaning: Government’s revenue and expenditure decisions are presented in the budget. Budget, being an essential and important element of planning and development, provide the specific development objectives to be pursued and the required policy direction. They are necessary because income and expenditure do not occur simultaneously. Thus, ‘budget’ has been defined as the annual financial statement of the estimated receipts and proposed expenditure of the government in a financial year, usually April 1 to March 31 of the next year. The term budget is derived from the French word ‘Bougette’. It means ‘small bag’. As such, the Finance minister of a country carries a bag containing abstracts of budget papers while presenting the budget in the Parliament or a State Legislature. The governments, both Union and State, prepare their budget every financial year. Government budget indicates the probable income and expenditure of the government, the financial policies, taxation measures, investment opportunities, extent of saving, utilization of resources, mobilization of capital etc. Definition: Various definitions have been formulated for the concept of Budget. Prof. Dimock says, “A budget is a balanced estimate of expenditures and receipts for a given period of time. In the hands of the administration, the budget is record of past performance, a method of current control and a projection of future plans”. To quote Gladstone, “Budgets are not merely matters of arithmetic but in a thousand ways go to the root of prosperity of individuals and relation of classes and the strength of Kingdom”. Therefore, the budget is a document containing preliminary approval plan of public revenue and expenditures. It bridges the proposed revenue and proposed expenditure for the budget period.

Kinds of Budget: Balanced budget and Unbalanced budget Balanced Budget: A balanced budget is that, over a period of time, revenue does not fall short of expenditure. In other words, government budget is said to be balanced when its tax revenue and expenditure are equal. Unbalanced Budget (Surplus or deficit): An unbalanced budget is that, over a period of time, revenue exceeds expenditure or expenditure exceeds revenue. In other words, the government’s income or tax revenue and expenditure are not equal. When there is an excess of income over

expenditure, it is called a surplus budget. On the other hand, when there is an excess of expenditure over income, it is a case of deficit budget. Classical economists advocated balanced budget. But it is not always helpful in achieving and sustaining economic growth. Modern economists argue that an unbalanced budget is very useful for achieving and maintaining economic stability. Revenue Budget and Capital Budget: Budgeting is the most important constituent of the financial administration. Preparation of the budget is one of the main operations of budgeting. It is mandatory for the government to make a statement of estimated receipts and expenditures which must be laid before the Parliament every financial year. It has to distinguish expenditure on revenue account and capital account from other expenditures. So government budget comprises Revenue Budget and Capital Budget. Revenue Budget: Revenue budget consists of revenue receipts of the government (tax revenue and non-tax revenue) and the expenditure met from these revenues. Expenditures which do not result in creation of assets are called revenue expenditure. (e.g. current revenues and current expenditure for normal functioning of the Government departments, interest charges on debt incurred by Govt. and other non-developmental expenditure). Capital budget: Majority of the government expenditures form the capital expenditure. Capital budget consists of receipts and payments. Capital receipts are loans raised by government from the public which are called market loans, borrowings from the RBI, sale of treasury bills, loans received from foreign governments etc. Capital payments are expenditure on assets creation such as land, buildings, machinery, equipment investment loans to government companies and state governments and other developmental expenditures. Performance budgeting: The process of fund allocation of governments in various countries has been changed from traditional expenditure budgeting to new forms of rationalistic budgeting, such as performance budgeting, programme budgeting and zero based budgeting. Under performance budgeting, various activities of the government are identified in the budget both in financial and physical terms. This is necessary to ascertain the relationship between input and output and to assess the performance in relation to cost. Performance budgeting is conceived as a system of presenting public expenditure in terms of distinguishable divisions such as government functions, programmes, activities and projects; such presentation would reflect the cost of running the government. Under this technique, funds are granted for carrying out specific amount of work identified under a particular division. A cost-benefit approach is employed which facilitates meaningful and purposeful allocation of funds. This method of budget technique promotes cost consciousness as well as cost efficiency and suggests corrections wherever required in the process of allocation of funds. Zero based budgeting: Traditional technique of budgeting has been found to be inadequate for the reason that, the previous year’s cost level is taken as the base for current year’s budget. The traditional methods have not

completely addressed the problem of efficiency in the matter of allocation of funds for various divisions. There is therefore a need for a new technique of budgeting which devices and uses a meaningful base for budgeting. Zero Based Budgeting is one such technique of budgeting. In zero based budgeting, every year is considered as a new year thus providing a connecting link between the previous year and the current year. The past performance and programmes are not taken into account. The budget is viewed as entirely a fresh and whole fiscal initiative i.e. from zero bases. Zero based budgeting evaluates and prioritizes the programmes of action at different levels. Each department has to justify its budget from its perspectives; evaluating feasible alternatives, before final selection and execution, the funds will be allocated for the selected programmes.

Stages of Budget Formulation in India: The job of FM’s is second most difficult after PM in India, given the compulsions of balancing the aspirations of industries, stock markets, investors, global markets and common man on one hand and fiscal consolidation, reducing subsidies, higher tax to GDP ratio, and providing stimulus to growth on the other. The rigorous process of budget making passes through various stages. The budget for a particular financial year let’s say 2015-16 comprises of budget estimates of 2015-16, revised estimates for 2014-15 and actual expenditure of 2013-14. The budget is prepared by the budget division in department of economic affairs, Ministry of Finance. Budget is passed through 4 different phases viz. Formulation of Budget, Budget enactment or approval by the legislature, budget execution, and auditing of the implementation on behalf of the legislatures. The process for budget making starts in Aug-Sept of the previous year means for budget 2015-16 it started in Aug-Sept 2014. An annual budget circular (let’s say for 2015-16) is issued to all the ministries containing the entries of estimates (2015-16), revised estimates (2014-15), and actual expenditure (2013-14). The five year plans are referred to discuss the gross budgetary support from the union government to support the annual plans. Till now the planning commission played the crucial role in suggesting the expected expenditure and the gross budgetary support available from the finance ministry for the plans of different ministries. Finance commission decides upon the distribution of the revenue so collected through taxes between the states and centre. With the abolition of planning commission, the role of Finance Commission would be crucial. The real test of the budget maker is to pass the legislation which fiscally disciplines the government. The fiscal responsibility and Budget management (FRBM) act sets the target of keeping the revenue deficit nil and fiscal deficit below 3%. This way the government is prevented to make any populist or irrational public spending. The process of budget takes final shape in around month of January when the revenue –earning minister provide the estimates for the revenue receipt of the current fiscal year and the estimates for the next year. The estimates from the ministries are also collected to get an idea from the

previous estimates and the need to reallocation to the various schemes of the concerned ministry. It gives an idea to the ministry of total revenue expected to be collected and hence accordingly plan the allocation to different sector. Finance minister at this stage examines the proposal thoroughly and make changes to it if needed after due consultation with the officials. The minister then consults the budget with the prime minister and also briefs it to the cabinet. If there is any conflict arises between any ministry and the finance ministry the issue is resolved with adequate discussions. The budget division then starts consolidating the plan and all figures and fact are made to put in the final document. It is assisted by the National Information Centre (NIC) in the computerized consolidation of the budget data. Then finally the finance minister takes the permission of the president to present the budget in the parliament. By convention the union budget is presented on the last day of February in the Lok Sabha. The budget is tabled at the Rajya Sabha only after the finance minister completes its speech in the Lok Sabha. A broad discussion takes place at this stage without any voting. Then the house is adjourned. The estimates of ministries and the demands for grants are given to the standing committees for examining. There are 24 such committees which submit its report on the demands for grants of each ministry. Once the report is tabled on the house a detailed discussion takes place according to the timetable. During the discussion the MP’s call for different cutting tool viz. cut motions reducing the grants and slashing the demands. Those demands which have not been voted for are guillotined i.e. they are passed without the discussion. After voting the demands for grants, appropriation bill is introduced and voted upon, which authorizes the government to spend the money from the consolidated fund of India. The finance bill is then taken up and passed in the Lok Sabha....