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The Budget process stages
June 30, 2004
The Indian Constitution requires the government to present to Parliament a statement that shows separately the expected revenues and expenditures, both current and capital by heads of account. The Budget-making process, in normal times, gets set in motion by the third quarter of the financial year.
On the expenditure side, initial estimates are provided by the various ministries. There are two components of expenditure - plan and non-plan. Of these, plan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission.
Apart from allocations for continuing plan programmes initiated in earlier fiscal year, the Planning Commission decides on the new programmes that can be undertaken on the basis of a tentative estimate or resources available for plan expenditure that is provided to it by the finance ministry.
Non-plain expenditure for various ministries are prepared by their financial advisors. These are sent to the expenditure secretary who, after exhaustive discussions with financial advisors, makes an assessment of the likely expenditures for the ensuing fiscal year.
In one sense, the assessment of likely non-plan expenditure is comparatively simple. Nearly 90 per cent of the non-plan expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers) and wage payments to employees.
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Parallel to the exercises on the expenditure side, an assessment is made of the revenues which are likely to flow into the government kitty. Revenue receipts, like expenditure, are of two types - capital and current receipts. Capital receipts include repayment of loans made by the federal government, receipts from divestment of public-sector equity and borrowings - both domestic and external.
Current receipts, by and large, include tax revenues, receipts by way of dividends from public-sector units and interest payments on loans given out by the federal government.
While both dividends from public-sector units and interest receipts are fairly easy to assess, the amounts received by way of tax revenues is estimated on the basis of existing rates of taxation and an assessment of the likely growth and inflation rate over the ensuing fiscal year.
On the capital receipts side, targeted amounts to be realised through divestment of public sector equity and amounts to be realised by way of repayments of loans is made. All the estimates flow to the revenue secretary.
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Once this exercise is completed expenditure estimates are matched with revenue estimate to arrive at a first estimate of the shortfall in revenue to meet projected expenditure. Following this the government, in tandem with its chief economic advisor, determines the optimum level of borrowings that the government can resort to.
The level of external borrowings is an easily estimated figure because much of the external borrowing on government account consists of bilateral and multilateral assistance which is known by the time budget exercises are undertaken.
The level of domestic borrowing depends partly on the desired level of fiscal deficit that the government targets for itself. A part of the revenue gap is left unfilled to be met through the issue of ad hoc treasury bills. Over the past few years, this gap, called the overall budget deficit, is government by an understanding between the Reserve Bank of India and the finance ministry on the maximum level of ad hoc treasury bills that can be issued during a fiscal year.
This has been done to ensure that the issue of ad hoc treasury bills to fill revenue gaps does not lead to problems of monetary management.
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After the targets for the fiscal deficits and the overall budget deficit have been decided by the government, any remaining shortfall is filled through a revision in tax rates where considered feasible and in keeping with fiscal incentive structure the government wishes to put in place to stimulate the growth in different sectors. Subsequently adjustments are made in expenditures, should it be required, to ensure that the fiscal and overall deficit remain at targeted levels.
Such adjustments in expenditure are usually made on the plan side - the only item of expenditure that offers any scope for adjustments. With nearly 90 per cent of non-plan expenditure being accounted for by interest payments, subsidies and administrative expenditure and the political sensitivities involved in reducing subsidies, non-plan expenditure of the Indian government is characterised by an extraordinary degree of rigidity.
Inevitably, therefore, plan expenditures are determined as a residual after pre-emptions have already been made for non-plan expenditure.
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The presentation of the Budget for the ensuing fiscal year (beginning April 1) is usually done on the last working day of February. Parliamentary scrutiny of proposals and the passage of the budget does not normally get completed until the second week of May, well after the commencement of the new fiscal year. Since expenditures cannot be incurred in a new fiscal year without Parliamentary approval, the government usually seeks an interim approval to meet emergent expenditures that have to be incurred pending the approval of the budget.
This is called the vote-on-account and the sanctions given by the passage of the vote-on-account get automatically overridden once the Budget is approved by Parliament.
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The Budget Process -- The Flow-chart