Finance Minister Nirmala Sitharaman will present the first Budget of the third successive government under the leadership of Prime Minister Narendra Modi

Subject: Economy

Sec: National Income

Context:

Budget presentation is typically a quinquennial event in India.
Once every five years, the Union Budget is presented twice — first as an interim budget (in February) by the outgoing government and then as a full budget by the newly-formed government.
Sitharaman had presented an interim Budget for the current financial year (2024-25) on February 1.

What is the Budget?

An exercise where the government tells the Parliament (and through it, the whole country) about the health of its finances.
This means coming clean on three main things:
- Income
- Expenditure
- Borrowing
Typically comes at the end of one financial year and the start of another.
Essentially discusses the citizen’s money. The government’s borrowing (the fiscal deficit) is, in no uncertain terms, an addition to a debt that citizens and their future generations will have to pay back.

Why does it matter?

The fact is that there is no such thing as government money — it is all taxpayer’s money. Conservative British Prime Minister Margaret Thatcher once explained in the House of Commons of the UK:
“The state (government) has no source of money other than the money people earn themselves. If the state (government) wishes to spend more, it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay. That someone else is you.”

Union Budget influence the economy:

One is by tweaking who it taxes and how much.
If a government wants to incentivise businesses in one segment of the economy — presumably because it believes such a move will leverage India’s demographic profile, create jobs and bring prosperity — it can lower the tax rate.
Lowering the tax rate may not necessarily lead to lower revenues; it is quite possible that the increased economic activity (thanks to the lower tax rate) leads to higher overall revenues despite a lower tax rate.
Second is by tweaking where a government spends and how much. While the budget is only for a year, budgets at the start of a new government’s term (as is the case this time) can often signal a broader shift in how the government wants to spend its money.
The biggest macroeconomic policy shift of the last government (2019-2024) was the focus on incentivising investments by the private sector.

Interim Budget:

An Interim Budget is presented by a government that is going through a transition period or is in itslast year in office ahead of general elections.
The purpose of the interim budget is to ensure the continuity of government expenditure and essential services until the new government can present a full-fledged budget after taking office.

Union Budget:

According to Article 112 of the Indian Constitution, the Union Budget of a year, also referred to as the annual financial statement, is a statement of the estimated receipts and expenditure of the government for that particular year.

Terms related to budget

Budget and Revised Estimate

Budget Estimates represent the idea of upcoming government projects and their progression. The revised Estimate explains the expenses that are going to happen.
Budget estimates work like a critical process and show the transparency work and budget fund of the government. The budget estimates session committee asks every finance minister and public services about their action decisions and advice for upcoming projects for public benefit.
Revised estimates only get sanction permission if the previous original sanctioned estimates go more than 5% due to material quality matter and rates. It also covers the fact of material quantity.
It is an evaluation that is presented in the middle of the year.

Deficits in the budget

Fiscal deficit by definition is the difference between total expenditure and the sum of revenue receipts and non-debt receipts. It indicates how much the Government is spending in net terms.
Since positive fiscal deficits indicate the amount of expenditure over and above revenue and non-debt receipts, it needs to be financed by a debt-creating capital receipt.
Primary deficit is the difference between fiscal deficit and interest payments.
Revenue deficit is derived by deducting capital expenditure from fiscal deficits.

FRBM Act and amendment

It was enacted in August 2003.
It aims to make the Central government responsible for ensuring inter-generational equity in fiscal management and long-term macro-economic stability.
The Act envisages the setting of limits on the Central government’s debt and deficits.
It limited the fiscal deficit to 3% of the GDP and mandates that the revenue deficit should be brought down to zero.
To ensure that the States too are financially prudent, the 12th Finance Commission’s recommendations in 2004 linked debt relief to States with their enactment of similar laws.
The States have since enacted their own respective Financial Responsibility Legislation, which sets the same 3% of Gross State Domestic Product (GSDP) cap on their annual budget deficits.
It also mandates greater transparency in fiscal operations of the Central government and the conduct of fiscal policy in a medium-term framework.
The Budget of the Union government includes a Medium Term Fiscal Policy Statement that specifies the annual revenue and fiscal deficit goals over a three-year horizon.
The rules for implementing the Act were notified in July 2004.

Amendment in 2018

The rules were amended in 2018, and most recently to the setting of a target of 3.1% for March 2023.
The NK Singh committee (set up in 2016) recommended that the government should target a fiscal deficit of 3% of the GDP in years up to March 31, 2020 cut it to 2.8% in 2020-21 and to 2.5% by 2023.

Expenditure

Capital expenditure:
- Capital expenditure is incurred with the purpose of increasing assets of a durable nature or of reducing recurring liabilities.
- Consider the expenditure incurred for constructing new schools or new hospitals. All these are classified as capital expenditure as they lead to creation of new assets.
Revenue expenditure:
- Revenue expenditure involves any expenditure that does not add to assets or reduce liabilities.
- Expenditure on the payment of wages and salaries, subsidies or interest payments would be typically classified as revenue expenditure.

Receipts

The receipts of the Government have three components —revenue receipts, non-debt capital receipts and debt-creating capital receipts.
Revenue receipts involve receipts that are not associated with increase in liabilities and comprise revenue from taxes and non-tax sources.
Non-debt receipts are part of capital receipts that do not generate additional liabilities. Recovery of loans and proceeds from disinvestments would be regarded as non-debt receipts since generating revenue from these sources does not directly increase liabilities, or future payment commitments.
Debt-creating capital receipts are ones that involve higher liabilities and future payment commitments of the Government.