What Is Budget? Key Terms Needed To Follow Budget Developments

Finance Minister Nirmala Sitharaman, India's first full-time woman finance minister, will present the Budget in February 2020. This will be PM Narendra Modi-led NDA government's first full-year budget after returning to power in May 2019. A budget is a crucial exercise for any government. It is an occasion for the finance minister to present a comprehensive statement of the government's finances, including revenues, spending and deficit. A budget can be daunting from the layperson's point of view as complex jargon usually pervades both, the budget documents and speech of the finance minister.

Here is a ready reckoner to decipher some terms associated with the Budget:

Union Budget

The Union Budget is also known as annual financial statement as it is a yearly statement of estimated receipts and expenditures of the Government of India. It outlines estimates of the government's accounts for the forthcoming fiscal year.

The government presents the budget in the Lok Sabha, as mandated by Article 112 of the Constitution. The budget has to be approved by the Lok Sabha so that it comes into effect on April 1, which is the start of financial year in India.

Finance Bill

Finance bill is (and can be) introduced only in Lok Sabha immediately after the presentation of Union Budget. It gives effect to the government's financial proposals on taxation front. For example, if the finance minister proposes changes in tax rates during the budget speech, the proposal needs to be introduced as a Finance Bill and passed by both the houses.

Fiscal Policy

Fiscal policy is the use of taxation policies and government spending to chart the economic direction of the country. The government adjusts its taxes and spending levels depending on the health of the economy. Fiscal Policy goes in tandem with monetary policy. Monetary Policy is the action taken by the Reserve Bank of India to manage the money supply and interest rates. The central bank increases liquidity in the system to spur economic growth, or lowers liquidity in order to control inflation.

Inflation

Inflation measures the rate at which products and services rise over a period of time. A rise in inflation implies that price of commodities increases due to a combination of internal and external economic factors. A rise in inflation reduces purchasing power of the citizens and thus impacts demand-driven growth in the long term. Deflation, at the opposite end of the pendulum, indicates a decline in the prices of goods and services. Prudent economic policy consists in charting a middle path between these two polarities.

Capital Expenditure

Capital expenditure (capex) generally refers to the financial outlay made by companies to maintain and expand their business operations, but has specific budgetary connotations. Capex, in this case, denotes funds used by the government for acquiring property, building infra projects and buying equipment.

Revenue Expenditure

Revenue Expenditure, broadly speaking, is any expenditure that does not result in the creation of assets. It includes expenses by the government for paying salaries and maintaining fixed assets, grants disbursed to state governments and other contractors. Revenue expenditure is recurring in nature as it is incurred by the government on a recurring basis.

Plan and Non-Plan Expenditure

Expenditure has two components viz. plan and non-plan expenditure. Plan expenditure is the money utilized for the main plan. These are budget estimates that are determined after discussions with the ministries and stakeholders concerned. Non-plan expenditure constitutes a major part of the government's budgetary expenses and mainly involves revenue expenditure incurred by the government on interest payments, statutory transfers to states and union territories, salaries of government employees and pension payments.

Fiscal Deficit

The fiscal deficit is a shortfall in the government's income compared to its spending, with the total expenditure exceeding total revenue, excluding external borrowings. Fiscal Deficit is an important barometer of the government's finances as it demonstrates the extent to which the government lives beyond its means. A certain amount of fiscal deficit is inevitable in fast-growing country such as India, but it has to be confined within healthy limits.

Fiscal Responsibility and Budget Management Act

Fiscal Responsibility and Budget Management Act (FRBM Act) is the law that keeps a tab on the fiscal deficit. The FRBM Act makes it mandatory for the government to restrict the fiscal deficit to about 3 percent of the GDP. It also mandates that the government reduces its fiscal deficit through a plan of fiscal consolidation, which involves cutting debt and wasteful expenditure and improving revenue inflows.

Budget Deficit

Budget Deficit is the amount by which government spending exceeds the revenue generated over the year. A reduction in the tax rates could also cause a budget deficit.

Current Account Deficit (CAD)

The current account deficit (CAD) occurs when the value of a country's imported goods and services exceeds that of its exports. Current account deficit is often used interchangeably with trade deficit, but there is an essential difference between the two. In CAD, a country spends more on imports than what it receives on exports, whereas a trade deficit occurs when the country's imports exceed its exports.

Revenue Deficit

Revenue deficit is a situation wherein the government's net income / revenues fall short of projected net income. The actual revenue and expenses do not correspond with budgeted revenue and expenses, leading to the situation of revenue deficit.