Budget terminology

Annual Financial Statement (AFS)
The Annual Financial Statement distinguishes the expenditure on revenue account from the expenditure on other accounts, as is mandated in the Constitution of India.The AFS, the document as provided under Article 112, shows the estimated receipts and expenditure of the Government of India for 2021-22 in relation to estimates for 2020-21 as also actual expenditure for the year 2019-20. The receipts and disbursements are shown under three parts in which Government Accounts are kept viz., (i) The Consolidated Fund of India, (ii) The Contingency Fund of India and (iii) The Public
Account of India.

The Consolidated Fund of India (CFI)
draws its existence from Article 266 of the Constitution. All revenues received by the Government, loans raised by it, and also receipts from recoveries of loans granted by it, together form the Consolidated Fund of India. All expenditure of the Government is incurred from the Consolidated Fund of India and no amount can be drawn from the Consolidated Fund without due authorization from the Parliament.

Article 267 of the Constitution authorises the existence of a Contingency Fund of India which is an imprest placed at the disposal of the President of India to facilitate meeting of urgent unforeseen expenditure by the Government pending authorization from the Parliament. Parliamentary approval for such unforeseen expenditure is obtained, ex post-facto, and an equivalent amount is drawn from the Consolidated Fund to recoup the Contingency Fund after such ex-post-facto approval. The corpus of the Contingency Fund as authorized by Parliament presently stands at 500 crore.

Public Account is the Money held by Government in trust are kept. The Public Account draws its existence from Article 266 of the Constitution of India. Provident Funds, Small Savings collections, income of Government set apart for expenditure on specific objects such as road development, primary education, other Reserve/Special Funds etc., are examples of moneys kept in the Public Account.

Finance Bill
At the time of presentation of the Annual Financial Statement before the Parliament, a Finance Bill is also presented in fulfilment of the requirement of Article 110 (1)(a) of the Constitution, detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. It also contains other provisions relating to Budget that could be classified as Money Bill. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution.

The Macro-Economic Framework Statement is presented to Parliament under Section 3 of the Fiscal Responsibility and Budget Management Act, 2003 and the rules made thereunder. It contains an assessment of the growth prospects of the economy along with the statement of specific underlying assumptions. It also contains an assessment regarding the GDP growth rate, the domestic economy and the stability of the external sector of the economy, fiscal balance of the Central government and the external sector balance of the economy.

The Medium-Term Fiscal Policy Statement cum Fiscal Policy Strategy Statement is presented to Parliament under Section 3 of the Fiscal Responsibility and Budget Management Act, 2003. It sets out the three-year rolling targets for six specific fiscal indicators in relation to GDP at market prices, namely (i) Fiscal Deficit, (ii) Revenue Deficit, (iii) Primary Deficit (iv) Tax Revenue (v) Non-tax Revenue and (vi) Central Government Debt. The Statement includes the underlying assumptions, an assessment of the balance between revenue receipts and revenue expenditure and the use of capital receipts including market borrowings for the creation of productive assets. It also outlines for the existing financial year, the strategic priorities of the Government relating to taxation, expenditure, lending and investments, administered pricing, borrowings and guarantees.

FRBM ACT:Enacted in 2003, the Fiscal Responsibility and Budget Management Act requires the elimination of revenue deficit by 2008-09. This means that from 2008-09, the government will have to meet all its revenue expenditure from its revenue receipts. Any borrowing would then only be tomeet capital expenditure— repayment of loans, lending and fresh investment. The Act also mandates a 3% limit on the fiscal deficit after 2008-09. This is a reasonable limit that allows significant-can’t leverage to the government to build capacities in the economy without compromising fiscal stability. It is important to note that since the entire Budget is at current market prices the deficits are also calculated with reference to GDP at current market prices.

Expenditure Budget
The provisions made for a scheme or a programme may be spread over a number of Major Heads in the Revenue and Capital sections in a Demand for Grants. In the Expenditure Budget, the estimates made for a scheme/programme are brought together and shown on a net basis on Revenue and Capital basis at one place. Expenditure of individual Ministries/ Departments are classified under 2 broad Umbrellas (i)Centres’ Expenditures and (ii) Transfers to States/ Union Territories( UTs).

Under the Umbrella of Centres’ Expenditure there are 3 sub-classification

  • Establishment expenditure of the Centre
  • Central Sector Schemes and
  • Other Central Expenditure including those on Central Public Sector Enterprises(CPSEs) and Autonomous Bodies.

The Umbrella of Transfers to States/UTs includes the following 3 sub- classification:

  • Centrally Sponsored Scheme
  • Finance Commission Transfers
  • Other Transfer to States

Receipt Budget
Estimates of receipts included in the AFS are further analysed in the document “Receipt Budget”. The document provides details of tax and non-tax revenue receipts and capital receipts and explains the estimates. The document also provides a statement on the areas of tax revenues and non-tax revenues, as mandated under the Fiscal Responsibility and Budget Management Rules, 2004. Trend of receipts and expenditure along with deficit indicators, statement pertaining to National Small Savings Fund (NSSF), Statement of Liabilities, Statement of Guarantees given by the government, statements of Assets and details of External Assistance are also included in Receipts Budget. This also
includes the Statement of Revenue Impact of Tax Incentives under the Central Tax System which seeks to list the revenue impact of tax incentives that are proposed by the Central Government.This was earlier called ‘Statement of Revenue Foregone’ and brought out as a separate statement in 2015-16. This has been merged in the Receipts Budget from 2016-17 onwards.

DIRECT TAX:Traditionally, these are taxes where the burden of tax falls on the person on whom itis levied. These are largely taxes on income or wealth. Income tax (on corporate and individuals),FBT, STT and BCTT are direct taxes.

INDIRECT TAX:In the case of indirect taxes the incidence of tax is usually not on the person who pays the tax. These are largely taxes on expenditure and include Customs, excise and service tax.Indirect taxes are considered regressive, the burden on the rich and the poor is alike. That is why governments strive to raise a higher proportion of taxes through direct taxes. 

NON-TAX REVENUE:The most important receipts under this head are interest payments (received on loans given by the government to states, railways and others) and dividends and profits received from public sector companies. Various services provided by the government— general services such as police and defence, social and community services such as medical services, and economic services such as power and railways— also yield revenue for the government. Though Railways area separate department, all its receipts and expenditure are routed through the consolidated fund.

Deficit: The amount by which total expenditure exceeds total revenue.

REVENUE DEFICIT:The excess of disbursements over receipts on revenue account is called revenue deficit. This is an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero. When revenue disbursement exceeds receipts, the government would have to borrow. Such borrowing is considered regressive as it is for consumption and not for creating assets. It results in a greater proportion of revenue receipts going towards interest payment and eventually, a debt trap. The FRBM Act, which we will take up later, requires the government to reduce fiscal deficit to zero by 2008-09.

Fiscal Policy: Policy on tax, spending and borrowing by the government.

FISCAL DEFICIT:When the government’s non-borrowed receipts (revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds) fall short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The excess of total expenditure over total non borrowed receipts is called the fiscal deficit.PRIMARY DEFICIT:The revenue expenditure includes interest payments on government’s earlier borrowings. The primary deficit is the fiscal deficit less interest payments. A shrinking primary deficit would indicate progress towards fiscal health.

Core Inflation: Core inflation measures the underlying inflation trend for a basket of goods in the economy and excludes more volatile elements. It is calculated by excluding the following from the consumer price index (CPI): prices of fresh and frozen meat and fish; vegetables, fresh fruit and nuts; interest rates and mortgage bonds, overdrafts and personal loans; value added tax and property taxes. See Consumer Price Inflation.

Gross Domestic Product (GDP): Total value of final goods and services produced in the country during a calendar year. GDP per person is the simplest overall measure of income in a country. Economic growth is measured by the change in GDP from year to year.

Monetary Policy: a policy determined by the Reserve Bank to influence the supply and demand for money in the economy. There are a number of approaches to setting goals and defining instruments for monetary policy. At various times, policy has targeted the growth of monetary aggregates, interest rates, the exchange rate and the inflation rate.

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