GOVERNMENT

BUDGET AND THE

ECONOMY

Vasanth K S
28 March 2016
1

PLAINSPEAK

Government's view of the

economy could be summed
up in a few short phrases: If
it moves, tax it. If it keeps
moving, regulate it. And if it
stops moving, subsidize it.

Ronald Reagan

Contents
Government Budget Meaning, Objective

Components of Government Budget

Classification of Receipts Capital and Revenue
Classification of Expenditure

Capital and Revenue

Balanced Budget Surplus Budget, Deficit Budget

Meaning and Implication

Revenue Deficit, Fiscal Deficit, Primary Deficit

Meaning and Implication

And One More

Be wary of strong drink. It

can make you shoot at tax
collectors... and miss.

Robert A. Heinlein

Meaning of Budget

A government budget is an annual statement of the estimated receipts and

estimated expenditure of the government during a fiscal year

Public Finance

is the study of the role of the government in the economy

It deals with: governmental effects on

efficient allocation of resources

distribution of income, and
macroeconomic stabilization

Public Good

is a good that is both non-excludable and non-rivalrous in that

individuals cannot be effectively excluded from use and where use by
one individual does not reduce availability to others. Examples include,
air, public infrastructure like roads, bridges, lighthouses and streetlights.
National defence is also another good example of a non-rival
consumption of a public good

Private Good

is "an item that yields positive benefits to people, that is:

excludable, i.e. owners can exercise private property rights, preventing those
who have not paid for it from using the good or consuming its benefits

and rivalrous, i.e. consumption by one necessarily prevents that of another

Example: Broadband

The Sort of Middle Land (Please remove headline from the

graphic)

A distinctive combination of democracy, welfare, and capitalisma sort

of middle ground between communism and capitalism

Objective of the Budget

Reallocation of resources

To reduce inequalities in income

and wealth

Reallocation of resources

It means managed and proper

Through budget government

There may be inflation or

distribution of resources. As
private sector can not provide all
the goods and services the
government has to provide
these goods.

tries to reduce the gap between

rich and poor. This is achieved
through taxing the rich and
subsidizing the needs of poor
people.

depression in the economy.

Inflation is the situation of rise in
price level whereas depression is
lack of demand. Both the
situations are undesirable.
During depression government
reduces rate of tax and
borrowing and increases public
expenditure. During inflation
government increases the rate of
tax and borrowing and decreases
public expenditure.

Management of public
enterprises

To achieve economic growth

Reducing regional disparities

Large no: of Public Enterprises

Depends upon rate of saving and

Through taxation and

which are established and

managed for social welfare of the
public.

investment.

expenditure policy.

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History of Budget
Roots of contemporary budgetary practices can be traced back to the development of English Constitution

Origin of budget linked to the supremacy of Parliament

Budgetary control first applied only to the armed forces

Most of the policies, procedures, and technical practices that we associate with modern budgeting were
developed during the Nineteenth Century. The first major changes occurred in France

Gladstone's legacies is the survival of his phrase, "the power of the purse"

Emergence of budgeting framework -- unity, annuality, balance, comprehensiveness, and control--in

Europe

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Bougette

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The Indian Budget

The budget was first introduced in India on 7 April, 1860 by the EastIndia Company to the British Crown. Pre-independence finance
minister, James Wilson presented the budget in 1860. And the budget
tabled by Arun Jaitley in 2016 is the 85th budget

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Budget and the Constitution

Article 265: No tax shall be levied or collected except by authority

of law

Article 266: No expenditure can be incurred except with

the authorisation of the Legislature

Article 112: ...President shall, in respect of every financial year,

cause to be laid before Parliament, an Annual Financial Statement

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(1/2)

Along with the Annual Financial Statement Government presents the following
documents:

The Budget documents presented to Parliament comprise, besides the Finance

Minister's Budget Speech, of the following:

A. Annual Financial Statement (AFS)

B. Demand for Grants (DG)
C. Appropriation Bill
D. Finance Bill
E. Memorandum Explaining the Provisions in the Finance Bill, 2016
F. Macro-economic Framework for the Relevant Financial Year
G. Fiscal Policy Strategy Statement for the Financial Year
H. Medium Term Fiscal Policy Statement

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(2/2)
I. Expenditure Budget Volume - 1
J. Expenditure Budget Volume - 2 (Part A and Part B)
K. Receipts Budget
L. Budget at a Glance
M. Highlights of Budget
N. Status of Implementation of Announcements Made in Finance Minister's Budget
Speech of the Previous Financial Year

The documents shown from Serial A, B, C and D are mandated by Art. 112, 113,
114(3) and 110(a) of the Constitution of India respectively while the documents at
Serial F, G and H are presented as per the provisions of the Fiscal Responsibility
and Budget Management Act 2003. Other documents are in the nature of
explanatory statements supporting the mandated documents with narrative or other
content in a user friendly format suited for quick or contextual references. Hindi
version of all these documents is also presented to Parliament
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How it works...

Process Starts August-September

Estimates, Revised Estimates and Actuals
Demands for Grants
Discussion
Standing Committees of Parliament
Cut Motions
Appropriation Bill
Finance Bill
Supplementary/Excess Grants

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Components of Government Budget

Government
Budget

Revenue Budget

Revenue
Receipts

Tax Revenue

Direct Tax

Revenue
Expenditure

Capital Budget

Capital
Receipts

Capital
Expenditure

Non-Tax
Revenue

Indirect Tax

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Budget Receipts
Budget receipts refer to the estimated money receipts of the government from all
sources during a given fiscal year.

Budget Receipts

Revenue Receipts

Tax revenue

Non-tax revenue

Capital Receipts

Borrowing

Recovery of
loans

Other receipts

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Revenue Receipts

Any receipts which do not either create a liability or lead to reduction in

assets is called revenue receipts. Two sources of revenue receipts

Tax Revenue
Non-Tax Revenue
Revenue Receipts

Tax Revenue

Direct Tax

In-direct Tax

Non-tax Revenue

Interest

Profit and
Dividend

Fees and
Fines

Gifts and
Grants

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Capital Receipts
Refer to those receipts of the government which i) tend to create a liability or ii) Causes
reduction in its assets. All the capital receipts are broadly classified into three
categories.

Recovery of
Loans

Borrowings

Other Receipts

These are capital receipts because they reduce financial assets of the
government

Funds raised by the government form the borrowing are treated as capital
receipts as such receipts creates liability

Funds raised through disinvestment are included in this category. By this

government assets are reduced

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How to Classify a Tax As Direct Tax or Indirect Tax

A tax is a direct tax, if its burden cannot be shifted

For example, income tax is a burden tax as its impact and incidence is on the
same person

A tax is a indirect tax, if its burden can be shifted

For example, sales tax is an indirect tax as its impact and incidence is on
different persons

Corporation tax
Value added tax
Service tax
Excise duty
Wealth tax
Sales tax

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How to Classify a Receipt as Revenue Receipt or

Capital Receipt?

A receipt is a capital receipt, if it creates a liability or reduces an asset

A receipt is a revenue receipt, if it neither creates a liability nor reduces

any asset

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Expenditure Budget

Shows the revenue and capital disbursements of various

ministries/departments; presents the estimates in respect of each under
'Plan' and 'Non-Plan'
Expenditure Budget

Revenue Expenditure

Capital Expenditure

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Revenue Expenditure

An expenditure which do not creates assets or reduces liability is called

Revenue Expenditure

It is recurring nature

It is incurred on normal functioning of the government and the provisions

for various services

Examples are Salaries of government employees, interest payment

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An Expenditure is a Revenue Expenditure, If It Satisfies the

Following Two Essential Conditions

The expenditure must not create an asset of the government

The expenditure must not cause decrease in any liability

Revenue Expenditure

Neither Creates an Asset

Nor Reduces Any

Liability

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Capital Expenditure

It refers to the expenditure which leads to creation of assets and

reduction in liabilities

It is non-recurring in nature

It adds to capital stock of the economy and increases its productivity

through expenditure in long period development programmes like Metro
or Flyover

eg. Expenditure incurred on construction of building, roads, bridges etc.

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An Expenditure is a Capital Expenditure, If It Satisfies

Any One of the Following Two Conditions

The expenditure must create an asset for the government. Eg:

construction of metro

The expenditure must cause a decrease in the liabilities. Eg: repayment

of borrowings

Capital Expenditure

Either Creates an Asset

Or Reduces a Liability

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Plan and Non-plan Expenditure

Plan expenditure refers to the expenditure that is incurred on the

programmes detailed in the current five year

Non-plan expenditure refers to the expenditure other than the

expenditure related to the current five-year plan

Budget Expenditure

Plan Expenditure

Non-Plan expenditure

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Plan Expenditure vs. Non-plan Expenditure

Plan Expenditure

Plan expenditure is spent on current

development and investment outlays

It arises only when the plans provide for

such expenditure

Non-plan Expenditure

It is spent on the routine functioning of

the government

It is a must for every economy and the

government cannot escape from it

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Developmental and Non-developmental Expenditure

Developmental Expenditure

It refers to the expenditure which is

directly related to economic and social
development of the country

It directly contributes to development of

the economy

It is productive in nature as it adds to the

flow of goods and services

Non-developmental Expenditure

It refers to the expenditure which is

incurred on the essential general
services of the government

It does not contribute directly to the

development , but it lubricates the
wheels of economic development

It is not concerned with the productivity

of working class

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Measures of Government Deficit

Deficit Budget:

When government expenditure exceeds government receipts in the

budget is said to be a deficit budget

Government Deficit

Revenue Deficit

Fiscal Deficit

Primary Deficit

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Types Government Deficit

Revenue Deficit

Revenue deficit refers to

Fiscal Deficit

Fiscal deficit is defined as

Primary Deficit

It refers to the difference

the excess of revenue

excess of total

between fiscal deficit of

expenditure of the

expenditure over total

the current year and

government over its

receipts

interest payments on the

revenue receipts

Revenue deficit = Total

Fiscal Deficit = Total

budget expenditure - Total

revenue expenditure

budget receipts net of

Total revenue receipts

borrowings

previous borrowings

Primary deficit= fiscal

deficit - interest payments

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Presented in the Lok Sabha on such a

day as the president may direct. By
convention,
Union budget has
been
presented in Lok Sabha by the finance
minister on the last working day of the
month of February every year. Until the
year 1999, the Union Budget was
announced at 5:00 pm on the last
working day of the month of February.
This practice was inherited from the
Colonial Era, when the British Parliament
would pass the budget in the noon
followed by India in the evening of the
day. It was Mr.Yashwant Sinha, the then
Finance Minister of India in the NDA
government (led by BJP) of Atal Bihari
Vajpayee, who changed the ritual by
announcing the 2001 Union Budget at 11
am.[10]
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So Said the PM...

At a time when major powers are
reducing their forces and rely more
on technology, we are still
constantly seeking to expand the
size of our forces. Modernisation
and expansion of forces at the same
time is a difficult and unnecessary
goal. We need forces that are agile,
mobile and driven by technology,
not just human valour.
--Prime Minister Narendra Modi,
Combined Commanders Conference,
December 15, 2015
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The Budget and the Defence Forces

Rs. 3,40,921.98 crore (US$ 52.2 billion) for the Ministry of

Defence (MoD)

Change in format in defence resource allocation

Impact of OROP and Pay Comission Recommendations

Tax rationalisation for Make in India initiative

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2016 Budgetary Allocation Across Sectors

(1.22%)
Rs.24130 Cr

(0.88%)
Rs.17352 Cr

(0.62%)
Rs.12253 Cr

(1.47%)
Rs.29161 Cr

Rs.45000 Cr

Rs.70453 Cr
Rs.57816 Cr

(1.92%)
Rs.38026 Cr

Rs.340922 Cr
Rs.44469 Cr

Rs.87678 Cr

Rs.75219 Cr

Rs.141392 Cr

Rs.72039 Cr

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Government Spending of BRICS Nations

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Government Earnings

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Shares of Various Taxes

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MoD Resource Allocation

Earlier Format

New Format

Demand no. 20 - Ministry of Defence (Civil)

Demand no. 20 - Ministry of Defence (Miscellaneous)

(Revenue and Capital)

Demand no. 21 - Defence Pensions

Demand no. 21 - Defence Pensions

Demand no. 22 - Defence Services, Army (Revenue)

Demand no. 22 - Defence Services (Revenue)

Demand no. 23 - Defence Services, Navy (Revenue)

Demand no. 24 - Defence Services, Air Force
(Revenue)
Demand no. 25 - Defence Services, Ordnance
Factories (Revenue)

Demand no. 23 - Capital Outlay on Defence Services

Demand no. 26 - Defence Services, Research

and Development (Revenue)
Demand no. 27 - Capital Outlay on Defence Services

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Budget and Revised Estimate for 2015-16 and 2016-17

(Old Format)
Revenue Expenditure
(Rs. in crore)

Capital Expenditure
(Rs. in Crore)

Total
(Rs. in Crore)

2015-16 (BE)

1,52,139.0

94,588.0

2,46,727.0

2015-16 (RE)

1,43,236.0

81,400.0

2,24,636.0

2016-17 (BE)

1,62,759.0

86,340.0

2,49,099.0

Note: BE: Budget Estimate; RE: Revised Estimate.

Rs. 1.0 crore = Rs. 10 million = US$ 153093 (alternatively, $1 million = Rs. 6.5 crore) as per the average exchange

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Comparative Statistics of Defence Budget: 2015-16 &

2016-17 (Old Format)
2015-16

2016-17

Defence Budget (Rs. in Crore)

2,46,727.0

2,49,099.0

Growth of Defence Budget (%)

7.74

0.96

Revenue Expenditure (Rs. in Crore)

1,52,139.0

1,62,759.0

Growth of Revenue Expenditure (%)

13.2

6.98

Share of Revenue Expenditure in Defence Budget (%)

61.7

65.3

Capital Expenditure (Rs. in Crore)

94,588.0

86340.0

Growth of Capital Expenditure (%)

0.0

-8.7

38.3

34.7

Capital Acquisition (Rs. in Crore)

77,406.69

70,413.92*

Growth of Capital Acquisition (%)

3.0

-9.4

Share of Defence Budget in GDP (%)

1.82

1.65

Share of Defence Budget in Central Government Expenditure (%)

13.9

12.6

MoDs Budget (Rs. in Crore)

3,10,079.6

3,40,921.98

Growth in MoDs Budget (%)

8.72

9.95

Share of MoD Budget in GDP (%)

2.29

2.26

Share of Capital Expenditure in Defence Budget (%)

* Approximate figure.

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Distribution of MoDs Total Allocation minus Defence

Pension

Note: Others include OFs, DGQA, RR, NCC, MF, and ECHS.

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Share of Pay and Allowances (P&A) of the Armed Forces in

Defence Expenditure

Note: Pay and allowances (P&A) include that of Army, Navy, Air Force, Joint Staff, DGQA, NCC, MF, RR and ECHS. It
does not include salary and wages of Military Engineer Services (MES) personnel.

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Held Strength of Indian Armed Forces Officers

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