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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