Budget Terms and Definitions

Budget preparation is a mammoth exercise that takes burning of the midnight lamp over several days and weeks. Quite naturally then that a Budget is full of important terms and numbers, terminologies and definitions.

The most important terms/numbers in a Budget are related to GDP growth, fiscal deficit, capital expenditure, gross or net borrowings and subsidies (food and fertilizer)

Key Terms and Definitions About Budget

Here are the key terms and definitions that you should know about Budget

Finance Minister

The Finance Minister is one of the senior most ministers in the Union Cabinet, the others being Home Minister, Defence Minister and External Affairs Minister. Appointed by the Prime Minister, the Finance Minister heads the finance ministry and is usually assisted by two state ministers and a team of secretaries – Finance Secretary, Expenditure Secretary, Revenue Secretary, Secretary of Department of Economic Affairs and Secretary of Department of Financial Services.

Union Budget

The Union Budget is an annual statement of the Indian government’s receipts and expenditure for the financial year starting April 1 and ending March 31. When presented in Parliament, it is called ‘The Finance Bill’. It’s a Money Bill, which means it needs only Lok Sabha’s approval to become a law, and not necessarily Rajya Sabha’s. The Budget gives details of government’s sources of revenue and the programmes and projects that money will be spent on. It includes details of spending on salaries and pensions; interest payments; government borrowings; infrastructure expenditure on projects related to railways, roads and ports; communications; food and fertilizer.

Interim Budget

An Interim Budget is presented when the government is not in a position to presented the full Budget. It usually happens when it’s the last Budget of the government before elections. Since, the same party may or may not return to power, it is thought best to present an Interim Budget to seek Parliamentary approval for next few months’ expenditure (usually first 2-3 months of the new financial year). While the estimates of income and expenditure that the government presents in the Interim Budget are for the full year, they can always be and are often changed when the government presents the full Budget. While nothing stops the government from introducing major tax-related measures in the Interim Budget, the governments refrain from doing so.

GDP

GDP is the total value of goods and services produced within the geographical boundaries of a country in a given year. GDP is usually talked about in two terms: real GDP and nominal GDP. Real GDP is considered a better representation of economic growth as it adjusts the numbers against the prevailing inflation levels in the country. Since higher or lower prices will obviously inflation in the value of goods and service, real GDP adjusts the inflation to show the actual growth. Nominal GDP is based on prevailing market prices. It is thus influenced by inflation numbers and hence may not give a true picture of growth. However, for economists, both numbers are important to understand the true impact of government’s actions and policies on the country’s GDP.

Direct and Indirect Taxes

Taxes which are directly levied on income of individuals, institutions, bodies and corporates are called direct taxes. Income and corporate taxes are forms of direct tax. Indirect tax is levied on goods and services. Examples of indirect tax are GST, customs duty, excise and value-added tax. They are called indirect tax as they are levied on goods and services that we buy from vendors and sellers who deposit the tax with the authorities after collecting from us.

Goods and Service Tax

GST is an indirect tax that is levied on most goods and services in the country. The tax is charged to the customer by the seller of goods and service and the seller in turn deposits the tax with the government. On some goods and services, the government allows the business establishment to claim input tax credit. This is allowed on items which are further used for business purposes and not for personal use. Some items which don’t come under GST in India are crude, alcohol, items of daily consumption like milk, fruits and vegetables. Exports also do not attract any GST since the country is earning precious dollars and the government’s doesn’t want to make them uncompetitive a=by imposing GST which will increase the cost of the goods and services being sold abroad.

Customs duty

Customs duty is an indirect tax that is imposed on imports and exports of goods and services. While it is a crucial source of revenue for the government and is levied by all countries, at times, customs duty is also used to as a tool to discourage exports and imports, as the case may be. Say for example, government may want to discourage export of wheat to keep domestic prices in check but at the same time, it may not want its exporters to lose the export market. In such a case, it may impose custom duty in the hope that the exporter finds it cheaper to sell the same in the local market. It may also reduce the import duty on a certain important component that goes into a machine so that it is cheaper for the manufacturer. At the same time, it may impose import duty to protect domestic manufacturers.

Fiscal deficit

Fiscal deficit is an important element in the Union Budget and is always expressed as a percentage of the GDP – a high fiscal deficit is not good for the economy. It is the difference when the government’s expenditure exceeds its revenue. The government ‘funds’ the fiscal deficit through borrowings. High government borrowings tend to stoke inflation due to hardening of interest rates. High government borrowings can crowd out private borrowings, making cost of capital more expensive for private companies and individuals.

Fiscal Policy

Just like the Monetary Policy is determined by a country’s central bank, its fiscal policy is decided by the government. It relates to taxation, levies and cesses the government imposes on people to collect its revenue and influence capacity creation in the economy. The Union Budget is a statement of the government’s fiscal policy.

Monetary Policy

The Monetary Policy of a country is concerned with money supply in the economy and is determined by its central bank, in India’s case the Reserve Bank of India (RBI). The RBI both lends and borrows from the regular banks that common citizens bank with. It does this by selling and buying bonds whose interest rates are determined by the RBI. RBI’s policies influence the interest rates in the market. It also decides how much money the banks should keep with the RBI to ensure they are liquid and don’t indulge in excessive lending. It thus influences the demand and supply of money in the economy.

Inflation

Inflation can be defined in many ways. One way is that it its too much money chasing too few goods. This happens when demand outstrips supply and prices of goods and service rise. It can be due to rising wages and incomes in the economy. As incomes go up, people want to spend on more food, clothes, housing, cars, and other items. When the supply doesn’t match, prices go up. Sometimes, it can also be due to a sudden supply crunch even when the demand is stable. Say an onion crop falling in a year which leads to a sudden shortfall in supply. Prices of onion will go up even when the demand is at same level.

Capital Budget

Capital Budget has two big elements: capital receipts and capital expenditure. Capital receipts are receipts that create liabilities or reduce financial assets. Financial assets get reduced when the entity liquidates them or monetizes them. Capital receipts mostly include borrowings or loans from banks/public/governments/international lenders and bodies. They are mostly one-off in nature like sale of a building or a natural resource like a mine or airwaves used for telecommunication purposes. Proceeds from sale of public enterprises (disinvestment/privatization) or stake sales in those enterprises is also a capital receipt.

Capital expenditure is expenditure that goes into creating long-term asset/infrastructure. This includes spending on land, machinery, roads, ports, transportation and power plants.

Revenue Budget

Revenue Budget comprises revenue receipts and revenue expenditure. Revenue receipts comprise tax collections, interest on loans and investments, dividends received from state enterprises and fee from services offered by government at its facilities or any activity.

Revenue expenditure is spending on salaries and pensions, interest payments on loans, any expenditure associated with day-to-day running of the government/entity, and generally, any expenditure that doesn’t create a long-term asset.

Finance Bill

A Finance Bill covers all changes linked to taxation, direct or indirect. The Union Budget presented in the Parliament is a Finance Bill. It carries all amendments related to income tax, excise or VAT, customs duties, Goods and Services Tax, or any other tax. Any change in the definition that can have an impact on taxation or any exemptions all form part of The Finance Bill. Say the government wants to redefine what constitutes an MSME (micro, small and medium enterprises) for the purpose of taxation, it will introduce the change through The Finance Bill.

The Finance Bill forms part of the Union Budget. Say the Budget presented in February 2024, will carry a document called ‘The Finance Bill, 2024’. The Finance Bill is a Money Bill. Once passed by the Lok Sabha, it becomes a law, and will be called ‘The Finance Act, 2024’ in this case.

Vote On Account

A Budget is a Bill, and has to go through the Parliamentary process to become a law. This process involves approval of the Lok Sabha after much discussion, and at times, there are amendments too in The Finance Bill.

A financial year starts on April 1 and there are occasions when there is not enough time to secure the Parliamentary approval to put the Budget into practice or to enforce its provisions. In such a scenario, the finance ministry tables a ‘Vote On Account’ to secure Parliamentary approval to ensure the smooth running of the government and to ensure all its expenditure commitments like salaries and pensions are met for the next 2-3 months. This gives it enough time to prepare the full Budget and secure its approval. This typically happens when there are elections and there’s not enough time to have all the approvals in place for a full Budget.

Excess Grants

The government allocates money for its various projects and programmes (including subsidies) through the Union Budget at the start of the financial year. The short in revenue, compared to the expenditure, is made up through borrowings. There are times when during the course of the year, the government feels it may need to spend more on certain items, exceeding the figure originally approved by the Parliament. In such a case, the government has to seek Parliamentary approval again for ‘excess grants’ or higher allocation to its projects. The procedure for this approval is similar to that of the Budget or any other Money Bill.

Budget Estimates

A Budget makes provisions for allocations to various ministries and departments; salaries and pensions; subsidies on food and fertilizer; railways; ports; communications infrastructure and defence. These allocations are based on certain assumptions which can change during the course of the year. Hence, all the numbers in a Budget are simply estimates or projections that the government makes at the start of the financial year. They are not the final figure, which depend on the execution of the plans. The final number can be lower or higher than the estimate.

Revised Estimates

At the start of the financial year, the government sets aside money for its projects based on its estimates. As it often happens, implementation of the plans can vary during the course of the year because of several factors. Often, the costs can go up and the departments and ministries then ask the finance ministry for higher allocation. More money is then allocated based on revised estimates. The final figures pertaining to the revised estimates in a given financial year are captured in next year’s Budget. The Budget gives figures (called Budget Estimates) for the new financial year as well as revised estimates for the ongoing financial year that will end in a couple of months.

Re-appropriations

There are times when a ministry may feel the need to transfer funds from one unit/project to another because of higher need for funding by the latter. According to the country’s Comptroller & Auditor General, re-appropriation of funds should be made only when it is known or anticipated that the appropriation for the unit from which funds are to be transferred will not be utilised in full or that unspent provision can be effected in the unit of appropriation.

Outcome Budget

Outcome Budget is prepared by departments/bodies and ministries to see if they utilized the funds allocated to them appropriately, to assess cost overruns and see if they could have spent the money more judiciously. It gives the ministries an opportunity to make their Budgets better next time and fix responsibilities for improvement in execution. With the Outcome Budget it receives, the finance ministry is also in a better position to question other ministries and departments and nudge them toward better implementation of their plans.

Guillotine

Any proposal or bill tabled in Parliament can be cleared only after both the House of Parliament have discussed it and changes, if any, have been incorporated. There are occasions when the time is less and the matter is urgent. Also, in case of a Budget, it is not possible to discuss demands of every ministry. Under such circumstances, the Speaker (in Lok Sabha and the Chairperson in the Rajya Sabha) can apply guillotine and order voting on need for grants without giving much time for discussion.

Cut Motion

A cut motion is a special power every Lok Sabha member enjoys. It allows them to oppose a demand being discussed for specific allocation by the government in the Finance Bill. If the motion is adopted, it amounts to a no-confidence vote, and the government falls given that it’s a Money Bill. The decision to accept a cut motion relies solely on the Speaker. The notice for a cut motion is given at least a day in advance. Any member can object to the moving of the cur motion if no notice was given a day earlier. Such objection usually prevails unless the Speaker allows the motion to be made.

Consolidated Fund of India

This is government of India’s most important account as all revenue flows into it while all expenditure flows out of it. The revenue that goes into it comprises taxes like income tax, central excise, goods and services tax, customs and other receipts of the government. Non-tax revenues are also credited into the Consolidated Fund. Similarly, all loans raised by the government, treasury bills and loans obtained from foreign governments and international institutions (external debt) are credited into this Fund. No amount can be withdrawn from the Fund without the Parliament’s approval.

Contingency Fund

As the name suggests, it’s an emergency fund that comes in use when there’s a crisis and funds are needed urgently. It is at the disposal of the President who acts based on the advice of the Prime Minister’s Cabinet. Unforeseen and urgent expenditure can be made through this Fund with Parliament approval coming in later. The current size of the government’s Contingency Fund stands at Rs. 30,000 crore.

Public Account

There are several schemes of the government under which the government of India acts like a banker, giving interest to individuals on money they keep with it. Some of these schemes are Public Provident Fund, Kisan Vikas Patras, Sukanya Samridhi Scheme, among others. While the money is collected through banks and post offices, the government’s Public Account manages the funds.