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Deciphering the Budget

V. Prasanna Bhat

EVEN topnotch accounting professionals often focus only on direct taxes, ignoring the other simple, yet subtle, aspects of the Union Budget. In fact, deciphering the Budget is an interesting exercise _ simpler than casting a balance-sheet.

An ABC analysis

The Budget is a combination of numerical statements and detailed write-ups. A finance professional who wants to make an objective assessment of the Budget should consider the following:

i) whether it is drawn for achieving the priorities;

ii) whether the allocations are adequate;

iii) the quality of receipts and expenditure;

iv) if the changes proposed are fundamental or merely cosmetic.

Rather than look at the absolute quantum of money proposed to be spent, the percentages must be calculated _ as done in pie-charts. For example, in a Budget of Rs. 3,00,000 crores, a sum of Rs. 50 crores is a mere 0.016 per cent. Much of the time, discus sions revolve around such insignificant items. In ABC analysis, these are known as C items. Income-tax, for instance, forms only a small percentage of the total tax revenues.

Revenue deficits: Meeting revenue expenditure with capital receipts has become a common practice of late; this is akin to eating away the paddy meant for seed. There will not be much leeway for additional budgetary provisions if the fundamental aspect of additional resource mobilisation is not tackled; expenditure control is, of course, a key issue here.

Debt-servicing and defence: As much of the Budget is concerned with debt-servicing, defence and maintaining the government, it is often reduced to tinkering with a mere 10 per cent of the fiscal flows. A relook at the whole exercise is, therefore, requir ed.

In India, the Budget size, on an average, works out to only around 14 per cent of GDP (roughly Rs. 2,85,000 crores for a GDP of Rs. 20,00,000 crores; of the Budget figure, the deficit is nearly 28 per cent, at Rs. 80,000 crores). Through ABC analysis, ef forts must made to improve the Budget base to nearly 20 per cent of GDP. Lessons must be drawn from other countries about ways to broad-base revenue and capital receipts. Realistic sources of revenue, unlike public sector disinvestment, must be found.

The basics

The preparation and submission of the Budget for the sanction of the legislature is a constitutional obligation (Article 265). It is a statement of projected receipts and expenditure of the government from different sources for the ensuing financial year . It also specifies the ways and means of meeting the proposed expenditures.

Components

The Budget normally has three components _ revenue, capital and public accounts. Tax and non-tax revenues _ which are estimated receipts _ as well as revenue/budgeted expenditures of the government are shown in the revenue account. Obviously, all expendi tures which do not result in asset creation are revenue expenditures.

`Budget at a glance' is a document which shows the sum of receipts along with details of tax revenues and other receipts. It also presents a broad break-up of expenditure _ Plan and non-Plan _ by various sectors, which includes ministries/departments, an d the items transferred by the Central Government to the States and Union Territories. The document also shows the revenue deficit, the gross primary budgetary deficit and the gross fiscal deficit.

Deficits: The excess of revenue expenditure over revenue constitutes revenue deficit. And after taking into account capital expenditure and capital receipts also, the gap between receipts and expenditure in a year constitutes overall budgetary deficit. T his gap is usually covered by issuing 91-day treasury bills (mostly held by the Reserve Bank of India). Apart from borrowing through T-bills, the government collects funds through many schemes which form part of capital receipts.

The difference between the total expenditure of the government by way of revenue loans net of repayments, on the one hand, and revenue and capital receipts which are not in the nature of borrowing that accrue to the government, on the other, constitutes gross fiscal deficit.

The gross fiscal deficit net of interest payments gives the gross primary deficit.

Resources transferred to States: State governments are given loans and grants for meeting their various Plan expenditures. Besides, sizeable amounts of tax revenues collected by the Centre in the form of income-tax and excise duties are passed on to the States. Some of the States, on the recommendations of the Finance Commission, also get grants to cover the gap in their revenues. The total resource given to States and UTs are indicated in the ``Budget at a Glance'' document.

Though, in any year, the revenue budget is balanced, financial propriety demands that the capital account should also be balanced. The government must not only provide for the ordinary expenses of administration covered by the revenue budget, but also fo r the expenses on capital works and the other services covered in the capital account. After providing for all these items of expenditure, the government should have a minimum cash balance at the close of the year.

The Center, unlike the States, can borrow money from the RBI which, in effect, amounts to creating currency (printing money).

Deficit concerns

The task of fiscal management has become complicated. Fiscal deficit has become a matter of much concern, especially with the IMF linking its disbursements to fiscal measures since the introduction of reforms. Fiscal deficit is nothing but budgetary defi cit plus the borrowings and other liabilities of the government.

The break-up of gross fiscal deficit into revenue deficit, capital outlay and net lending brings out the dynamic linkage between revenue deficit and gross fiscal deficit.

The Budget process

There are standard methods of preparing the Budget. Prior to World War II, the Budget format was simple, involving only incremental budgeting. But over the years, with growing government expenditure and complexity in its operations, new forms and process es, such as performance and programme budgeting, zero-based budgeting, and so on, came about.

The first step in Budget-making involves the collection of past expenditure details and forecasts from all departments. The finance department scrutinises the forecasts based on past experience and foreseeable future trends and fixes a reasonable estimat e for all the available schemes and sources of taxation.

But the role of the government and the needs of the people are always changing and, hence, there is a continuous demand for newer schemes. Such schemes are brought before the Planning Commission, which, keeping in view the overall objectives of planning and development, recommends for the consideration of the government the schemes that require higher priority. The final picture that emerges includes expenditure on both Plan and non-Plan schemes. The Plan expenditure broadly conforms to the Plan size ag reed to by the Planning Commission and takes into account the recommendations made by it.

Once this exercise is over, whether all the three accounts together leave the State governments with a positive balance or not must be seen. If not, the Centre can help reduce the gap by mobilising additional resources through taxation, reducing expendit ure, or both. Once the decision is taken, the Budget is ready for presentation. This represents the entire expenditure from the consolidated fund. If the legislature approves the Budget, the government then accords sanction to incur the budgeted expendit ure, which is known as appropriation.

(To be concluded)