Union Budget Process

An introduction

Dept. of Economic Affairs

Ministry of Finance

03/04/1102/07/07 1
 Presentation Scheme

1. Budget: fiscal policy and Indian legislative objective

2. Budget: citizen, parliament, constitution
3. Budget: legal framework
4. Budget: format / documentation / documents/ printing
5. Budget: preparations / consultations
6. Budget: FRBM Act, 2003 & medium-term framework
7. Budget: macroeconomic context
8. Budget: expenditure composition, policies & reforms
9. Budget: debt management
 Fiscal Policy
 Represents formulation and implementation of government sector activities
through budget

 Achieves budget balance though size of government, type of budget

financing and revenue & expenditure composition

 Covers all levels of government including quasi government

 Seeks internal & external balance, lowers debt, ensures long-term

sustainability

 Provides public goods; promotes private investment; engineers pro-poor

growth

 Reduces poverty and provides good governance

Issues: impact on interest rates, aggregate demand, output growth, competitiveness,

credit rating, crowding out private sector;
Legislative Objective of fiscal responsibility a

“To Provide for the responsibility of the Central Government to

ensure inter-generational equity in fiscal management and
long-term macro-economic stability by achieving sufficient
revenue surplus and removing fiscal impediments in the
effective conduct of monetary policy and prudential debt
management consistent with fiscal sustainability through limits
on the Central Government Borrowings, debt and deficits,
greater transparency in fiscal operations of the Central
Government and conducting fiscal policy in a medium term
framework and for matters connected there with or incidental
thereto.”
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 Budget & the Citizen
Not on Railway budget is separate, but Constitutionally, Railway receipts are part of CFI
Constitutional
strength
but by practice

Non
Tax
Four*
Revenue
Services
Tax b Grants
Revenue /Donor
support States

P
N
O a c
L N
A P
N L
A
4 CFI P

citizen
S
3 N Other Market U
Receipts Borrowings S

g d Depts.,

R C
E A
V P Interest Loan
E I
T
receipts repayment
N
U A &
1 2
E L
f e ,
T
Application of Funds eeF,sexa sgnivaS Consolidated
03/04/1102/07/07 5
Fund Of India

*Economic Services Fiscal Services Social Services & Other General Services
 Budget & the Parliament

• Presentation on last business day in February

• Examination by parliamentary standing committees
• Vote on Account before 31st March
• Approval by parliament within 75 days
• Seeking supplementary demand for grants- 1st , 2nd & 3rd
• Submission of C&AG Reports
• Examination by PAC
• Regularization of excess expenditure

No taxation without representation; Lok Sabha & Money bill: why supplementary? Why regularization?
how to work with Budget Division? Why to avoid excess expenditure? Lessons from C&AG reports!
Aligning between DDG and Outcome Budget of the Ministry. 6
 Budget & the Constitution
AFS- Anchor to all documents: Art 112 Trigger to All Documents

While the following provide for

• Procedure in Parliament with respect to Estimates … 113
• Appropriation Bills … … … 114
• Supplementary, additional or excess grants … 115
• Votes on account, votes of credit and exceptional grants … 116
• Special provisions as to financial Bills … 117
• Consolidated Fund … … … 266
• Contingency Fund … … … 267
• Finance Commission … … … 280
• Expenditure defrayable by the Union out of its revenues … 282
• Laws/Rules for Custody, etc., of Consolidated Funds,
Contingency Funds and moneys credited to the
public accounts … … … 283
• Borrowing by the Government of India … 292

7
*Annual Financial Statement
 Budget Documents in the context of CFI
Constitutional mandate in Article. 266

• All taxes, revenues, grants, loans,

repayments, proceeds from treasury bills,
way & means advances go into CFI (A)

• Other public money goes into

Public Account of India (B)

• No money to be appropriated from CFI

except through law passed by Parliament (C)

8
Relate of A, B, & C to various Documents/ statements Explore relevance of A,B & C to Fiscal Balance
 …a stylized peep into the Budget
(excluding charged estimates)

• Objectives
– in Spending, Taxing, Balancing, Investing, Macro-economic stability, growth & global
positioning

• Risks & Risk proofing, leak plugging

– in pass-thru of public money;
– contingent liabilities eg: guarantees, PPP terms, legal liabilities

• Transfer payments
– transfer objectives, transferring routes, vs. Operational issues

• Impact on equity*, efficiency** & entitlements***

*Intergenerational. Regional. Public Vs. Private sectors, Farm & non-Farm sector.
Rural Vs Urban. Spenders Vs. Savers. ** Capital Vs. Revenue. Productivity (ICOR) 9
***States Vs. Union Government. Through Finance Commission’s recommendations.
BPL Vs. APL. Children & Aged. Women Vs. Others
 Budget & Accounts Protocol
Controller General of Accounts

– Accounts Management
CAG’
s Audit Repo
– Expenditure tracking (Monthly) on
Finance
Accounts
for
– Finance A/Cs presentation to Parliament the
year T-1
through MoF

– Quarterly FRBM Statements

03/04/1102/07/07 Issues: Periodicity of Accounts; Time lag and aligning 10

Provisional, Provisional Actual A/cs, Flash figures, Actual/Audited A/cs
 Budget Format

• Receipts • Expenditure
– Revenue receipts – Charged (discussion
only)/ Voted (discussion &
• Tax voting)
• Non-tax
– Non-Debt Capital – Capital/Revenue
• Loan repayments
• Disinvestment (till – Plan*/Non-Plan
2006)
• Debt

Issues: Source and logic of the inputs influencing these entries

11
* Developmental expenditure within the framework of 5-Year Plans
 Budget Making
What Who
• Expenditure Dept. of Expenditure

• Revenue
– Non-Tax Dept. of Economic Affairs
– Tax Dept. of Revenue

• Deficit Dept. of Economic Affairs for

its Control* & financing**
– Fiscal,
– Revenue &
– Primary Deficits

03/04/1102/07/07 *FRBM Legislation 12

** Reserve Bank Coordination (Costs, price, instruments, scheduling)
 Budget: Annual preparations
Start in Sept. with issue of Budget Circular
• Extensive consultations involving
– line ministries DoE
– other stake holders: DEA & DoR
farmers, labour unions, business,
FIs, economists & other civil society groups

• Intense internal assessment about

– spending priorities DEA
– revenue mobilization DoR
– aligning with policy goals DEA

DEA: Dept. of Economic Affairs. DoE: Dept. of Expenditure. DoR: Dept. of Revenue
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Issues: Coordination between line Departments, Planning Commission & CGA 13
Aligning expenditure, physical progress and capacity to absorb as also compliance to legal ceilings
 Triggers -Target time - Goals
Budget Circular - 29th February - FRBM Act - Annual Plans

Inputs Source Output presented in

1 SBE/ spending performance Line Ministries Demands for Grants

2 Pre-budget meetings Line ministries/ PC & Non-Plan in Demands for

CGA Grants
3 NTR/ guarantees/ assets Line ministries Receipts Budget statements
profile/NTR arrears
4 Plan allocations PC, DoE & Line ministriesGBS: Plan in Demands for
Grants
5 State entitlements FC & DOE Transfers to States

6 Revenue receipts DoR (CBDT/CBEC) BE & RE

7 Debt/liability profile & Interest RBI, CAAA RE & BE, Receipts Budget
liability (instrument specific) statement

8 Resource Gap MoF Deficit targets

 Core Budget Documents = 13+
Presented by MoF and line Ministries

1. Key to Budget Documents 9. Explanatory Memorandum

2. Annual Financial Statement 10. Appropriation Bill
3. Budget at a Glance 11. Demands for Grants
• Exp. Budget Vol-1
4. Budget Speech
• Exp. Budget Vol-2
5. Budget Highlights
9. FRBM Statements
6. Action Taken on Budget • Macro-Economic framework for
Announcements Year T+1
• Medium term fiscal policy for
7. Receipts Budget Years upto T+3
• Fiscal policy strategy for the Year
8. Finance Bill T+1
• Customs & Excise Notifications • Deviations statement for Year T

13. Detailed Demand for Grants*

Pink Bold italics: Constitutionally mandated: Blue Bold: legally mandated 15

White : supporting documents: * of respective ministries
 Few more Documents
Related* Relevant*

• Economic Survey • Finance Commission Report

(Accepted Recommendations)

• • Five Year Plan Documents

Supplementary Demand for Grants
(Annual Plans & Evaluation Reports)
• Finance Accounts
• RBI Reports relating to
–Credit /Policy
• FRBM Statements
– Q4 of Year T-1
–Macroeconomic &
– Q3 of Year T Monetary Developments
• Outcome Budgets –State Budgets and
–Annual Report
• Annual Reports
• PSUs’ Annual Reports
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Discuss: *How & why to relate ? * How & when to look for relevance ?
 13+Budget Documents
…a framework to understand

• Accounting framework
– CAG, CGA Accounts
– Public Account & CFI: Charged Vs. Voted
– Revenue Vs. Capital; Tax and non-Tax Receipts

• Performance perspective
– Accounting the Resources & Counting the Results
– Outcome budget, Annual Report
– CAG Finance Accounts, Audit Reports

• Time-frame
– Past year, Current Year, Ensuing Year & Future Years (Medium Term) Viz.,
years T-1, T, T+1, T+2, T+3

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Issues: Classification: Reconciling the Provisional: Provisional Actual: & Actual
 Together – the Budget Documents…
…reveal Government resources flow & ...
… Answer the questions like:

• Whether the results matched with the resources used?

• How much money will go to health, education, pay, pensions, poverty
alleviation, interests payments, defence etc., ?
• How much money will go for research & development ?
• How much money will go to pay down the debt?
• Will taxes go up or down?
• How much money will be borrowed?
• What is the fiscal impact of all this ?

03/04/1102/07/07 Would you like to try few more questions ? 18

 FRBM Framework

A c c o u n t a b I l I t y*
Disclosures

Budget Budget
Making F R B M Act Management

Budget
Review

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•(a) limits on Fiscal & Revenue Balance, debt & guarantees,
•(b) Disclosures, (c) H1 performance indicators, (d) Transparency
 India’s FRBM Act – Managing The Mandate

Legal Frame work

Constitution, FRBM Act, Public Debt Act, etc.,

Borrowing by the Government of India - Art. 292

The executive power of the Union

extends to borrowing upon the security of the
Consolidated Fund of India
within such limits, if any,
as may from time to time be fixed by Parliament
by law and to the giving of guarantees within
such limits, if any, as may be so fixed.
 FRBM Goals
Annual Medium Term

• Reduce by • Reduce to “zero”

Revenue Deficit >0.5% of GDP by 2008-09 &
build surplus
later

Fiscal Deficit • Reduce by

• Reduce to 3% of
>0.3% of GDP
GDP by 2008-09

Contingent liabilities • Assume < 0.5%

GDP
 Fiscal Performance

: 22

Source: Budget at a glance 2007-08

 GDP & Fiscal Indicators
Y=C+I+G+(X-M)
• GDP: Gross Domestic Product
– indicates annual national wealth production (value
added at every stage of production of goods & services: CSO brings out
Advance, Quick and Quarterly estimates)

• Economic Growth
- GDP Growth: indicates how fast a nation is getting richer
(Real Vs. Nominal Growth & WPI)

Issues:
What causes higher GDP growth - Increase in Output:
What causes increase in Output – Increase in productivity & employment:.
What causes increase in productivity – increase in efficiency.
What cause increase in efficiency - enhanced/effective technology & raised skills:
03/04/1102/07/07 What raises investment and skills - Creative people with money; 23
How to do that - Help more people to be creative & help them to have access to more money.
 Framework of Fund Applications & GDP

CFI

Public Accounts [Art. 266 (2)]

National investment Fund

Revenue Capital
Savings

Plan Plan

Non-Plan Non-Plan

Services on which Funds are applied

GDP Growth
Adds to

Reduction
Poverty
Partial
+

Impact
+

&
+ =
Fiscal Social Economic General
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 Focusing Expenditure analysis on …
• Macroeconomic framework*
– Growth objective of Budget making

• Fiscal framework for budgeting

– Revenue, Expenditure & Borrowing and basis for assumptions

• Fiscal Objective of Budget Making$

– Optimal budgeting, net worth

• Balancing exercise@
– Revenue balance, Fiscal balance, Primary balance
– Golden Rule (exception to balancing exercise)

• Legal framework
• Parliamentary Accountability
The cause-and-effect:
* A higher economic (GDP) growth yields higher tax revenue growth:
03/04/1102/07/07
$
Higher tax revenues yield greater fiscal flexibility for accomplishing government's fundamental tasks: 25
@
A low level of debt liability increases net worth of government; takes less and leaves more with people
 ... A Framework to Analyse Expenditure
• Policy framework
– Economic/Growth policy viz., plan, non-plan
– Fiscal policy viz., revenue, expenditure, borrowing

• Institutional framework
– Finance Commission, Planning Commission, Line Ministries, RBI
– Centre Vs. States resources

• Legal framework
– Tax law, Debt law, FRBM law, Accounting Rules, Spending Rules (GFR)

• Accounting framework
– Heads of Accounts, Surrender of savings, re-appropriation, provisional, final, actual, audited
numbers

03/04/1102/07/07
Issues: How to leverage the framework to influence for ‘right’, ‘more’ & ‘better’ spending
 Budget & Debt Management
for deficit financing

• Objectives
– Minimize costs and risks in long & medium term
– Develop/ maintain efficient market for government securities
– Enlarge savings options

• Process
– Preference to domestic debt (that finances about 90% of deficit)
– ‘No debt’ from external commercial sources
– Increasing reliance on marketable debt instruments
– Elongation of maturity of government securities
– Average tenor in 2005-06 is 15 years, longest tenor 30 years
– Institutional and administrative reforms to make debt market modern and deeper

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