What is the Union Budget?

The Union Budget, referred to as the Annual Financial Statement under Article 112 of the Constitution, outlines the government's estimated receipts and expenditure for a financial year. It serves as a crucial instrument for economic policy and governance.

The Budget Division of the Department of Economic Affairs under the Ministry of Finance is responsible for preparing the Union Budget.

Key Components of the Budget

1. Expenditure

Expenditure is classified on the basis of:

• Asset Creation and Liability Reduction:
  • Capital Expenditure: Increases assets or reduces liabilities (e.g., infrastructure, hospitals).
  • Revenue Expenditure: Does not create assets (e.g., salaries, subsidies, interest payments).
• Sectoral Impact:
  • General Services: Administrative functions, defence, interest payments.
  • Economic Services: Agriculture, transport, rural development, etc.
  • Social Services: Education, health, welfare.
  • Grants-in-Aid and Contributions.

Development Expenditure = Economic Services + Social Services, and it too can be capital or revenue in nature.

2. Receipts

Government receipts are classified into:

• Revenue Receipts: Do not create liabilities (e.g., tax and non-tax revenues).
• Non-Debt Capital Receipts: Do not involve liabilities (e.g., loan recovery, disinvestment).
• Debt-Creating Capital Receipts: Involve future liabilities (e.g., borrowings).

3. Deficit Indicators

• Fiscal Deficit = Total Expenditure - (Revenue Receipts + Non-Debt Capital Receipts)
• Primary Deficit = Fiscal Deficit - Interest Payments
• Revenue Deficit = Revenue Expenditure - Revenue Receipts

Fiscal deficit reflects the net borrowing requirement of the government.

Implications of the Budget on the Economy

1. Aggregate Demand

• Government Expenditure boosts aggregate demand.
• Tax and Non-Tax Revenue reduces disposable income, thereby contracting demand.

Policy Interpretations:

• Expansionary Fiscal Policy: Rise in expenditure-GDP ratio, increase in fiscal deficit.
• Contractionary Fiscal Policy: Increase in revenue-GDP ratio, reduction in fiscal deficit.

2. Income Distribution

• Revenue expenditure like food subsidies or MGNREGA supports lower-income groups.
• Corporate tax concessions benefit businesses. Both may increase deficits but differ in their distributional impact.

Fiscal Rules and Their Role

Fiscal rules define policy targets to maintain macroeconomic stability. They guide the government’s borrowing and spending behaviour.

Current Framework in India

India’s fiscal framework is guided by the N.K. Singh Committee Report, which recommended:

1. Stock Target: Maintain a specific Debt-to-GDP ratio.
2. Flow Target: Limit Fiscal Deficit-to-GDP ratio.
3. Composition Target: Maintain Revenue Deficit-to-GDP ratio.

Challenges in Implementation

• India’s tax rates are largely fixed and not adjusted frequently.
• To meet fiscal targets, the government primarily adjusts expenditure.
• This rigidity may constrain the ability to undertake expansionary fiscal policy, especially during economic downturns or rising unemployment.

Need for Re-examination

Given persistent issues like low growth and unemployment, current fiscal rules may hinder responsive policy action. A flexible and context-specific fiscal framework is essential for ensuring both macroeconomic stability and inclusive development.

Conclusion

The Union Budget is not merely a financial statement but a tool of economic management. A nuanced understanding of its formulation, components, and policy implications is vital for evaluating government priorities and their impact on the economy and society.