Understanding Union budget 2012.. (part 1)

This is very comprehensive and easy-to-understand guide to understand Union Budget 2012.

Let’s first understand what a budget is:

Let’s assume Mr. Natwarlal earns 50k per month but spends 55k per month so his financial health is like India, I mean he has a budget deficit.(He must be borrowing remaining 5k from someone else). Let’s take the second case, Mr. Sundar who earn 50k per month and restricts his spending in 45k. So he has a surplus budget.

Union Budget (AKA “Annual Finance Bill”) : Under Article 112 of the Constitution, a statement of estimated receipts and expenditure of the Government of India has to be laid before Parliament in respect of every financial year which runs from 1st April to 31st March.

It comprises of these funds:

· Consolidated Fund: The Constitution of India provides for the manner in which the accounts of the Government have to be kept. All revenues received, loans raised and all money received by the Government in payment of loans are credited to the Consolidated Funds of India all expenditures of the Government are incurred from this Fund. In short, Government’s Bank Account.

· Contingency Fund: The Contingency Fund of India exists for disasters and related unforeseen expenditures. In 2005, it was raised from 50 to Rs 500 crore.

Few important Terms:

To understand budget speech or budget related documents, one needs to understand following imp terms:

· Public Accounts Committee :

o The Public Accounts Committee (PAC) is a committee of selected members of Parliament, constituted by the Parliament of India, for the auditing of the expenditure of the Government of India.

o The PAC is formed every year with a strength of not more than 22 members of which 15 are from Lok Sabha, the lower house of the Parliament, and 7 from Rajya Sabha, the upper house of the Parliament. The term of office of the members is one year.

o Earlier, it was headed by a member of the ruling party. Its chief function is to examine the audit report of Comptroller and Auditor General (CAG) after it is laid in the Parliament.

· Revenue Budget: It is an account of Revenue Expenses and Revenue receipts. (It is very important terms to be understood)

o Revenue spending is all recurrent expenditure like salaries of govt employees.

o Revenue Receipts are exactly opposite of the former, it includes all recurrent receipts by government like interest of loans given to states or to other countries or any recurring income.

· Capital Budget: It is an account of capital expenses and capital receipts. (Another extremely important term to be understood).

o Capital expense is any one-time or non-recurring expense of a government. Majority of them include spending on infrastructure (building roads, airports). This expense will give return to government on a very long term basis so investing in them even by taking loan at lower interest would be a profitable affair.

o Capital Receipt is on the opposite side is one-time or non-recurring money coming to government. Prime examples are 2G and 3G auction. OR in Greece’s case, government leased many public properties like airports or tourist spots.

· Deficit: Remember Mr. Natwarlal’s case? Yeah, that’s called deficit. Let’s understand different types of deficits.

o Revenue Deficit: It is an extra expense done above the revenue receipts (See revenue budget explain above). i.e.,

Revenue Expenditure – Revenue Receipt

o Fiscal Deficit: When we consolidate Capital and Revenue receipts whatever deficit we get is called Fiscal deficit. i.e.,

Total Expenditure – Total Receipts (excluding borrowings)

o Primary Deficit: It adds interest payment (of the loans taken by Government from states or other counties) to Fiscal Deficit.

Fiscal Deficit – Interest payments

o Current Account Deficit: Remove total amount of exports from total amount of imports, you shall get current account deficit.

Imports – Export

· Fiscal Consolidation: You may find these terms at many occasions, it simply means ways of squeezing government spending and reducing government deficits [explained above].

· Fiscal Policy: it is the use of government expenditure and revenue collection (taxation) to influence the economy. Two main instruments: a) government expenditure b) taxation. This will include all changes related all types of taxes and government expenditure.

· Monetary Policy:

o Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.

o Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

· Debt Trap: You will never find this word in official budget speech. (As it involved two dangerous words one, DEBT and two, TRAP, any government will try to ignore.) Each government around the world takes loans [read debt] (Every government is like our Mr. Natwarlal) every year and after paying interest for around 2-3 decades it find this loan hard to bear so takes another loan [read debt]. In short, Debt taken to repay your earlier debt is called debit trap.

Jasmine Revolution and its global Repercussions

Some say that daily consumption of Jasmine helps in preventing cancer. Sometimes an autocratic rule is like a rigid cancer. What Jasmine tea does to cancer, Jasmine revolution in Arab has done exactly the same in many countries in Western Asia and Arab. Although the Jasmine revolution which we are talking about has nothing to do with actual Jasmine flower. But Jasmine is the name of national flower of the country, Tunisia, where it all began.

Jasmine Revolution, better known as “Arab Spring” started in Tunisia when a young man set himself on fire to oppose corrupt police/governance. This incident triggered a mass movement against 26-year old dictatorship in Tunisia. People of Tunisia were fed up with fast deteriorating living condition, lack of political freedom and unprecedented corruption. The uprising spread like a wildfire in countries like Egypt, Yemen, Libya, and Syria in that order. In Egypt, it ended 30 year autocratic rule, although shown on paper as democratic – by rigging elections, of Hosni Mubarak. Same was the case in Yemen, a poor country, where people had a lot of angst against growing corruption, unemployment and economic hardship. Next comes the land which is very rich in Oil and natural gas, Libya. The revolt against 41-year, capricious and autocratic rule of Muammer Qaddafi was a major part of Arab spring. Next comes Syria, where protest against 10-year old rule of Bashar al Assad was demanded by people.

Oil, China, Israel, geo-strategic interests, and weapons are five major reasons why US and its western ally are akin to shape Arab revolution to fulfill their own agenda. The Arab revolution is likely to change the regional balance of power decisively. The US-led “axis of moderation” and Iran-led “axis of resistance” are unlikely to endure the current upheaval. The contest between Iran and US has intensified after the Arab uprising. It will also affect a long war between Israel and Palestine. Whereas India is mainly concerned about three things: large oil supplies, their own people living in those countries and larger geo-strategic impact on west Asian neighboring countries.

The year 2011 will be remembered as the year of change for entire Middle East region where this revolution happened. It has certainly changed the power equations world over. Next decade will be important for countries like Israel, which has major threats from Palestine and Iran; US, who has just recovered from recession and has tactful interest in natural oil reserves in that region; Iran, who wants more amicable relationship with Middle East countries.