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.
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