Budgetary process

The budget is prepared by the Finance Minister with the assistance of number of advisors and bureaucrats. The Finance Minister seeks the view of the industry captains and economists prior to preparation. Various accounting and finance related organisations send in their opinions and suggestions .The budgeting exercise in India remains mainly the domain of bureaucrats to participate and influence the outcomes.

Normally, the budget-making process starts in the third quarter of the financial year. The budget has four stages viz., (1) estimates of expenditures and revenues, (2) first estimate of deficit, (3) narrowing of deficit and (4) presentation and approval of budget.

Stage 1: Estimates of expenditures and revenues

Part A: Estimates of Expenditure

The process begins with various ministries providing initial estimates of plan and non-plan expenditures. The ministries discuss the plan expenditures with the Planning Commission. The Planning commission allocates resources for continuing plan programmes and decides on the new programmes that can be undertaken on the basis of a tentative estimate or resources available, that is provided to it by the finance ministry. The financial advisors of the ministries prepare the non-plan expenditures. The expenditure secretary consolidates them and after intensive discussion with financial advisors, budget estimates are set for the ensuing fiscal year.

The majority of the non-plan expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers) and wage payments to employees.

Part B: Estimates of Revenue

Apart from estimating the expenditure, an assessment of expected revenues likely to flow into the government treasury has to done as a concurrent exercise. Revenue receipts are of two types - capital and current receipts.

Capital receipts include repayment of loans given by the government, receipts from divestment of public-sector equity and borrowings - both domestic and external. Current receipts include mainly, tax revenues, receipts by way of dividends from public-sector units and interest payments on loans given out by the central government.

The amounts to be received by way of tax revenues is estimated on the basis of existing rates of taxation and taking into consideration the likely growth and inflation rate over the ensuing fiscal year.

On the capital receipts side, targeted amounts to be realised through divestment of public sector equity and amounts to be realised by way of repayments of loans is made. All the estimates are provided to the revenue secretary.

STAGE 2: First estimates of deficit

After the estimates of revenue and expenditure are made, they are matched together. This provides the first estimate of expected shortfall in revenue to meet projected expenditure. The government then, in consultation with the chief economic advisor, decides on the optimum level of borrowings to meet this deficit. The figure of external borrowings is known as much of the external borrowing by the government consists of bilateral and multilateral assistance which is known by the time budget exercises are undertaken. The level of domestic borrowing depends partly on the desired level of fiscal deficit that the government targets for itself. A part of the revenue gap is left unfilled to be met through the issue of ad hoc treasury bills.

STAGE 3: Narrowing of the deficit

After the targets for the fiscal deficits and the overall budget deficit is decided, any remaining shortfall is filled through a revision in tax rates if feasible , keeping in mind the fiscal incentive structure the government wishes to put in place to stimulate the growth in different sectors. Following the initial plans, if any changes need to be made adjustments are made to the expenditure; usually the plan expenditure has to be modified. The non plan expenditure comprises of interest payments, subsidies and administrative expenditure. Due to the political sensitivities involved in reducing subsidies, non-plan expenditure of the government is inflexible about changing it and it is the plan expenditures which get the axe after per-emption have already been made for non-plan expenditure.

STAGE 4: The Budget

The presentation of the Budget for the ensuing fiscal year (beginning April 1) is usually done on the last working day of February. The Indian constitution has made the Parliament supreme in financial matters. The Union government, under Article 112 of the constitution, is required to lay an annual financial statement of estimated receipts and expenditure before both Houses of Parliament. It can levy taxes or disburse funds only on approval in both houses of Parliament. However, the proposal for taxation or expenditure has to be initiated within the Council of Ministers--specifically by the Minister of Finance. The Finance Minister presents before the Parliament, a financial statement detailing the estimated receipts and expenditures of the central government for the forthcoming fiscal year and a review of the current fiscal year.

Under Article 114 of the Constitution, the government can withdraw money from the Consolidated Fund of India only on approval from Parliament and so it has to get the Appropriation Bills approved by Parliament. This authorises the executive to spend money. Article 265 of the Constitution prohibits the government from collecting any taxes without the authority of law. Therefore, the government comes up with the Finance Bill. The Bill may levy new taxes, modify the existing tax structure or continue the existing tax structure beyond the period approved by Parliament earlier. The bills are forwarded to the Rajya Sabha for comment. The Lok Sabha, however, is not obligated to accept the comments and the Rajya Sabha cannot delay passage of these bills. The bills become law when signed by the President. The Lok Sabha cannot increase the request for funds submitted by the executive, nor can it authorize new expenditures.

The proposals in the budget come into force on April 1. Between the presentation and effective date there is a gap of 1 month during which the Lok Sabha can review and modify the government's budget proposals. This does not happen most of the time and the Parliamentary scrutiny of proposals and the passage of the budget gets completed in May, well after the commencement of the new fiscal year. Since the proposed budget has to be effective from April 1, the government usually seeks an interim approval to meet emergent expenditures that have to be incurred pending the approval of the budget.

This is called the vote-on-account and the sanctions given by the passage of the vote-on-account get automatically overridden once the Budget is approved by Parliament.