How is the Union Budget Prepared?

Podcast Duration: 09:00

How is the Union Budget prepared?

With the Union Budget just around the corner, aam aadmi ke bahut saare hopes aur expectations hain. Lekin what are the government’s actual considerations while preparing the budget,besides of course keeping the common man happy? Aaj hum discuss karenge the various factors and metrics that go into budget planning. Isse you will also understand how and why taxation is increased or decreased.

Pehle samajhte hai what the budget is really supposed to be: Bahut logon ko lagta hai ki the budget is simply news about “kitna tax badhna padega?”. And while that is indeed the most important question for us, the Union Budget has a much bigger picture. The Union Budget is actually what you might call a plan for the government’s income and expenditure in the coming financial year. Iss document mein sarkar ke estimated revenue sources aur estimated expenditure ke details diye jate hai. Union Budget ke 2 parts hai aur yahi pe mushkil shabd aur jargon shuru ho jati hai. Lekin fikar math kariye kyunki yeh podcast mein hum saare budget-se-related jargon, simplify karnenge.

Union budget ke 2 parts hai: Revenue budget and capital budget.

Revenue budget ka matlab hai, the blueprint for government income. For example, aap jo tax dete ho, woh government ka income hai.

Capital budget ka matlab hai, the blueprint for government spending. For instance, government ke infrastructure projects, Covid-19 relief packages vagera, yeh sab government ke spends hai.

Basically let us make a huge simplification and look at the Union Budget as any individual’s budget. Let us call the individual Ramesh. Let us imagine that Ramesh is preparing his own budget for the year. He will have an estimation of how much he will earn from his salary, from his loaned amounts he is supposed to get back from his perpetually broke friends Rahul and Karan and from any investments he redeems. He is also planning on selling his old electric guitar, his son’s drum kit and some old furniture that is in storage. He might even sell his second car.

Similarly he will have an estimation of how much he plans to spend in the year. He knows that groceries for the month come to approximately Rs 15,000; he, his wife and son spend about Rs 5,000 per month on lifestyle, his son’s school fees are about Rs 170,000 per year and so on.

The point is this: Ramesh has a good idea of how much he will earn and how much he will spend in the coming year. By jotting all of it down in advance he might be able to make adjustments in order to meet a savings target, or to just make sure he breaks even and does not end up broke like his friends Karan and Rahul.

Now that you have wrapped your head around the two headlining metrics that go into budget planning, aage badhte hai to understand the three stages in budget planning!

Stage 1: Gathering estimates of expenditure

Yeh stage ke phase 1 mein, agriculture ministry, defense ministry, tourism ministry - sarkar ke saare ministries - they prepare and submit an estimation of planned and unplanned spending in the coming financial year. Unplanned kyun? Because given how much in advance this planning is taking place, substantial room needs to be kept for events that cannot be foreseen. Also expenses like interest to be paid, subsidies and pension payouts that may be required cannot always be estimated accurately. Coming back to our example about Ramesh, un ko abhi already pata nahi ki kitna paisa spend hoga, by way of Diwali bonuses to the bais, the gurkhas, the drivers and various other people who might render his service in the coming year. He does not know how much his son’s tution teachers and coaches will charge yet. What if his wife wants a set of diamonds for their anniversary? He’s budgeted for a handbag and a fancy dinner but should keep some funds aside just in case. God forbid anyone catches Covid or any other serious illness and ends up in hospital. He’ll need money. Its the same for the government!

Easier to understand when we compare the government’s spending to spending that we can understand right?

Stage 1 ke phase 2 mein, the Planning Commission takes centrestage. The Planning Commission and various ministries put their heads together to decide on programmes and projects that will be taken ahead and any new initiatives etc.

You could say that this is the equivalent of Ramesh and his wife sitting down together and figuring out what all they might need money for. Maybe his wife reminds him that this year they need to account for a big present to Ramesh’s parents for the 50th wedding anniversary, for example.

Phase 3 of stage 1 is the final stage. Har ministry ka finance secretary aur expenditure apne ministry ke expenditure document finalise kar dete hai - it is now ready for submission.

Stage 2: Gathering estimates of income

Ramesh wala example mein Ramesh already knows ki us ko salary kitna milega. He would also plan in advance for whatever other income he hopes to get from selling the purana gaadi, investment redemptions etc. He might at least get an estimate of how much he will earn in the year.

Same scene sarkar ke liye bhi. The government is trying to get an estimate of aage financial year ke honewale earnings - it may not be accurate but it is to be close.

Phase 1 of stage 2 mein, dekha jata hai capital receipts. These are further divided into debt capital receipts and non-debt capital receipts

Debt capital receipts are the ones which indicate a future debt (because at some point they need to be paid back). All the loans taken by the government from the public by way of bonds, shares and other investments made by the public in the government, will come under this particular estimation. State provident funds also come under this category.

For example, Ramesh is planning to take a 1 crore home loan to buy a house in Mumbai. He has 1 cr more in his pocket. But he has to pay it back someday hain nah? Similarly anything that the government has to pay back to the public in India or even any foreign borrowings, all of that is counted as debt capital receipts. Right now it is money in the pocket, but not for long!

Non debt capital receipts refer to income where the government does not have the burden of future repayment. So when the government recovers loans given out, when it pulls out its investments in shares etc or receives a bonus issue of shares, it earns and these are non debt capital receipts.

This is the equivalent of Ramesh’s cash-strapped friends Karan and Rahul paying him back.

Phase 2 of stage 2 mein current receipts pe dyaan diya jata hai. Yeh hai the taxes that we pay. For example, taxes on your rail or bus fare amount to income for the tourism ministry.

This is perhaps what you might call the equivalent of Ramesh’s salary. An income that can be relied upon to disburse expenses. Surprised? Oh! Kkya aapko laga ki sarkar taxes aise hi levy karte hai?

Stage 3: Deficit estimation and adjustment of taxes

Yeh phase mein, the estimates are tallied against each other. Abhi pata chalta hai how much the expenditure exceeds income by. Ab decide kiya jata hai

Kitne borrowings lena padega, in order to meet the deficit. In Ramesh’s case, does he need a bigger loan?

Taxes kitna adjust karna padega. Or in our analogy, does Ramesh need to ask for a raise or look to move to a better paying job?

How can expenditure be modified in order to reduce the deficit? Maybe Ramesh’s wife will have to settle for that handbag and fancy dinner this year; no diamonds.

Ji haan if we are experiencing increased taxation, it is because the capital is required in order to meet expenditure by the government. Now you understand why people grumble when a road is badly made or a politician is spotted living lavishly. Because they literally contributed to the road’s construction or the politician’s lifestyle decision, with their own money A high deficit is usually not a good thing for many reasons, one of the most significant being a weakening currency.

As you can imagine, the planning of the budget begins months before it is actually announced. The various ministries begin work in the third quarter of the fiscal. Kaam October aur December ke beech mein suru kiya jata hai, taki 1 February tak budget presentation ho sakta hai.

We hope this simplification exercise of the various metrics and considerations that go into budget planning, tumhare liye interesting aur useful raha. Check out humare dusre bhi podcasts to find out many interesting facts about the Union Budget.