Budget in general refers to the financial planning of the government for a period of 1 year where they present their upcoming projects , scheme , and the funds allocations to meet the day to day expenditure of the country as well as the state. In India budget planning and funds allocation is directly impact almost every sector of the society . In this blog we will discuss about the Budget and its impact on Indian Economy .
What is Budget –
A budget is a financial plan of the government that forecasts its expenditures and revenues for a specific period of time. A budget is an annual financial statement of the government.
The period covered by a budget is usually a year, known as a financial or fiscal year.
According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual Financial Statement (AFS).The Budget Division of the Department of Economic Affairs in the Finance Ministry is the nodal body responsible for preparing the Budget .
History Of Budget
The Union Budget accounts for the government’s finances during the fiscal year from April 1 to March 31. The first Budget in pre-independent India was presented in 1860 by James Wilson of the British Indian Government. After independence, India’s first Budget was presented in 1947 by Finance Minister RK Shanmukham Chetty.
The Union Budget presented for 2017-18 was path-breaking in many ways. With it, the day of the budget presentation was shifted from the end of February to the first day of February.
The Railway Budget was also integrated with the Union Budget from 2017.
The Halwa Ceremony; –
The Halwa Ceremony is a famous ritual, which marks the start of the printing of the budget documents. Understandably, officials who are directly in contact with the budget papers and data are locked down in the basement of the North Block. The Halwa ceremony marks the lockdown of the Finance Ministry. In this premise, even the Finance Minister is not allowed to carry a mobile phone.
Budget Milstones In India ;
The one Union Budget that changed India’s future and was responsible for putting India on the road to accelerated growth was the Budget of 1991-92, presented by the then Finance Minister, Dr. Manmohan Singh. Under the leadership of P.V. Narasimha Rao, Dr. Manmohan Singh opened up India’s economy to foreign investors and eased up trade blockages.
The Union Budget of 1997-98, presented by P. Chidambaram is also regarded as one of the turning points of the economy. This budget saw easing up of income tax rates and lowering of customs duties. Chidambaram presented the Voluntary Disclosure of Income Scheme in this budget. The scheme was aimed to curb black money in the economy and widen the tax net.
The Millennium Budget, i.e., the Union Budget of 2000-01, is touted to have transformed the Indian economy into a tech-hub. Yashwant Sinha, who presented the budget, announced a reduction in customs duties for a few raw materials required for the production of the optical fiber by almost 10%, and by 20% in case of mobile phones.
Types of Budget
According to the government, the budget is of three types:
- Balanced budget.
- Surplus budget.
- Deficit budget
1. Balance budget: A government budget is said to be balanced when it is estimated revenues and anticipated expenditures are equal. i.e. government receipts and government expenditures. The concept of a balanced budget has been evocated by classical economists like Adam Smith. A balanced budget was considered by them as neutral in its effects on the working of the economy and hence they regarded it as the best.
2. Surplus budget – when estimated government receipts are more than the estimated government expenditure it is termed a surplus budget. When the government spends less than the receipts the budget becomes surplus that is.Estimated government receipts > anticipated government expenditure. A surplus budget is used either to reduce government public debt or increase its savings . The surplus budget is undesirable. It may lead to unemployment and low levels of output as an economy.
3. Deficit budget – when estimated government receipts are less than the government expenditure. In modern economies, most of the budgets around the world are of this nature. The estimated government receipts < anticipated government expenditure. A deficit budget increases the liability of the government or decreases its reserves .
Terms Related To Budget ;-
- Union Budget: Here is the definition of the Union Budget according to Article 112 of the Indian Constitution. Union Budget is the statement of estimated receipts and expenditures of the government called the Annual Financial Statement for a specific year.
- Capital Budget: The capital budget consists of capital receipts and payments. Capital receipts are Government loans raised from the public, Government borrowings from the Reserve Bank and treasury bills, divestment of equity holding in public sector enterprises, loans received from foreign Governments and bodies, securities against small savings, State provident funds, and special deposits. Capital payments refer to capital expenditures on the construction of capital projects and the acquisition of assets like land, buildings machinery, and equipment.
- Revenue Budget: The revenue budget consists of revenue receipts of the Government and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues constitute taxes like income tax, corporate tax, excise, customs, service and other duties that the Government levies. The non-tax revenue sources include interest on loans, dividends on investments etc. Revenue expenditure is the expenditure incurred on the day-to-day running of the Government and its various departments and for its services.
- Revenue Deficit: Revenue Deficit refers to the difference between revenue expenditure (on the government’s day-to-day operations) and revenue receipts (or income from taxes and other sources).
- Fiscal Deficit: This is the gap between the Government’s total spending and the sum of its revenue receipts and non-debt capital receipts.It represents the total amount of borrowed funds required by the Government to completely meet its expenditure. The gap is bridged through additional borrowing from the Reserve Bank of India, issuing Government securities etc. The fiscal deficit is one of the major contributors to inflation.
- Direct and Indirect Taxes: Direct taxes are levied on the incomes of individuals and corporations. For example, income tax, corporate tax, etc.
Indirect taxes are paid by consumers when they buy goods and services. These include excise duty, customs duty etc.
- Balance of Payments: Balance of payments is the difference between the demand for, and supply of, a country’s currency on the foreign exchange market. In layman words, Balance of Payment (BoP) is the difference between the total amount of money entering a country over a specific time period and the total amount of money leaving the country to the rest of the world.
- Consolidated Fund: Under this, the Government pools all its funds together.It includes all Government revenues, loans raised, and recoveries of loans granted.All expenditure of the Government is incurred from the consolidated fund and no amount can be withdrawn from the fund without the authorization of the Parliament.
- Contingency Fund: This is a fund used for meeting emergencies where the Government cannot wait for authorization from the Parliament. The Government subsequently obtains Parliamentary approval for the expenditure. The amount spent from the contingency fund is returned to the fund later.
How Does the Budget Impact Stock Markets?
- India’s Union Budget has a significant impact on the stock markets, interest rates, and economy of the nation. Generally speaking, the state of the economy is reflected in the performance of the stock market. Moreover, interest rates and stock prices have a historical relationship. The country’s fiscal imbalance is impacted by the expected amounts that the finance minister announces for expenditure and investment. This affects India’s economy, money supply, and interest rates.
High-interest rates typically result in an increase in the industry’s capital costs, which hurts profitability and, ultimately, drives down stock prices. When interest rates are low, the situation is the opposite .Generally, long-term interest rates are said to be negative for stock markets, while short-term interest rates impact stocks positively. A lower long-term interest rate motivates further investments, while on the other hand, higher rates discourage it. These investments are vital for economic growth. Higher bond yields further lead to discomfort in stock markets. If there is an increase in direct taxes, this will lead to a decrease in disposable income, which will further pull back the demand for various goods. With the decrease in demand, there would also be a drop in production, which would impact economic growth.
