UNDERSTANDING BUDGET
G Bharathi

This is a two-part article. The main objective of the first part familiarizes the readers, especially the management students, with the terminology related to budget. The second part concentrates on the main procedure involved in the passing of the finance bill in both houses of the parliament along with the main proposals of the Union Budget 2003-04 and their implications. 

INTRODUCTION:

Nowhere in the world does the budget attract attention as it does in our country. The Union budget is an important annual exercise which helps utilize the scarce domestic resources optimally and leads the economy to the some predetermined objectives.

To put it in simple terms, a budget is an annual financial statement of the government’s expenditure and income. It deals with the past revisions, present situation and future proposals regarding the governments policy initiatives and objectives. The budget gives details of the government receipts and payments. It gives break up of the expenditure, allocation of plan outlays by sectors as well by the ministries.

SOME CONCEPTS

Before going into the details of the proposals of the annual union budget it is necessary to understand some useful terms related to the budget for a beginner. The government gets its major part of Income (revenues) from two sources; they are called the Tax Revenue and the non-tax revenue.

As the budget deals with annual statements, the Tax revenue includes the collection of Income tax, corporate profit tax, Customs (export and import duties), Central excise and other tax for the concerned financial year. The major Non-tax Revenue includes the profit from the public sector undertaking, fees, fines, and receipts of interest on lent out money, confiscated gold, currency and other equivalents from smugglers, etc.

Besides receipts of revenue nature, the government also gets money from other sources, which are termed as Capital Receipts. The major sources of capital receipts are the borrowings, small savings and other liabilities from public, foreign sources and RBI. Now a days the government is also receiving the money from disinvestment of the public sector undertakings. Besides these, any recovery of debt is also included in this account.

Given below is a pie diagram, which summarises the sources of rupee generation for the government.

1 BORROWINGS ANDLIABILITIES
2 CORPORATION TAX
3 INCOME TAX
4 CUSTOMS
5 EXCISE DUTIES
6 NON-TAX REVENUES
7 NON-DEBT CAPITAL RECEIPTS
8 OTHER TAXES

The government, in a developing country, is vested with several roles to lead the economy to faster growth through the
development of infrastructure (roads, ports, railways, and airports, irrigation facilities etc), generation of employment, upliftment of the poor, encouraging exports, improving agriculture, motivating industrialization etc.

Therefore, the government plays the role of producer in some cases, the role of a regulator, facilitator or a planner in others. The government sets up firms, which are called Public Sector undertakings.

Of late, the sweeping global changes are encouraging investment by the private sector in the economy. The government, having realized the same, is consciously following a role of regulator and facilitator by providing various kinds of incentives (subsidies), reduction of duties (both excise and customs) and infrastructure development to create a conducive environment.

All these naturally involve a cost (expenditure), which is classified in budget terminology as capital expenditure and revenue expenditure.

Any expenditure, which is incurred by the government for the normal functioning of the administrative bodies and the specific parts of the government, are taken from the revenue account and therefore called as Revenue Expenditure.

The government generally overspends (spends more than what it gets as income on this account), therefore incurs what is called as Revenue Deficit. It simply means that the revenue receipts are less than the revenue expenditure.

Since the money that is received in the capital account is a liability, and costly money, it is expected that the government spend the same judiciously on the creation of assets and wealth (productive purposes), so that the income earned from them can be used in turn to repay the principal and the interest. Therefore, the expenditure on this account is termed as the Capital Expenditure.

The expenditure on revenue and capital account are further classified as Plan Expenditure and Non-plan Expenditure. The plan expenditure involves all the expenditure as mentioned and prescribed in the five-year plans of the economy. Sometimes it so happens that the planned projects need to be extended beyond their expected levels. E.g. construction of a 500 km rail line started in 1997 may be planned to be completed by the year 2002. Therefore, the expenditure is allocated for the same from every budget till 2002.  But due some delays, only 400 km is constructed till date, therefore the remaining expenditure falls beyond plan period and results in non-plan expenditure. Similarly, there may be unforeseen natural calamities, wars, and other disturbances for which some expenditure takes place. All these also find place in the latter account. The expenditure on defence, subsidies and interest payments on borrowed capital also comes under this head.

Given below are the major items where the rupee from the government pocket goes to 

1 INTEREST

2 DEFENCE

3 SUBSIDIES

4 OTHER NON-PLAN EXP

5 STATES SHARE OF DUTIES

6 NON-PLAN ASSISTANCE TO STATES AND UT

7 STATE AND UT PLAN ASISTANCE

8 CENTRAL PLAN

Thus, the total receipts minus total expenditure on both revenue and capital accounts can be called as Budget Deficit. Since we are taking the borrowings and other liabilities of the government as receipts, the budget deficit does not give a correct picture of the delicate position of the government with respect to the indebtedness. Therefore, we take into consideration a concept called Fiscal Deficit, the difference between revenue receipts plus non-debt capital receipts on one side and total expenditure including loans, net of repayments, on the other side. This simply shows the borrowings and liabilities position of the government.

Another refined term is the Primary Deficit, which is the fiscal deficit minus interest payments. This shows the real financial position of the government.

The main implications of each of these items and the concepts will be dealt in the next part of the article.

UNDERSTANDING BUDGET - PART II

In this Section the process through which the finance bill passes and a brief review of the Union Budget 2003-04 and its implications will be analysed.

The Union Budget is introduced in the Parliament by the Finance minister on the 28^th of February at 11.00 a.m. every year. It is customary that the entire budget proposals are read out in the parliament. This is called the budget speech. It is interesting to note that the term budget was derived from the word “boguette” which means a wallet/ purse. The Budget represents the annual income and expenditure statement of the government, i.e. from where does the money come and where is it spent.

The budget has two main bills: the Finance Bill which gives the government the right to collect the revenue from the general public and deposit it in the treasury. It consists the government’s proposals for the imposition of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by the Parliament. The second bill is called the Appropriation bill which gives the government to draw money from the Consolidated Fund of India. This Bill is like a green signal enabling the withdrawal of money from the Consolidated Fund to pay off expenses. These are instruments that Parliament clears after the demand for grants has been voted by the Lok Sabha.

The Budget speech includes the review of the economic performance for the current financial year, the main objectives of the government for the next year, the main areas of thrust, and the direct and indirect tax proposals for the next year. Here it is to be noted is the budget is a financial plan of the government for the next fiscal, based on the performance in this financial year.

Therefore, the budget includes the actual performance of the government in the previous year, the revised figures of the current year, and the proposals for the next year. Since the financial year is considered from April 1 to March 31, and the budget is proposed in February, the actual figures of revenue and expenditure are not available. Therefore, the estimates are presented which are subject to revisions at the close of the financial year. Given below is the brief summary of the Union Budget 2003. Try and relate the concepts described in the previous section with this Table.

BUDGET AT A GLANCE 2003

This year the budget was presented by the Finance minister Mr. Jaswant Singh, the speech was one of the longest in the history and lasted for two hours and twenty minutes. The main objectives, Economic performance and the major proposals are given below along with the analysis. 

OBJECTIVES:

• Poverty eradication; addressing the “lifetime concerns” of our citizens, covering health, housing, education and employment;

• Infrastructure development;

• Fiscal consolidation through tax reforms and progressive elimination of budgetary drags, including reform of the additional excise duty, introduction of service tax, and introduction of value added tax (VAT) from April 1, 2003, at the state level.

• Agriculture and related aspects including irrigation; and

• Enhancing manufacturing sector efficiency, including promotion of exports and further acceleration of the reform process.

ECONOMIC PERFORMANCE IN THE YEAR 2002-2003:

• Agricultural GDP decline of an estimated 3.1percent

• Real growth of 4.4percent in GDP net of inflation

• Growth rates of industry 6.1percent and services 7.1 percent

• Healthy exports at 20.4 percent

MAJOR PROPOSALS:

1. Housing

·        Huge backward linkage, and employment generating industry

·        To maintain the present momentum of growth, interest deductible under income tax up to Rs.1,50,000/-  to be continued

2. Education

·        Education expenses up to Rs.12,000/- per child for 2 children made eligible for rebate under section 88 of IT Act

·        Royalty income up to 3 lakh per annum received by authors of literary, artistic and scientific books fully exempt

3. Health

·        Rate of depreciation in case of life saving medical equipment increased from 25 percent to 40 percent

·        Customs duty on life saving equipment and drugs reduced from 25 percent to 5 percent, exemption from excise duty also to encourage indigenous manufacture

4. Health Insurance

·        In order to correct the huge disparity in the health sector, a community based universal health insurance scheme is introduced which entitles the insured to get a reimbursement of medical expenses up to Rs.30,000/- towards hospitalization with a premium of just Rs.1/- per day

5. Disabled and Handicapped

·        To enable all round development of persons with disabilities, income tax deduction up to Rs.50,000/- and Rs.75,000/- for permanent disability and severe disability respectively is allowed for persons with such dependants

·        Customs duties on several equipments reduced to 5 percent without any special additional duty (SAD)

6. Salaried

·        Standard deduction for employees raised to 40 percent of salary or Rs.30,000/- whichever is less for salary income up to 5 lakhs and allow a deduction of Rs.20,000/- for salary income above 5 lakhs

·        Leave travel concession facility to government employees restored

7. Senior Citizens and Pensioners

·        With 76 million elderly population expected to increase to 100 million by 2013, specific responsibility of the society for them

·        Income up to 1.53 lakhs becomes fully exempt from income tax and senior citizens with pension this becomes equal to 1.83 lakhs

·        Self declaration to be accepted in regard to no deduction of tax at source from interest income, income from units, and such other sources

8. Insurance Pension Scheme

·        Special pension policy guaranteeing a annual return of 9 percent for citizens above 55 years of age

9. Restructured Pension Scheme introduced for central government employees, this scheme available on a voluntary for self employed as well

10. Physical Infrastructure

·        48 new road projects with a total length of 10,000 km at an estimated cost of around 40 thousand crores

·        National Rail Vikas Yojana projects worth 8,000 crores

·        Renovations/modernization of 2 airports and 2 seaports at an estimated cost or 11,000 crores

·        Establishing 2 global standard international convention centers at an estimated cost of 1,000 crores

·        Money to be gathered through an additional levy of 50 paisa per liter on diesel and motor spirit

·        Power: Customs duty on specific equipments for high voltage transmission projects reduced from 25 percent to 5 percent, 20 crores allotted to CSIR for research in non-conventional energy

·        Drinking water: Water supply projects now totally exempt in regard to capital goods and machinery both from customs and excise duties

11.  Fiscal Consolidation and Debt Restructuring

·        Cash management introduced on a pilot basis in some major ministries releasing budgetary allocation in a time sliced manner

·        External debt prepayment of high cost loans from World Bank and ADB totaling around 3 billion dollars

·        Domestic debt of the central government contracted under high interest regime to be offered for a buy back on a voluntary basis from banks

·        State governments debt to be restructured by a mutually agreed debt swap scheme

12. Agriculture

·        Diversification, resonance with market forces and a swift adoption of sunrise technologies are the need of the hour

·        Several new central government schemes for the development of horticulture, floriculture, plantations, animal husbandry and veterinary medicine and sugar industry; several reductions in custom duty and excise

·        Cheaper credit availability

·        Fertilizer subsidy reduced resulting in an increase of their prices

13. Water Management and Irrigation

·        Several schemes for river inter-linkage, desert pasturage development

14. Industry

·        Dividends now tax free in the hands of shareholders

·        12.5 percent dividend distribution tax on domestic companies

·        Long term capital gain tax removed on all listed equities that are acquired after March 1^st 2003 and sold after one year

·        As a one time measure exemption from capital gains tax on corporatization or demutualization of the stock exchanges

·        Research and development companies get tax holiday up to March 31^st 2004

·        Textiles get a major boost through sharp reduction in excise duties on domestic production and reduction in customs duty on the import of machinery. Heavy thrust on modernization and technology up gradation to improve productivity and also the infrastructure required thereof

·        Heavy incentive for pharmaceutical, biotechnology and information technology industries through reduction in excise and customs duties

·        Tourism: Expenditure tax on tourism removed, exemption for the hotel industry from the levy of service tax continued

·        Import duty on gold reduced to Rs.100/- per 10 gm from Rs.250/-

·        ECGC strengthened

·        SSI reservation for 75 items removed

·        Disinvestment receipts for the current year estimated at 3360 crores against the target of 12,000 crores

15. Other Reforms

·        Foreign direct investment in the banking companies presently capped at 49 percent increased to 74 percent for private banks

·        Rate of interest on small savings and Public Provident Fund reduced by 1 percentage points

·        Reorganization of Ministry of Finance through restructuring of Department of Company Affairs, FIPB, and Department of Economic Affairs

MAJOR GAINERS AND LOSERS:

·        Prices of cars drop by Rs.8000-Rs.30000 due to excise cut. Companies like Tata, Maruti, Ford and Hyundai to gain

·        Price of A/C down by Rs.1500, that of CTV and Refrigerator to cost less as excise reduced from 32 percent to 24 percent

·        Price of life saving drugs comes down as excise and customs drop. Companies like Pfzier, Ranbaxy and DRL to gain

·        Price of branded clothes come down

·        Tourism and hotel industry to benefit

·        Spur of private banks expected. Centurion, IDBI, GTB to gain

·        Telecom industries like Bharti, Hutch, Idea and Reliance may cut costs due to decrease in customs on telecom network equipments

·        ACC, L&T, Gujrat Ambuja, TISCO and SAIL companies to gain due to 60 thousand crores investment in infrastructure. It implies a fresh demand of 6.5-7 million tonnes of cement

·        Soft drink makers like Coke and Pepsi benefit due to cut in excise

·        Confectionary and biscuit makers like Britannia and Nestle also to benefit due to halved excise duty

·        Price of audio CD’s to fall

·        Power projects to get a boost

·        Small savings may get affected due to rate cut

·        High income sections both in individuals and corporate to be hit due to surcharge and also low standard deductions

·        Services like internet, advertising, travel agency, net café, coaching institutes, forex brokers also hit due to hike in service charge from 5 percent to 8 percent

·        Petrol and diesel prices go up, this may spur  inflation in the economy

·        Fertilizer companies may be hit due to increase in urea prices

·        Smuggling may reduce due to sharp reduction in customs duty of gold

·        India may turn out to be a major trading and manufacturing hub for diamonds

·        Greenfield housing projects may be expected in the near future

·        More money in the hands of households and corporate due to decrease in surcharge

·        Domestic producers of capital goods hurt due to decrease in customs

·        The linkage effect may work on companies related to hospital and health care services

·        Dividend paid by mutual funds tax free in the hands of investors likely to boost fund inflows. Scrapping of capital gains tax may also lure investors to hold equity for a longer period

G Bharathi,
Faculty in Economics,
Aurora’s Post Graduate College,
Chikaddpally, Hyderabad- 500020.
The Author can be reached at bharathishan@rediffmail.com