budget (1)

Unit- 3

Components of the national budget and how these impact on the business world.

Budget

Planning process of assessing revenue & expenditure is termed as Budget.

An estimation of therevenue and expenses over a specified future period of time, usually a year.

Budget is of two types-a)Deficit budget, b)Surplus budget

Surplus budget means revenue exceeds expences .

Deficit budget means expenses exceeds revenues.

Balanced budget means thatrevenuesare expected toequal expenses

Adjustments are made to budgets based on the goals of the budgeting organization.

Budgets are usually compiled and re-evaluated on a periodic basis.

Objective of the Government Budget

I. Reallocation of resources:-It means managed and proper distribution of resources. As private sector can not provide all the goods and services the government has to provide these goods.
II. To reduce inequalities in income and wealth:-Through budget government tries to reduce the gap between Rich and poor. This is achieved through taxing the rich and subsidizing the needs of poor people.
III. To achieve economic stability :-During depression government reduces rate of tax and borrowing and increases public expenditure. During inflation government increases the rate of tax and borrowing and decreases public expenditure.
IV. Management of Public Enterprises :- Governmentt has many public sector companies to manage and run
V. To achieve economic growth:-Government does capital expenditure in the country to provide economic growth , infrastructure for employment and earning opportunities.

Budget process in India

The budget process in India, like in most other countries, comprises four distinct phases.Step 1:-Budget formulation: the preparation of estimates of expenditure and receipts for the ensuing financial year;Step 2:-Budget enactment: approval of the proposed Budget by the Legislature through the enactment of Finance Bill and Appropriation Bill;Step 3:-Budget execution: enforcement of the provisions in the Finance Act and Appropriation Act by the governmentcollection of receipts and making disbursements for various services as approved by the Legislature; andStep 4:-Legislative review of budget implementation: audits of governments financial operations on behalf of the Legislature.


Process starts August-September:-Step 1 :-In the Union government, there is a Budget division in the department of economic affairs under the Ministry of Finance.

Step -2:-This division starts the process of formulation of the next financial years Union budget in the months of AugustSeptember every year.

Step -3:-Budget Division coordinates with various ministries and departments with regard to their revenue receipt budgets during October and November months.

Step-4:-The Finance Minister also began his consultations with sectoral representatives in January and meet economists, trade unions, industry leaders and regulators among others.


Process starts August-September:-Step -5:-In the Union government, there is a Budget division in the department of economic affairs under the Ministry of Finance.

Step -6:-This division starts the process of formulation of the next financial years Union budget in the months of AugustSeptember every year.

Step -7:-Budget Division coordinates with various ministries and departments with regard to their revenue receipt budgets during October and November months.

Step -8:-The Finance Minister also began his consultations with sectoral representatives in January and meet economists, trade unions, industry leaders and regulators among others.

Step -9:-Ministries are required to provide three different figures relating to their expenditures and receipts during this process of budget preparation.

Step 10:- budget estimates, revised estimates and actual

For instance, the case of budget preparation in the second half of the calendar year 2013-14. The Union government would prepare the budget for 2015 during the time period of September 2013 to February 2014.

Approval of Parliament would be sought for the estimated receipts/expenditures for 2014-15, which would be called budget estimates( next year)

At the same time, the Union government, in its budget for 2014-15, would also present revised estimates for the ongoing (2013-14) year

Finally, ministries would also be reporting their actual receipts and expenditures for the ongoing financial year

Estimates, revised estimates and actual -

Planning Commission's role

Step -11:-The ministries would provide budget estimates for plan expenditure for budget estimates for the next financial year, only after they have discussed their respective plan schemes with the Central Planning Commission.

Step -12:-The Planning Commission depends on the finance ministry to first arrive at the size of the gross budgetary support, which would be provided in the budget for the next annual plan of the Union government.In principle, the size of each annual plan should be derived from the approved size of the overall Five-Year Plan (12th Five-Year Plan, 2012-13 to 2016-17, in the present instance). However, in practice, the size of the gross budgetary support for an annual plan also depends on the expected availability of funds with the finance ministry for the next financial year.

Budget Process- Final stages

Step -13:-In January, Revenue-earning ministries of the Union government provide the estimates for their revenue receipts in the current fiscal year (revised estimates) and next fiscal year (budget estimates)

Step -14:-In the final stage of budget preparation, the finance minister examines the budget proposals prepared by the ministry and makes changes in them, if required.

Step -15:-The finance minister consults the prime minister, and also briefs the Union Cabinet, about the budget at this stage.

Step -16:-If there is any conflict between any ministry and the finance ministry with regard to the budget, the matter is supposed to be resolved by the Cabinet.

Step -17:-In the final stage, the budget division in the finance ministry consolidates all figures to be presented in the budget and prepares the final budget documents.


Step-18:-At the end of this process, the finance minister takes the permission of the president of India for presenting the Union budget to Parliament.

Step -19:-As per the Constitution, the Union budget is to be presented in the Lok Sabha on such a day as the president may direct.By convention, Union budget has been presented in Lok Sabha by the finance minister on the last working day of the month of February every year.

Step-20:-The finance minister, by convention, makes a speech while introducing the budget.

Step -21:-The annual financial statement is laid on the table of Rajya Sabha only after the finance minister concludes his budget speech in Lok Sabha.

Components of Government Budget

Components of Government Budget:-

1. Revenue Budget Amount of money allocated to maintenance and growth. It is estimated on two components:-a. Revenue receipts b. Revenue expenditure.a. Revenue receipts:-This is called as governments earning. They are divided into Tax and non tax receipts(interest, profit of public sector enterprises) b. Revenue expenditure -It is day to day expenditure done by the government.Revenue expenditure includes expenditure on administration, salaries, subsidies, interest payments day to day expenditure


a. Revenue receipts:- It is of two types- Tax and Non tax revenue:-i. Tax Revenue:-Tax revenue consists of the income received from different taxes and other duties levied by the government.Taxes are of two types, viz., Direct Taxes and Indirect Taxes.

Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden can not be shifted to some one else. E.g. Income tax, property tax etc. are direct taxes.

Indirect taxes are those taxes which are levied on commodities and services. E.g. Custom duties, sales tax, services tax, excise duties, etc. are indirect taxes.


ii Non-Tax Revenue:-Fees : The government provides variety of services for which fees have to be paid. E.g. fees paid for registration of property, births, deaths, etc.

Fines and penalties : Fines and penalties are imposed by the government for not following (violating) the rules and regulations.

Profits from public sector enterprises : T he government owned companies like - Indian Railways, Oil and Natural Gas Commission, Air India, Indian Airlines, etc. earn profits and that becomes revenue.

Gifts and grants : Gifts and grants are received by the government when there are natural calamities like earthquake, floods, famines.

(b) Revenue Expenditure Revenue expenditure is the expenditure incurred for the routine, usual and normal day to day running of government departments and provision of various services to its residents.
An expenditure which do not creates assets or reduces liability is called Revenue Expenditure.
Examples are Salaries of government employees, interest payment on loan taken by the government, subsidies,Expenditure by the government on consumption of goods and services.

Expenditure on agricultural and industrial development, scientific research, education, health and social services.

Expenditure on defense and civil administration.

Expenditure on exports and external affairs.

Payment of interest on loans taken in the previous year.

Expenditure on subsidies.


2. Capital Budget(a) Capital Receipts :-Receipts which create a liability or result in a reduction in assets are called capital receipts. They are obtained by the government by raising funds through borrowings, recovery of loans and disposing of assets . For Example-Loans raised by the government from the public through the sale of bonds and securities. Borrowings by government from RBI and other financial institutions through the sale of Treasury bills.Loans and aids received from foreign countries and other international Organizations like International Monetary Fund (IMF), World Bank, etc.Receipts from small saving schemes like Provident fund, etc.Recoveries of loans granted to state and union territory governments and other parties.


(b) Capital Expenditure

Capital Expenditure:-It refers to the expenditure which leads to creation of assets and reduction in liabilities eg. Expenditure incurred on construction of building, roads, bridges etc.

Any projected expenditure which is incurred for creating asset with a long life is capital expenditure.

Expenditure on land, machines, equipment, irrigation projects, oil exploration and expenditure by way of investment in long term physical or financial assets are capital expenditure.


Plan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission.

Plan expenditure forms a sizeable proportion of the total expenditure of the Central Government.

The Demands for Grants of the various Ministries show the Plan expenditure under each head separately from the Non-Plan expenditure.

Non-plan expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors

Non-plan capital expenditure mainly includes defense, loans to public enterprises,loans to States, Union Territories and foreign governments.

Plan and non-plan expenditure


Capital ExpendituresRevenue Expenditures

1Its effect is long term i.e., it is not exhausted within the current year. Its benefit is enjoyed in future years also. In a word, its effect is reduces gradually.

1Its effect is temporary, i.e., it is exhausted within the current accounting year.

2An asset is acquired or the value of an asset is increased as a result of this expenditure.2Neither an asset is acquired nor the value of an asset is increased.

3It does not occur again and again - it is non-recurring and irregular.3It occurs repeatedly - It is recurring and regular.

4It does not reduce the revenue of the concern. Purchase of fixed assets does not effect revenue.4It reduces revenue. Payment of salaries to employees decreases revenue.

Capital ReceiptsRevenue Receipts

(a) Receipts derived from activities which are not part of the normal trading activities of the business(a) Receipts related to normal activities of the business

(b) Examples: receipts of cash brought in by partners, shareholders, debenture holders and bank loans(b) Examples: receipts from sales of goods and services, rent, commission and interest on bank deposits received by the business.

Budget Deficit

Budget deficit is commonly known as the national debt.Budget deficit means that a country has more money going out when compared to the money its earning. Budget deficits can usually be resolved by raising taxes, cutting spending or a combination of both. Unlike fiscal deficit, while calculating budget deficit, the countrys borrowings are taken into consideration. Indias budget deficit last fiscal year was 4.9 percent of gross domestic product.

TYPES OF DEFICIT

Fiscal deficit-Difference between govts total expenditure and receipts.

Revenue deficit-Difference between revenue expenditure and revenue receipt

Primary deficit- Subtraction of interest paid from fiscal deficit.

Budget deficit- Subtraction of fiscal deficit from government borrowings and other liablities.

FISCAL DEFICIT

Fiscal deficit is when the Government's total expenditure surpasses the revenue generated .

Government spending, inflation and lower revenue and subsidies are among some of the main factors that point to fiscal deficit. from 4.9 percent last year to 4.8 percent of the GDP in 2013-14.

A large fiscal deficit is an indication that the economy is in trouble and will have reasons to worry.

A high fiscal deficit could pose an inflation risk, minimize the growth of the economy, doubt the governments abilities; it could affect the countrys sovereign rating, which in turn will limit foreign investors from looking at India as one of the investment hubs.

high fiscal deficit is that it leads to higher interest rates, disturbing the entire economy as money

Government spends less- money becomes scarce- interest rates rise

Impact of budget on Business

The Budget impacts the following-

Economic policies-Fiscal, monetary

The interest rate of banks

Stock markets.

How the budget spends and invests money affects the fiscal deficit.

The fiscal measures undertaken by the government affect public expenditure.

Economic growth

GDP

Tax collection

Features of Budget 2014

Key Features of Budget 2014-2015 The Current economic situation and the challenges: The state of world economy has been the most decisive factor affecting the fortunes of every developing country. 1. Growth:- The world economy has been witnessing a sliding trend in growth, from 3.9 percent in 2011 and 3 per cent in 2013. 2. US/ Euro zone contribution:-The economic situation of major trading partners of India, who are also the major source of our foreign capital inflows, continues to be under stress. United States has just recovered from long recession, Euro zone, as a whole, is reporting a growth of 0.2 per cent, and China's growth has also slowed down.

State of economy

3.Deficit and Inflation :-The fiscal deficit for 2013-14 contained at 4.6 per cent. 4. CAD:-The current account deficit projected to be at USD 45 billion in 2013-14 down from USD 88 billion in 2012-13. 5. Foreign exchange reserve to grow by USD 15 billion in this Financial Year. 6. Inflation:-WPI inflation down to 5.05 per cent and core inflation down to 3.0 per cent in January 2014. Food inflation down to 6.2 per cent from a high of 13.8 per cent


7. Agriculture :-Food grain production estimated for the current year is 263 million tonnes compared to 255.36 million tonnes in 2012-13. Agriculture export likely to cross USD 45 billion higher from USD 41 billion in 2012-13. Agricultural credit to exceed the target of Rs 7 lakh crore.

8.Investment :-Savings rate at 30.1 per cent and investment rate of 34.8 per cent in 2012-13. Government set up a Cabinet Committee on investment and the Project Monitoring Group to boost investment. By end of January 2014, Projects numbering 296 with an estimated project cost of Rs 660,000 crore cleared.

9. Foreign Trade :-Despite a decline in growth of global trade, our export have recovered sharply. The estimated merchandise export is estimated to reach USD 326 billion indicating a growth rate of 6.3 per cent in comparison to the previous year.

10.Manufacturing :-The sluggish import is a matter of concern for manufacturing and domestic trade sector. Due to deceleration in investment, the manufacturing sector has witnessed a sluggish growth.


11.Growth:-GDP expansion in 2013/14 third and fourth quarters will be at least 5.2 per cent12.Fiscal Deficit:-* Fiscal deficit projected at 4.1 per cent of GDP in 2014/15* Fiscal deficit seen at 4.6 per cent of GDP in 2013/14* Says need to bring down fiscal deficit to 3 per cent of GDP by 2016/1713.Current Account Deficit* Current account deficit for 2013/14 projected at $45 billion* Forex reserves to rise by $15 billion by end of 2013/1414.Borrowing* Gross market borrowing seen at 5.97 trillion rupees in 2014/15* Net market borrowing at 4.07 trillion rupees* Debt repayment in 2014/15 seen at 1.897 trillion rupees spending* Plan expenditure for 2014/15 seen at same level as previous year* Non plan spending estimated at about 12.08 trillion rupees in 2014/15


15.Subsidies* Total spending on food, fertilisers and fuel at 2.5 trillion rupees in 2014/1516.Defence* Spending raised to 2.24 trillion rupees in 2014/15, up 10 percent year on year17.Exports* Merchandise exports seen at $326 billion in 2013/14, up 6.3 per cent year on year.* Agriculture exports expected to touch $45 billion in 2013/14, up from $41 billion in 2012/1318.Tax Proposals* No major change in tax rates* Cut excise duty on small cars, two wheelers, commercial vehicles to 8 percent from 12 per cent* Recommends excise duty reductions on larger vehicles19.Banks Restructuring* Govt to provide 112 billion rupees capital infusion in state run banks in 2014/15* Propose to set up public debt management office to start5 work from 2014/15


Click to edit the title text formatClick to edit Master title style

4/1/14

Click to edit the title text formatClick to edit Master title style

Click to edit the outline text formatSecond Outline LevelThird Outline LevelFourth Outline LevelFifth Outline LevelSixth Outline LevelSeventh Outline LevelEighth Outline Level

Ninth Outline LevelClick to edit Master text styles

Second level

Third level

Fourth level

Fifth level

4/1/14

budget (1)

Documents