EXPLAINER: A Glossary of the key Terms: Decoding the budget

As finance minister Nirmala Sitharaman presents the Union Budget 2024-25 in Parliament, we explain some of the terms used in the Budget documents, and indicate what stakeholders could look forward to today

Gross domestic product

GROSS DOMESTIC PRODUCT (GDP) of a nation is the monetary value of “final” goods and services (those consumed by the final user) produced within its geographies in a given period of time, say a quarter or a year. Apart from production for sale, it also includes some no-market production such as certain defence, education and health services provided by the government, but excludes unpaid work (such as voluntary household work) and black-market activities. GDP also takes into account wear and tear of the capital stock.

Nominal and real GDP

NOMINAL GDP REFLECTS the current value of the currency, unadjusted for inflation/deflation. Real GDP eliminates the distortion caused by inflation or deflation, and, therefore, gives a clearer picture of how the national output is expanding or contracting year on year. The headline GDP growth numbers (8.2% for FY24) denote the expansion rate of GDP in real terms, that is, at “constant prices” computed from a base year (2011-12 at present, and due for revision).

Utility of nominal GDP

NOMINAL GDP IS used to compare the nation’s output with other factors that are not inflation-adjusted, like its public debt, government budget deficits/ surplus, current account surplus/ deficit, tax collected, etc. When it is said that India is currently the world’s fifth largest economy, and is on track to be the third largest in the next 5-7 years or so, what is being counted is the nominal GDP. Nominal GDP growth for FY25, as per the interim Budget estimate (IBE), is pegged at 10.5%. The IBE of total expenditure for FY25 is `47.66 trillion, and the same for nominal GDP is `327.7 trillion, implying Budget of 14.5% of GDP.

Many agencies, including the Reserve Bank of India, have revised the growth estimate for the current fiscal upwards after the interim Budget, and inflation projection of 4.5% could also change marginally given the latest spurt.

To look for in today’s Budget : Will the nominal GDP estimate for FY25 go up?

Finance Bill

FINANCE BILL, PRESENTED along with the Annual Financial Statement, details the imposition, abolition, remission, alteration or regulation

of taxes proposed in the Union Budget. It also contains other provisions relating to Budget that could be classified as Money Bill.

A Finance Bill is a Money Bill as defined in Article 110 of the Constitution.

Among the laws that are commonly sought to be amended via Finance Bills each year are Income-Tax Act, Customs Act, FRBM Act, Securities Contracts Regulation Act, Foreign Exchange Management Act, Prevention of Money Laundering Act, etc.

Capital & revenue receipts

CAPITAL RECEIPTS INCLUDE market borrowings, other loans and also non-debt receipts like proceeds of disinvestment. The receipts cause a decrease in the government’s assets. Revenue receipts include (mostly) tax and non-tax revenues. The latter consists of interest and dividend receipts from investments as well as other receipts for services rendered by the government.

To look for in today’s Budget: Since the RBI dividend turned out to be more than double the IBE at `2.1 trillion, and net tax revenues (post mandatory transfers to states from the gross amount) to outpacing IBE, revenue receipts estimates may be revised upwards.

Capital expenditure

ThIS CREATES OR reduces government’s assets/liabilities, consists of expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc., and loans and advances granted by the Centre to states/UTs. As per IBE, FY25 capital expenditure is `11.1 trillion (3.4% of GDP) versus `9.5 trillion (3.6%) in FY24 (RE). The Budget also uses a term “effective capital expenditure” which includes grants-in-aid that helps creation of capital assets.

To look for in today’s Budget: Will the FY25 capex be retained at IBE level, despite 14% decline in such spending in April-May (election time)?

Revenue expenditure

INCURRED FOR NORMAL running of government departments and services, interest payments on debt (20% of total expenditure, IBE FY25), subsidies (6%), etc. These don’t necessarily result in creation of assets.

To look for in today’s Budget: Does it signal any significant rise in spend on healthcare (just 1.9% of total expenditure in FY24) and education?

Tax revenue

THIS IS REVENUE collected from taxes imposed on income and profits (direct taxes) and those levied on consumption of goods and services/transactions (indirect taxes), and is the main source of the government’s revenue. Indirect taxes include the Goods and Services Tax (GST), excise duty, basic customs duty (tariff) on imports, while personal income tax (PIT), corporate income tax and capital gains tax are among various direct taxes.

As per IBE FY15, personal income tax is the single largest non-borrowed receipt item accounting for 19% of inflows, followed by GST (18%) and corporate tax (17%). This is a marked shift from earlier years (in FY11, corporate tax was 2.15 times the PIT.

To look for in today’s Budget: Any significant shift in terms of tax revenue distribution among the various heads?

Gross and net tax receipts

GROSS TAX RECEIPTS include all taxes collected net of refunds, while Net Tax Receipts (NTR) are the actual inflows into the Budget after mandatory devolution of certain part of revenues from the divisible tax pool to states. Revenue deficit is the excess of revenue expenditure over revenue receipts.

Gross fiscal deficit

THIS IS THE difference between the total expenditure by way of revenue, capital and loans net of repayments on the one hand, and revenue receipts and capital receipts which are not in the nature of borrowing but which accrue to government.

To look for in today’s Budget: Will the IBE of fiscal deficit (`16.86 trillion or 5.1% of GDP) and revenue deficit (2%), be revised, in the wake of higher RBI dividend, higher growth net tax receipts so far, and likely higher nominal GDP? A 10 basis points reduction in FD would mean H2 market borrowings could be `20,000-30,000 crore less than estimated now, depending on how deficit is sought to be financed between market borrowings and small savings funds.