Finance minister Nirmala Sitharaman will present the Union Budget 2023-24 in Parliament on February 1. Here’s a glossary of some of the terms commonly used in government budgets.
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 (machinery, buildings etc).
Alternatively, a nation’s GDP can be defined as the total value of all of its consumption and investment expenditures, including those by the government and “net” exports (value of exports minus value of imports).
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Nominal GDP & real GDP
Nominal GDP reflects the current value of the currency, unadjusted for inflation/ deflation. Real GDP eliminates the distortion cased by inflation or deflation, and therefore gives a clearer picture of how the national output of a country is expanding or contracting year on year.
Utility of nominal GDP computation
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 and tax collected.
Gross national product or GNP counts all the output of the residents of a country. It is equal to the GDP plus the net income from foreign investments of residents.
Annual Financial Statement
This document, as tabled in Parliament under Article 112 of the Constitution, shows the estimated receipts and expenditure of the Government of India for a financial year, net of refunds and recoveries, along with the revised estimates of the previous year as also actuals for the year before.
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Finance Bill, presented along with the Annual Financial Statement, details the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. It also contains other provisions relating to the Budget that could be classified as a 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 the Income-Tax Act, Customs Act, FRBM Act, Securities Contracts Regulation Act, Foreign Exchange Management Act, and Prevention of Money Laundering Act.
Consolidated Fund of India/ Union Budget
Receipts and disbursements are shown under three parts in which government accounts are kept: Consolidated Fund of India (CFI), Contingency Fund, and Public Account. The Annual Financial Statement distinguishes the expenditure on revenue account from that on other accounts. The Revenue and Capital sections together make up the Union Budget. All revenues received by the government, loans raised by it, and also receipts from recoveries of loans granted by it, together form CFI. All expenditure of the government is incurred from the CFI and no amount can be drawn from it without authorisation from Parliament.
This fund is to meet urgent unforeseen expenditure by the government pending authorisation from Parliament, whose approval is obtained, ex post facto, and an equivalent amount is drawn from the Consolidated Fund to recoup the Contingency Fund. The authorised corpus of the Contingency Fund stands at `30,000 crore at present.
Moneys held by the government in trust are kept in this account created under Article 266. Provident funds, small savings collections, receipts of government set apart for expenditure on specific objects such as road development, primary education, other reserve/ special funds etc., are among moneys kept in Public Account. Public Account funds that do not belong to the government, and have to be finally paid back to the persons and authorities who deposited them, don’t require Parliament’s approval for withdrawal.
Revenue and Capital Budgets
The Union Budget comprises Revenue and Capital Budgets. Revenue Budget doesn’t alter the government’s assets and liabilities, whereas the Capital Budget does. Capital receipts and capital payments (expenditure) make up the Capital Budget, while revenue receipts and revenue expenditure constitute Revenue Budget.
These include market borrowings and other loans, but also non-debt receipts like proceeds of disinvestment/ sale of government assets, including incorporated companies, and recovery of loans. The receipts cause a decrease in the government’s assets.
Revenue receipts include (mostly) tax revenues, but also non-tax revenues. The latter consist of interest and dividend on investments made by the government, and fees and other receipts for services rendered by it (for example, the government raises revenue from telecom industry by charging for/ collecting licence fees from telecom companies for spectrum, a sovereign asset, allocated to them).
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.
Incurred for normal running of government departments and various services (administrative expenses, payments of salaries/pension etc.), interest payments on debt, subsidies, among others. These don’t result in creation of assets.
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). This is the main source of the government’s revenue. Tax is an involuntary fee levied on individuals and firms by the government to finance its activities. In principle, these are quid pro quo in nature.
Indirect taxes include the Goods and Services Tax, excise duty, basic customs duty (tariff) on imports, while personal income tax, corporation income tax and capital gains tax are among various direct taxes. Direct tax is paid by the person concerned directly to the government (unless in case of tax deduction at source/ withholding taxes). Indirect taxes, meanwhile, may often be collected on behalf of the person by an intermediary, like a vendor when selling goods. The GST, introduced in July 2017, is a fairly comprehensive indirect tax, into which most major indirect taxes — except the basic customs duty — collapsed (state-level VAT were subsumed in GST too, but not stamp duties and taxes on petroleum products at the central and state level). Since the GST is in the combined domain of the Centre and states, the GST Council is the arbiter of the tax, leaving not much for the Union Budget to decide on, except accounting for central GST 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. Proceeds of cesses (imposts linked to specific purpose) and surcharges (additional charges on taxes) are not shareable with states and go straight into NTR.
Revenue deficit/ surplus
The excess of revenue expenditure over revenue receipts.
Gross fiscal deficit
Usually referred to as fiscal deficit. In short, the difference between the government’s total expenditure and its total non-borrowed receipts. To elaborate, 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, on the other.
Gross primary deficit
Gross primary deficit (referred to as primary deficit) is gross fiscal deficit reduced by the gross interest payments. All these deficits (or surpluses) are mostly expressed as a fraction of nominal GDP, for better appreciation.
The total amount, including liabilities, borrowed by the Union and state governments. The debt, serviced out of the CFI in the Centre’s case, includes a large internal component and a much smaller external debt. While a government-appointed panel had pitched for a debt-to-GDP ratio of 60% (40% for Centre and 20% for states) by 2022-23, the ratio peaked at 89% in FY21 and was at 83.4% in FY22.
Demands for Grants
Article 113 of the Constitution mandates that the estimates of expenditure from the CFI are included in the Annual Financial Statement and voted on by the Lok Sabha, in the form of Demands for Grants. Generally, one Demand for Grant is presented in respect of each ministry or department, but there could be more than one demand for a ministry/ department, depending on the nature of expenditure. Each demand normally includes the total provisions required for a service, that is, provisions on account of revenue expenditure, capital expenditure, grants to state and Union territory governments, and also loans and advances relating to the service.
Fiscal Policy/ FRBM Act
While the government is a component of the economy and carries out economic activities by itself, it is also required to calibrate its revenue and expenditure policies in keeping with broader objectives like economic growth, stability, people’s welfare and equitable resource distribution. Keeping public debt within reasonable levels, addressing national emergencies and creating the conditions for private enterprise are also among its ends. This calls for an appropriate fiscal policy attuned to the times.
India’s fiscal policy is enunciated in the Fiscal Responsibility and Budget Management Act (FRBM), 2003. A Macroeconomic Framework Statement is presented to Parliament under Section 3 of the Act every year, with the Budget. It contains an assessment regarding the GDP growth rate, the domestic economy and the stability of the external sector of the economy, fiscal balance of the central government and the external sector balance of the economy.
The Medium-Term Fiscal Policy Statement cum Fiscal Policy Strategy Statement is presented to Parliament under the Act. It sets out three-year rolling targets for specific fiscal indicators in relation to GDP at market prices. Though the FRBM Act targets a fiscal deficit of 3% of GDP and elimination of revenue deficit, the targets have been missed in recent years (the Budget estimate for FY23 is 6.4%), owing to various contingencies including the pandemic, resulting in redrawing of the fiscal glide path. According to the latest road map, the Centre has to bring down its fiscal deficit to 4.5% by 2025-26.
Inflation is the sustained increase in the general price level in the economy, which over time translates into a decline in purchasing power. It is generally measured on a year-on-year basis. With positive inflation, each rupee buys less. A 10% inflation rate, for instance, denotes `100 now will be worth `90 after a year. The inflation indexes being used in India are the Consumer Price Index and Wholesale Price Index. The opposite of inflation is deflation, which occurs when prices decline and purchasing power increases.
These are estimates made at the time of presentation of Budget (before the start of the fiscal year concerned), regarding the allocation of funds for different tasks, schemes and ministries. These estimates broadly indicate the upper limit of expenditure for the purpose specified or the amount the government intends to spend on the scheme/ for the ministry.
These are estimates made during the course of the year, on the basis of fund requirements cited by the agencies concerned. Revised estimates for a year are usually presented in the Budget for the subsequent year.
Source: Finance ministry, IMF, OECD