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Government Budgeting – 2/3: Concepts & Budget 2017-18

Basics of Fiscal Policy

Fiscal policy refers to all the means which influence the income and expenditure of the Government. Since most of the government income comes from taxation and most of the government expenditure goes to public expenditure, these two viz. taxation and public expenditure are main fiscal policy instruments. Any government policy stance that influences the government taxation and government spending – would be termed as a fiscal policy.

Any changes in the level and composition of taxation and government spending can affect the economy because –

  • This can bring a change in the aggregate demand and the level of economic activity
  • This can bring a change in the pattern of resource allocation
  • It can bring a change in the distribution of income.

A welfare government tries to reallocate income by designing tax systems that treat high-income and low-income households differently.

Types of Fiscal Policies

There are three types of the Fiscal Policies viz. neutral, expansionary and contractionary.

Neutral Fiscal Policy

A neutral fiscal policy means that total government spending is fully funded by the tax revenue. The government takes a neutral fiscal policy stance when the economy is in a state of equilibrium.

Expansionary Fiscal Policy

An expansionary fiscal policy means that the government spending is more than tax revenue. Government needs to spend more than its revenue during the time of recessions.  This is because recession occurs when there is a general slowdown in economic activity. Recessions generally occur when there is a widespread drop in overall spending. Recessions may be triggered by various events, such as

  • financial crisis
  • External trade shock,
  • Adverse supply shock
  • Bursting of an economic bubble.

Governments usually respond to recessions by adopting expansionary fiscal policies, such as increasing money supply, increasing government spending and decreasing taxation. When the tax is decreased, there is more money left with people, who can spend more.

Contractionary fiscal policy

Contractionary fiscal policy occurs when government spending is lower than tax revenue. When the tax revenue of the government is more, the excess money can be used to pay the government debt.

Difference between Fiscal Policy and Monetary Policy

Fiscal policy deals with the taxation and expenditure decisions of the government. On the other side, the monetary policy deals with the supply of money in the economy and the rate of interest. The Fiscal Policy and the monetary policy are the main policy approaches used by economic managers to steer the broad aspects of the economy. In India as well as almost all countries, the government deals with fiscal policy while the central bank (RBI in India) is responsible for monetary policy.

Implications of Fiscal Policy on the Economy

Fiscal policy is composed of several parts such as taxation policy, expenditure policy, investment / disinvestment policies, debt and surplus management etc. Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy. Moreover, fiscal policy has direct relation with the economic trends. The fiscal policy directly influences monetary policy. When the government receives more than it spends, it has a surplus. If the government spends more than it receives it runs a deficit.

Evolution of Budget

Etymologically, the term budget is related to Latin bulga , which refers to a ‘leather bag. The term comes from a Gaulish source connected to the Irish bolg, which means a bag. It got associated with finance in mid 18th century following up a pamphlet titled “The Budget Opened” sarcastically attacking the tax plans of Great Britain’s first prime Minister Sir Robert Walpole. However, the term budget was first used in 1760 for statement of the actual results of receipts and expenditure in the preceding fiscal year presented in House of Commons by UK’s Chancellor of Exchequer.  The term budget was used in current context only after mid 19th century. 20th century was a stimulating era for budgeting. It was only after 1950s that budget was more rationally used for public planning and policy. The development of the theoretical framework of budgeting during 20th century has been shaped by the political, social and administrative players and circumstances.

During the 20th century, while the Budget and Accounting Act 1921 systematized the budgeting in USA, the Parliament Act 1911 excluded the Lords in UK to refuse money bills, thus depriving House of Lords of its power of veto over financial legislation. Since then, the elected House of Commons has supreme powers regarding budget decisions in UK and same was followed in India where Lok Sabha has such powers.

Key Points: Evolution of Indian Budget

A rough budget of East India Company was prepared in 1790. After the end of East India’s Company’s rule, India’s first budget was presented on February 18, 1860 by James Wilson, a Finance Member of the India Council. The Finance Member’s work was to advise the Viceroy on financial matters.

After the Morley-Minto Reforms of 1909, the Finance Member had to present his estimates to the Central Legislature in first quarter of every year. The Finance Member’s presentation was followed by discussions on Budget proposals. During discussions, the members of the legislature could propose alterations in tax provisions, loans and grants to local government. The Finance Member was able to accept or reject these proposals but he needed to justify why he accepted some proposals and why rejected others.

Initially, the Railway budget was part of the general budget. On the basis of recommendations Acworth Committee, the Rail Budget was separated in 1924. That system follows till date. Recently, the Bibek Debroy committee has recommended to abolish the separate Railway Budget in a period of five years. The first budget of Independent and united India was presented by John Mathai in 1949-50. This budget also included the financial statements for former Princely States. The decision of forming a planning commission was declared in this budget.

Functions & Principles of Budgeting

The key functions of a government budget are discussed below:

Public Policy Document

The budget serves as a public policy document expressed in money and is an embodiment of implied policy objective in monetary terms.

Redistribution of Wealth

The most important function of budget is redistribution of wealth. However, that needs proper integration of revenue and expenditure side.

Instrument of Economic Development

Budget serves as an instrument of economic development, which embodies a work programme for administration and government. It’s a source of information for all stakeholders.

Instrument of Budgetary Control

Budget also serves as an instrument of financial control by legislative over executive. It also serves as instrument of accountability and financial control. Further, it is a management tool for achieving efficiency, productivity, improvements and for determining the degree to which policy goals have been accomplished.

Instrument of Accountability

Budget is an instrument to make elected legislators accountable to people. It also upholds the economic, social and cultural rights of the people.

Principles of Budgeting

There are a few principles followed in budget preparation exercise. These are as follows:

Principle Of Annuality

This implies that a budget is prepared every year on annual basis. One year is considered ideal period for budget because it’s an optimum period for which the legislature can afford to give financial authority to the executive. Further, executive also needs this much time to implement the budget proposals effectively. Further, a year corresponds with the customary measures of human estimates.

Annuality in budget formation is a widespread phenomena. In some countries of OECD, yearly budgets are now framed within a multi-year framework.

Rule Of Lapse

Principle of Annuality also implies that the money left unspent in a year must also lapse to the public treasury and government should not be able to spend it unless it is re-sanctioned in next year’s budget. This is called Rule of Lapse and is useful as an effective tool of financial control.

Fiscal Discipline

Budget should be balanced and should be able to display congruence between the income and expenditure. This is known as Fiscal Discipline and it adheres to the Keynesian School of Thought. Fiscal discipline helps to eliminate fiscal deficits and offset fiscal surplus.

Inclusiveness

Budget should be comprehensive and inclusive of diverse budget estimates. An inclusive budget includes all government revenue and expenditures and helps evaluating the much required trade-offs between different policy options.

Accuracy

Budget figures are essentially predictions of the amount of money to be generated in the forthcoming year and its expenditure. The Finance Ministry is accountable for its formulation with the help of the data and material from the various departments. These estimates need to be accurate and precise. The preciseness is dependent real and credible input data, information and unbiased information.

Transparency and Accountability

Budget transparency and accountability are two of the eight basic indicators of good governance as propounded by United Nations. Budget transparency implies that government gives out all data regarding budget. These two traits of budget also involve ethics on the part of the Government. For the sake of clarity and transparency, the revenue and capital portion of the budget are kept separate.

Budget Preparation Process

The preparation of budget in India involves the several stages before its presentation to the house.

The fiscal year of the Union and State Governments is from April to March. The preparatory work on budget documents starts around 6-8 months before the commencement to of the fiscal year. The first initiative is taken by the finance ministry which sends circulars along with some skeleton forms to different ministries and departments asking them to start preparing in advance for the coming fiscal year. It also sends various instructions and guidelines in the Budget Circular, releases via Department of Economic Affairs, Budget Division.

The ministries and departments pass on these printed forms to the disbursing officers. Disbursing Officers are the heads of the local offices such as Deputy Commissioners of the districts, for preparing their own estimates. The forms are filled with items of income and estimated expenditures with actual figures of last year, sanctioned budget of current year, revised estimates of current year and proposed estimates of next year.

This makes it clear that in our country, process of budget preparation is bottom up process, that starts at the lowest level in departments and moves upwards to the level of the Head of the Department. The head of the department works as Controlling Officer for budgetary transactions. This is as per the below flowchart:

In the second stage, the estimates sent by the disbursing officers are scrutinized by Head of Departments (Controlling Officers). They have the option to either accept the estimates as they are or revise it. These revised estimates are then sent to the Budget Department of the Ministry of Finance by mid November. The Estimates Committee considers these estimates and after its approval sends them to the Finance Ministry. They are further scrutinized by the finance ministry. This scrutiny by Finance Ministry is of different nature. For example, it would correlate the estimates with the state of economy and see if the revenues are available. It also would correlate them with new schemes to be announced soon. Simple questions are kept in mind while scrutinizing the estimates for example:

  • If the proposed expenditures are really necessary?
  • How without this expenditure was done till now? How this expenditure would make difference?
  • Is such expenditure done elsewhere?
  • From where the funds would come?

The Finance ministry justifies and passes the demands of several Administrative Ministries and fixed a net figure for each Ministry. We note here that the decision of the finance ministry is final in determining the provision. Many a times, there might be differences between ministries over inclusion or exclusion of some schemes. Such disputes are sorted out by finance ministry at ministerial level and such disputes might also be sent to Union Cabinet or Prime Minister, whose decision in this context is final.

Once the budget estimates on the expenditure side are done; the Finance Ministry prepared the estimates of revenue side with the help of Central Board of Direct Taxes and Central Board of Excise and Customs (a.k.a. Central Board of Indirect Taxes).

Finally, a consolidated statement is prepared which is now considered by the cabinet. Cabinet approval of the budget is done by January. The Finance minister in consultation with the Prime Minister now prepares a Financial Policy, which is essentially kept secret.

Key Budget Documents

Article 112 of the Indian Constitution says that every year “the President of India shall cause to be laid before both the houses of the parliament” the “Annual Financial Statement”. This is popularly known as Budget. “cause to be laid” here means that the person through whom President acts, is Finance Minister of the country, who is known as the custodian of the nation’s Finances. The Budget gives the complete picture of the estimated receipts and expenditures of the Government of India for that year. This picture is actually based upon the budget figures of the previous years. In all budget documents, generally budget figures of three years are used. For example, if we are studying the budget of 2017-18, then this set would be made up:

  • Actuals of 2015-2016
  • Budget Estimates of 2016-2017
  • Revised Estimates of 2016-2017
  • Budget Estimates of 2017-2018

Budget Documents

Apart from the speech of the Financial Minister, the budget contains total around 14 to16 documents. Among these, four documents are mandatory as per constitution of India, while four other documents are mandatory as per FRBM Act, 2003. Rest of the documents are either explanatory or as per recommendations of NITI Aayog or under some other initiatives. Thus, we can divide these documents in three parts as follows:

Documents Mandated by Constitution

  1. Annual Financial Statement (AFS) { Article 112}
  2. Demands for Grants (DG) { Article 113}
  3. Appropriation Bill {Article 114(3)}
  4. Finance Bill {Article 110(a)}

Documents mandated by FRBM Act, 2003

  1. Macro-Economic Framework Statement
  2. Fiscal Policy Strategy Statement
  3. Medium Term Fiscal Policy Statement
  4. Medium Term Expenditure Framework Statement- (to be presented in parliament in the Session after the Budget session).

Explanatory /Other Documents

  1. Memorandum Explaining the Provisions in the Finance Bill
  2. Expenditure Profile1
  3. Expenditure Budget2
  4. Receipts Budget
  5. Budget at a Glance
  6. Highlights of Budget- Key Features.
  7. Outcome Budget

Some important facts about initial eight documents are enumerated below:

Annual Financial Statement (AFS)

This document comprises the receipts and expenditures of the government of current year, previous year and budget year in three separate parts viz. Consolidated Fund of India, Contingency Fund of India and Public Account of India.

 Demands for Grants

The estimates of expenditures are presented to Lok Sabha in the form of Demands for Grants. General there is one demand for grants per ministry but there can be more than one demands for grants also for a ministry depending on the type of expenditure. Further, the government presents separate demands for grants for union territories along with the ministries’ demands for grants.

Appropriation Bill

The article 114(3) stipulates that no amount can be withdrawn from the Consolidated Fund of India without enactment of a law by parliament. So, once the demands for grants are vetted by the Lok Sabha, the Appropriation Bill is presented to withdraw amount from Consolidated Fund.

Finance Bill:

It is presented to enact a law for imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution.

Macro-Economic Framework Statement

This document, presented as per mandate of FRBM Act, 2003 and it contains the assessment of growth prospects of the economy; GDP growth rate; stability of domestic and external sector of economy; fiscal and external sector balance of the central government.

Fiscal Policy Strategy Statement

Fiscal Policy Strategy Statement outlines the strategic priority of the government related to taxation, expenditure, lending, investments, administered pricing; borrowings, guarantees etc.

Medium-Term Fiscal Policy Statement

This document sets out three year rolling targets for five specific fiscal indicators viz. Revenue Deficit, Fiscal Deficit, Effective Revenue Deficit; Tax to GDP ratio and Total Outstanding Central Government Liabilities

Medium-Term Expenditure Framework Statement

This document sets forth the three-year rolling target for certain expenditure indicators along with delineation of the underlying assumptions and risks. The objective of the MTEF is to provide a closer integration between the budget and the FRBM Statements. This Statement is presented separately in the session next to Budget session (generally monsoon session).

Overview of Budget Process

On a day subsequent to the presentation of the Budget, the House takes up the General Discussion of the Budget which is called the first stage followed by second stage i.e. discussion and voting on Demands for Grants.

During the General Discussion on the Budget, the house is at liberty to discuss the Budget as a whole or any question of principle. The scope of discussion at this stage is confined to the general examination of the Budget i.e. the proper distribution of the items of expenditure according to the importance of a particular subject or service, the policy of taxation as is expressed in the Budget and the speech of the Finance Minister.

After the General Discussion on Budget in both the Houses is over and Vote on Account is passed, the House is adjourned for a specified period. The Demands for Grants of each Ministry/Department will be examined by the concerned Standing Committee having jurisdiction over it during the said recess period. The Committee gives separate report for each Ministry. The Demands for Grants are discussed / considered in the House in the light of the reports of the Standing Committee. The reports of the Standing Committees which are of persuasive value are nevertheless treated as considered advice given by the Committee.

The detailed discussions are followed by Guillotine. Guillotine refers to closure imposed on the debate. On the last of the allotted days at the appointed time, the Speaker puts every question necessary to dispose of all the outstanding matters in connection with the Demands for Grants. The Guillotine concludes the discussion on Demands for Grants.

Revenue and Capital Budget

The most basic thing in public finance is to know the difference between revenue and capital flows, be they receipts or expenditures. On this basis, there are four elementary concepts viz. Revenue Receipts, Revenue Expenditures, Capital Receipts and Capital Expenditures. On the basis of these four elementary concepts, the government budget can be divided into two parts viz. Revenue Budget  and Capital Budget. While revenue budget deals with revenue receipts and expenditures; capital budget deals with capital receipts and expenditures. Revenue budget is also known as Current Budget.

Revenue Budget

Revenue budget deals with revenue receipts and expenditures of the government.

Revenue Receipts

The term “Revenue Receipt” is made up of two words revenue and receipts. Any income that does not generate a liability is revenue. For example, if the Government borrows money from World Bank, it will increase its liabilities (because this money has to be paid back)- so cannot be called revenue. However, if the government gets the same money has grant (donation), its revenue receipt because grants are not to be paid back.

Taxes are the most important revenues receipts of the governments. However, some revenue receipts are non-tax revenues such as grants. On this basis, revenue receipts are of two types viz. Tax Revenue and Non-tax revenue.

Tax Revenues

Tax revenues are either from direct taxes or indirect taxes. Direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. Income Tax, Gift Tax, Wealth Tax and Property tax etc. are direct taxes. Indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). Sales tax, Value Added Tax (VAT), Goods and Services tax (GST) or any other such tax is an indirect tax. Largest chunk of tax revenues of government of India currently comes from Corporation Tax, followed by Income Tax, followed by Union Excise duties, customs and thereafter service tax.  The collection of service taxes is increasing over the last years. The amount collected under Direct Taxes (Corporate/ Income/ wealth) is larger than that under Indirect taxes.

Non-Tax Revenue

Non Tax Revenue Receipts are those revenue receipts which are not generated by Taxing the public.

  • Money which the Government earns as “Dividends and profits” from its profit making public enterprises (PSUs).
  • Interest which the Government earns on the money lent by it to external or internal borrowers. Thus this revenue receipts may be in foreign currency as well as Indian Rupees.
  • The money which the government receives out of its fiscal services such as stamp printing, currency printing, medal printing etc.
  • Money which the Government earns from its “General Services” such as power distribution, irrigation, banking services, insurance, and community services etc. which make the part of the Government business.
  • Money which the government accrues as fees, fines, penalties etc.
  • Grants the Government of India receives from the external sources. In case of the state Governments, it may be the internal grant from the central Government.

In recent times, spectrum auctions have been one of the major sources of non-tax revenues for the government. We note here, that despite it looks that spectrum amount should be a capital receipt, it is shown as a non-tax revenue receipt in budget documents as one time spectrum charges levied on telecom players.

India’s Tax and Non-Tax Revenue

The above graphics shows the tax-revenue and non-tax revenue of the central government as per the latest budget documents. We note from the above chart that (1) Tax Revenue is much higher in comparison to the non-tax revenue. (2) In 2017-18 Budget year, the non-tax revenue are expected to go down. This is mainly due to low expected spectrum receipts and privatization proceeds.

Revenue Expenditure

While the Revenue Receipts are those incomes of the Government which don’t create additional liability, the Revenue Expenditures are those expenditures which don’t create any productive assets. The money in these expenditures goes either in running administration / operation of government or in welfare schemes which don’t result in creation of assets. Specific examples are discussed below:

  • The interest paid by the Government of India on all the internal and external loans does not produce any assets, so it is revenue expenditure.
  • The salaries and Pension paid by the Government to Government employees is needed to run the Government’s business. It is revenue expenditure.
  • The subsidies forwarded by the government to all sectors do not produce any productive asset, so it is revenue expenditure.
  • The defense expenditures which are needed for smooth operation of the standing armed forces is a revenue expenditure. However, purchase of equipments produces assets, so that would be a Capital expenditure.
  • The postal expenditures and deficits are Revenue expenditures.
  • The money spent of maintaining the law and order situation of the country is also revenue expenditures.
  • The money spent on various social services such as public health, education, poverty alleviation, scholarships, etc. all revenue expenditures.
  • The grants given by the Government of India to states and other countries is Revenue expenditures.

Revenue Deficit and Surplus

If total Revenue receipts are more than total revenue expenditure, it is called revenue surplus. If the total revenue receipts are less than total revenue expenditures, it is called Revenue Deficit.

Implications of Revenue Deficit and Revenue Surplus on Economy

Revenue expenditures are a consumptive kind of expenditures and that is why the Governments try to minimize the Revenue deficit. The Revenue deficit does not add into the production of productive assets so, it is considered dangerous to have a large revenue deficit.

Revenue surplus is good because it would give the government some opportunity to use some of the surplus in those activities which might create some productive assets. But the revenue surplus is not appreciated for many other reasons. We can easily understand that if the Tax revenue of the Government is increased, it may give the Revenue surplus to the Government. But ultimately it would not be judicious to burden the public with large taxes. Further, large taxes would result in Tax evasion, corruption and problem of black money. So, the aim of the governments is to have a judicious tax structure, so that the balance is near Zero.

Primary Deficit

The Revenue expenditures include the interest liabilities of the Government. If the interest liabilities are NOT included from the revenue deficit, it is called primary Deficit.

How can government increase revenue receipts?

Since the grants are generally fixed, the most common way to increase revenue receipt is to raise taxation. Raising taxation also implies increasing Tax-GDP Ratio and this would include:

  • Raising tax rates i.e. direct and / or indirect
  • Lowering tax exception slabs
  • Impose new taxes, cess or surcharges
  • Improving profitability of PSU companies.
  • Increasing government business.
How can government curb the revenue deficit?

The government can curb the revenue deficit either by increasing revenue receipts or by decreasing revenue expenditure. Revenue expenditure can but reduced by a cut in social expenditures and subsidies. Since both ways have their own economic and political ramifications, government could never achieve what it was supposed to achieve as per the FRBM act. The FRBM act had mandated the government to eliminate revenue deficit by March 2008 (it was later shifted to March 2009). It has never been achieved. The act also mandates the government to place the three separate documents along with Budget documents viz. Macro-Economic Framework Statement, Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement. These statements every time reiterate the government vow to achieve FRBM targets.

Revenue Deficit in India’s budget

The term Revenue deficit and fiscal deficit are being used in the Government of India Budget since the fiscal year 1997-98. Please note that since 1997-98, the Government budget has shown revenue deficit every year.  

Effective Revenue Deficit

The definition of the revenue expenditure is that it must not create any productive asset. However, this creates a problem in accounts. There are several grants which the Union Government gives to the state / UTs and some of which do create some assets, which are not owned by union government but by state government. For example, under the MGNREGA programme, some capital assets such as roads, ponds etc. are created, thus the grants for such expenditure will not strictly fall in the revenue expenditure.

So, to do away with such anomaly, the government introduced the Effective Revenue Deficit concept from Union Budget 2010-11. From 2012-13 onwards the Effective Revenue Deficit is being brought in as a fiscal parameter.

Definition and logic behind Effective Revenue Deficit

Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. In other words, the Effective Revenue Deficit excludes those revenue expenditures which were done in the form of grants for creation of capital assets aka GoCA. Such grants include the grants given under:

  • Pradhan Mantri Gram Sadak Yojana
  • Accelerated Irrigation Benefit Programme
  • Jawaharlal Nehru National Urban Renewal Mission
  • MGNREGA etc.

The logic is clear; these expenses despite being shown in the accounts as Revenue Expenditures, are involved with asset creation and cannot be considered completely ‘unproductive’.

India’s Effective Revenue Deficit?

According to the Interim Budget 2014-15 documents, the Effective revenue deficit is 2.2 % of the GDP and the government projects it to be 1.8% of GDP in fiscal year 2014-15.

Effective Revenue Deficit 2016-2016 (Actuals) 2016-2017 (BE) 2016-2017 (RE) 2017-2018 (BE)
Rs. Crore 210982 187175 139526 125813
% of GDP (1.6) (1.2) (0.9) (0.7)

Capital Budget

Capital budget deals with the capital receipts and expenditures of the government.

A receipt that results in either reduction in government assets (sale of share, disinvestment) or increase in some liability (government borrowings) is a capital receipt. These receipts are NOT a part of normal operations of government business. Capital Receipts include market loans, external loans, small savings, Government Provident Funds, Accretions to various Deposit Accounts, Depreciation and Reserve Funds of various departments like Railways.

The Capital receipts are of two types viz. Debt receipt and non-debt receipts. The debt receipts are those which government needs to repay along with interest. Non-debt receipts are those which come to the government by sale of some assets. Most of the capital receipts of the government are debt receipts and are shown as liabilities of the Government’s balance sheet.

Borrowings by the Government

The Government borrows from domestic as well as foreign sources. All  borrowings are called capital debt receipts. However, interest paid on such borrowings is placed under Revenue expenditures.

It’s worth note that Government of India is the largest borrower in India and the market borrowings are the largest source of capital receipts of the Government.

Government raises its market loans by selling dated government securities by Auction since 1992-93. These auctions are conducted by the Reserve Bank of India, as debt manager to the Central Government. These bonds are of either fixed interest rate (called Fixed Coupon Securities) or of floating interest rate (called Floating Rate Bonds (FRB)).

Apart from these, Government also issues short term money market instruments viz. 364/182/91 days Treasury Bills. These treasury bills offer short-term investment opportunity to financial institutions, banks, etc. Finally, government also issues Cash Management Bills, which are issued to meet the temporary cash flow mismatches of the Government. The Cash Management Bills are issues only when Government needs a short term cash. Thus, the maturities of the Cash Management Bills are always less than 91 days. The above borrowings are from the market.

Government also borrows from common people like all of us in the form of small saving schemes. At present, the active small saving schemes are as follows:

  • Post Office Saving Account
  • Post office fixed deposits of 1, 2, 3 & 5 years
  • Post Office RDs (Recurring Deposits)
  • Post Office Monthly Income Account
  • Senior Citizens Saving Scheme
  • National Saving Certificates
  • Public Provident Fund (PPF)
  • Sukanya Samriddhi Account
  • Kisan Vikas Patra
  • Monthly Income Scheme

The money of all of these goes to National Small Savings Fund. This fund is a part of Public Account of India and is active since 1.4.1999.All withdrawals are also taken out of this fund. What remains as balance in the fund is invested in the Central and State Government Securities. How should be these invested and in which securities, this is decided by the Government from time to time. At present, the term of Central and State Government Securities is 10 years, 9.5 per cent interest rate.

Then finally, government issues savings bonds for people to invest in them. There are two kinds of Bonds viz. Tax Saving and not Tax Saving. Obviously the interest rate in taxable bonds is higher.

Miscellaneous Capital Receipts

Miscellaneous Capital Receipts refers to the money receipt by disinvestment of the public sector companies. This money comes from sale of government share / equity in public sector companies. In 2013-14, Government received around Rs. 40,000 crore in lieu of sale of its shares in Hindustan Copper, ITDC, MMTC, National Fertilizer, Neyveli Lignite, State Trading Corporation Ltd, Power Grid Corporation of India Ltd, NHPC Ltd, Indian Oil Corporation, Engineers India Ltd, BHEL, Hindustan Aeronautics Ltd. The money from this disinvestment earlier used to go to ‘National Investment Fund’ (NIF). Currently, this fund is merged with the Public Account of India and these proceeds are maintained in the public Account as a separate head – NIF.

The Money from NIF is used for several purposes as decided by the Government. These include recapitalisation of Public Sector Banks’, investment in Indian Railways, investment in other public sector units towards capital expenditure.

Loan Recovery

The money which the Government of India had lent in the past to the states, to the PSUs and to the Union Territories, and to the parties and Governments abroad, when recovered back, are called Capital Receipts.  Here, please note that Loan recovery is Capital Receipt but the interest received on these loans is revenue receipts.

Capital Expenditures

Capital Expenditure is that expenditure which results in increasing of government asset (giving out loans) or reduce in some liability (paying back old loans). Following are the key examples of capital expenditures.

Loan disbursals

The loans given by the Government to the states, PSUs and other governments come under Capital Expenditures because such loans are assets of the government.

Loan Repayments

The loans that were borrowed in past but are now returned back are included in the capital expenditures; because they result in reduction of liability.

Expenditures  resulting in asset creation

The government’s budget expenditures on infrastructure, machinery, land, roads, bridges etc. and purchase of arms and equipments, modernization of the army etc. are also Capital Expenditures.

Capital Deficit

In Public Finance or Economy, The term Capital Deficit is not used. Generally, we read about the Capital crunch which refers to the expenditures needed by the Government for Capital Expenditures.

Revenue Deficit & Fiscal Deficit

Revenue Deficit

If total Revenue receipts are more than total revenue expenditure, it is called revenue surplus. If the total revenue receipts are less than total revenue expenditures, it is called Revenue Deficit.

Implications of Revenue Deficit and Revenue Surplus on Economy

Revenue expenditures are a consumptive kind of expenditures and that is why the Governments try to minimize the Revenue deficit. The Revenue deficit does not add into the production of productive assets so, it is considered dangerous to have a large revenue deficit.

Revenue surplus is good because it would give the government some opportunity to use some of the surplus in those activities which might create some productive assets. But the revenue surplus is not appreciated for many other reasons. We can easily understand that if the Tax revenue of the Government is increased, it may give the Revenue surplus to the Government. But ultimately it would not be judicious to burden the public with large taxes. Further, large taxes would result in Tax evasion, corruption and problem of black money. So, the aim of the governments is to have a judicious tax structure, so that the balance is near Zero.

Primary Deficit

The Revenue expenditures include the interest liabilities of the Government. If the interest liabilities are NOT included from the revenue deficit, it is called primary Deficit.

How can government increase revenue receipts?

Since the grants are generally fixed, the most common way to increase revenue receipt is to raise taxation. Raising taxation also implies increasing Tax-GDP Ratio and this would include:

  • Raising tax rates i.e. direct and / or indirect
  • Lowering tax exception slabs
  • Impose new taxes, cess or surcharges
  • Improving profitability of PSU companies.
  • Increasing government business.
How can government curb the revenue deficit?

The government can curb the revenue deficit either by increasing revenue receipts or by decreasing revenue expenditure. Revenue expenditure can but reduced by a cut in social expenditures and subsidies. Since both ways have their own economic and political ramifications, government could never achieve what it was supposed to achieve as per the FRBM act. The FRBM act had mandated the government to eliminate revenue deficit by March 2008 (it was later shifted to March 2009). It has never been achieved. The act also mandates the government to place the three separate documents along with Budget documents viz. Macro-Economic Framework Statement, Medium-Term Fiscal Policy Statement and Fiscal Policy Strategy Statement. These statements every time reiterate the government vow to achieve FRBM targets.

Revenue Deficit in India’s budget

The term Revenue deficit and fiscal deficit are being used in the Government of India Budget since the fiscal year 1997-98. Please note that since 1997-98, the Government budget has shown revenue deficit every year.  

Fiscal Deficit

The term Revenue deficit and fiscal deficit are being used in the Government of India Budget since the fiscal year 1997-98. Fiscal deficit is the difference between total expenditure and total revenue receipts including recoveries of loans and other receipts.

Fiscal Deficit = Total Expenditure – (Revenue Receipts + Recoveries of Loans + Other Receipts)

or

Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – {(Tax Revenue + Non Tax Revenue) – + Recoveries of Loans + Other Receipts}

Funding of Fiscal Deficit

The rising fiscal deficit has dominated all discussions on the budget in recent years. The biggest question is that if there is an excess of government’s expenditure over its tax and non-tax revenues, where it will be funded from? The answer is that the excess of the government expenditure has to be met with borrowings from the public. To be exact, this borrowing is called fiscal deficit, which is usually expressed as a percentage of GDP.

This also means that a high fiscal deficit runs the risk of government cornering the bulk of the savings, leaving little for corporate and other borrowers (crowding out). Prolonged periods of high fiscal deficit run the risk of raising interest rates and inflation and depressing growth. A deficit of 3% of GDP is seen as sustainable.

  • A deficit budget shows that the government proposes to spend more in the coming year than its receipts. A surplus Budget shows that Government will get more receipts and spend less.
  • In a developing country like India, the Government always seeks to present a “deficit budget” because it intends to spend more (on development) than what its receives. This is because; the deficit budget symbolizes the concerns of the Government towards the development activities. In India a surplus budget was NEVER presented.

Current Year Targeted Fiscal Deficit

For 2017-18, Indian Government has aimed to contain the fiscal deficit at 3.2 per cent of the GDP.

Deficit Financing

The Government, when proposes a deficit budget is well aware of the fact that its total expenditures are going to be more than its receipts. So, it adopts the policies and process which can sustain the burden of the deficit. The process of supporting the budget deficit of the country is called Deficit Financing. There are several methods of Deficit Financing such as:

  • Borrow from domestic or foreign sources
  • Draw upon its foreign exchange reserves
  • Print an equivalent amount of money.

Any of the above three activities would tend to influence other economic variables. The following observations must be noted in this context:

  • In a general sense, excessive printing of money leads to inflation. This is because when government prints too much money, its purchasing power goes down and a situation of too much money choosing too few goods
  • If the government borrows too much from abroad, it leads to a debt crisis. The money that has been borrowed from abroad comes on sovereign guarantee and is called Sovereign Debt. Governments usually borrow by issuing securities, government bonds and bills. However not all governments can borrow by these methods. The less creditworthy countries need to borrow directly from World Bank or other financial institutions. The debt may be short term or long term. Inability to service the debt may result in Sovereign Default which is another name of Debt Crisis.
  • If the government draws down on its foreign exchange reserves, a Balance of Payments crisis may arise. Balance of payments (BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of goods, services, financial capital, and financial transfers. A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation’s currency.
  • Excessive domestic borrowing by the government may lead to higher real interest rates and the domestic private sector being unable to access funds resulting in the “crowding out” of private investment.

The above discussion makes it clear that it is not prudent for a government to run an unduly large deficit. But at the same time, for a developing country like India, it is also not prudent to have surpluses at the cost of long-term growth. This is because the need for infrastructure and social investments is substantial. So, the most developing country governments have the biggest challenge to meet infrastructure and social needs while managing the government’s finances in a way that the deficit or the accumulating debt burden is not too great.

Domestic Borrowing Versus External Borrowing

Government in India prefers external funding of the Deficit Budget because External Borrowing is cheaper in long term and comes in foreign exchange, which the Government can use to meet its fiscal deficit. The Government also prefers borrowing from the external sources because if it only resorts to the internal borrowing, there may be a problem of liquidity in the country. External grant comes as free, but in recent years, external grant has been very low.

Why printing of currency is used as a last resort?

Printing Currency is used by the Government as last resort in deficit financing. The printing of currency has its own side effects such as increasing inflation and pressure on the Government for upward revision of the wages. Further, printing currency does not meet the expenditures which are needed to be met with foreign currency only.

Appropriation Act and Finance Act

An Appropriation Act in India is an act of Parliament which allows the withdrawal of funds from Consolidated Fund of India or Consolidated Funds of States (in case of state budgets). Similarly, the Finance Act of Central Government gives effect to the taxation proposals in the beginning of every financial year. For taxation proposals at state levels, State Finance Acts are enacted every year.

Appropriation Act

Constitution says that no money shall be withdrawn from the consolidated fund of India except under the appropriation made by law. Thus, the Appropriation Bill authorizes the amount which can be drawn out of the Consolidated Fund of India for meeting the expenditures. This bill is required to be passed for votable as well as non-votable expenditures and also any vote on account.

Further, kindly note that once the Lok Sabha has passed the Appropriation Bill, no amendments in its amounts can be proposed in either house of Parliament. Once the bill gets President’s assent, it becomes Appropriation Act. The Appropriation Act authorises the government to withdraw funds from Consolidated Fund of India.

Finance Act

The Constitution (Article 265) says that no tax shall be levied or collected except by authority of law. Consequently, a Finance Bill dealing with such law is introduced to authorize the government to raise funds through taxation. This bill must become an act within 75 days of introduction.

Difference between Appropriation and Finance Bills / Acts
  • While Appropriation act legalizes the expenditure side of the budget, Finance act legalizes the income side (Taxes) of budget.
  • While no amendments can be moved or passed in case of appropriation bill, amendments seeking to reject or reduce a tax can be moved in the case of finance bill.

Vote on Account and Interim Budget

The Appropriation Bill and Finance Bill are presented in the month of February, and they take their own time to become act. In order to keep the Government functioning, the House is asked to vote usually two months’ funds i.e. approximately 1/6th of the total estimated expenditure under various grants. This is called Vote on Account. Vote on Account is passed after general discussion on the Budget. Usually it is treated as a formal matter and is passed without discussion. Vote on account is as per provisions of Article 116 of the Constitution. This makes clear that Vote on Account __:

  • Can be passed on occasions when government needs some money on its disposal to keep running the administration till appropriation act is passed.
  • Related to only taking money out of Consolidated Fund of India and thus limited to expenditure side
  • Normally related to expenditures of 2 months only that is equivalent to 1/6th of the total budget; but that is NOT a rule. In 2004-05, the NDA Government sought for a Vote on Account for Four Months. In fact, during election year or when it is anticipated that the main demands and appropriation bill will take longer time than two months; the vote-an-account may be for a period extending two months. Typically this period does not exceed six months, as that is the maximum gap possible between two sittings of the Parliament.
  • Not related to Taxation matters or revenue side of budget
  • Can be passed by all governments whether incumbent or regular or caretaker, however, Vote On Account becomes of special importance when the elections are underway and a caretaker government is in place.

Interim Budget

While a vote-on-account deals only with the expenditure side of the government’s budget, interim budget is a complete set of accounts, including both expenditure and receipts. When a government presents Vote on Account as a part of its Budget exercise; two appropriation bills viz. Appropriation (Vote on Account) Bill and Appropriation Bill of that year are passed. For example, the current (outgoing) Lok Sabha has passed Appropriation (Vote On Account) Bill, 2014 authorising the government for withdrawal of Rs 20,30,334 crore from the Consolidated Fund of India for expenses during the first four months of the new financial year 2014-15.

Interim Budgets also can be presented by all governments whether incumbent or regular or caretaker, however, Interim Budget becomes of special importance when the elections are underway and a caretaker government is in place. It can also be presented when a new Government has recently sworn in.

The Votable and Non-Votable Expenditures

The budget shows the estimated receipts and expenditure of the upcoming Financial Year.  After the budget is presented to the house (parliament), the government needs its approval to draw even one rupee from the Consolidated Fund of India. This approval comes by voting, which means that the Budget proposals must be passed by the Parliament. However, there are some charges which essentially have to be paid by the Government and for those charges no voting takes place. Thus, the expenditure embodied in the Budget Documents is of two types:

  • The sums required for charged expenditures. These are non-votable.
  • The sums required for other expenditures as mentioned in the Budget Documents. These are votable.

Charged Expenditures or Non-Votable Charges

Non-votable charges are called Charged Expenditures; and no voting takes place for the amount involved in these expenditures for their withdrawal from Consolidated Fund of India. This means that they have to be paid in any case, whether the budget is passed or not passed. Following are the charged expenditures:

  • Salary and Allowances of the President, Speaker / Deputy speaker of Lok Sabha, Chairman/ Deputy chairman of Rajya Sabha, Salaries and Allowances of Supreme Court judges, Pensions of Supreme Court as well as High Court Judges, Salaries and Allowances of CAG, Lok Pal
  • Debt charges of Government of India.

The above expenditures cannot be voted because; these payments are deemed to be guaranteed by the state. Although voting does not take place on such charges, discussion can take place in any house of the parliament. The demand for grant for these charges is also made on recommendation of the president. (Article 113)

Here we should not that retainer of Attorney General or Solicitor General is NOT a charged expenditure upon Consolidated Fund of India. They are paid a fee which comes from the budgetary allocations of Department of Legal Affairs, which itself though comes from consolidated fund but is a votable charge. Further, while salary of High Court Judges is charged from Consolidated Fund of States, their pension comes from Consolidated Fund of India.

Votable / Voted Expenditures

The Votable part is actual Budget. The expenditures in the Budget are in the forms of Demand for Grants. There Budget also presents ways and means – how the government would be recovering the expenditures. Generally, the demands for Grants of each and every ministry are made separately in the Budget documents and each demand for grant has the provisions under its different heads.

Cut Motions

After the budget is presented in Parliament and discussions over it are completed, the members get an opportunity to move cut motions to reduce the amount of demand. The members from particular parties or coalitions may bring their own cut motions. The members generally give notice of the Cut Motions for the reduction of the votable heads of expenditure of the Demands for Grants immediately after the Finance Minister or the Railway Minister as the case may be, has presented the Budget in the House.

Every Cut Motion to a demand for Grant represents disapproval of some aspect or other of the Budget or the economic policy of the Government. Accordingly Cut Motion is of three kinds:

Policy Cut

This type of cut motion aims that the amount of the demand be reduced to Re. 1. It represents the complete disapproval of policy underlying the Demand. This is because the motion aims to reduce the demand for grant to Re. 1 only, which almost finishes the demand for grant of a ministry.

Economy Cut

This type of cut motion aims that the amount of demand be reduced to certain other amount and it represents that the demand for grants should be altered.

Token Cut

This Cut Motion aims that the amount of the Demand be reduced by Rs. 100” in order to ventilate a specific grievance, which is within the sphere of responsibility of the Government of India. Actually, Token cut is symbolic and is humiliating for the Government. To be precise, all cut motions are humiliating for the ruling party or coalition. The Cut motions provide the members maximum opportunity to examine every part of the budget and criticize the Government.

Implications of Cut Motions

The Cut Motions are mostly defeated due to Number strength of the ruling party or coalition. As the cut motion is a veto power given to the member of the Lok Sabha to oppose a demand in the financial bill discussed by the government, it is seen as an effective tool to test the strength of the government. If a cut motion is adopted by the House and the government does not have the numbers, it is obliged to resign. The cut motion can be admitted to the house only if it is related to only one demand and not many. No cut motion can be moved on charged expenditures. The cut motions are important because they facilitate the constructive discussion on each demand and uphold the principle of democratic government, by giving the members power to veto the demands.

Plan and Non Plan Expenditures

Government of India has now scrapped the plan and non-plan expenditures in budget exercise and their place has been now taken by capital and revenue spending classifications. The classification of plan and non-plan was a major exercise in India during planning era. Under this, all expenditures which were done in the name of planning were called plan expenditures while all other expenditures were placed under non-plan expenditures.  Further, generally (not always), the plan expenditure produced some tangible assets related to economic development.  This was the reason that plan expenditures were also called “development expenditures”.

This classification is not relevant now still for your examinations, kindly note that important non-plan revenue expenditures included the following:

  • Interest payments on the loans taken by Government of India
  • Expenditure incurred on Defence Services (except Defence Equipment which is a capital expenditure)
  • Subsidies
  • Grants to the states and UTs, including those from calamity fund
  • Pensions, Social services such as healthcare, education, social security etc.
  • Police
  • Economic services by the government such as Agriculture, Industry, Power, Science & Technology
  • Grants to foreign Governments

Non-Plan Capital Expenditure included the following:

  • Defence Equipments and modernization
  • Loans to Public sector companies
  • Loans to states and union territories

One of the most important headings under the non plan revenue expenditures is “Interest payments on the loans taken by Government of India”.  The plan components were related to items dealing with long-term socio-economic goals as determined by the ongoing plan process. They often relate to specific schemes and projects. Furthermore, they are usually routed through central ministries to state governments for achieving certain desired objectives. These funds are generally in addition to the assignment of central taxes as determined by the Finance Commissions. In some cases, the state governments also contribute their own funds to the schemes.

Internal Debt and External Debt

Internal debt is that part of the total debt that is owed to lenders within the country. It is the money the government borrows from its own citizens. The government borrows by issuing the Government Bonds and T-Bills (Treasury Bills). It also includes the Market borrowings by the government. The government bonds and T-Bills are traded in the market which is also known as Gilt Market. When government borrows from the domestic sources, the increase in inflation is less in comparison to simply printing the money.

External Debt

External debt is owed to creditors outside the country. The outsider creditors can be foreign governments, International Financial Institutions such as World Bank, Asian Development Bank etc., corporate and foreign private households. External debt may be of several kinds such as multilateral, bilateral, IMF loans, Trade credits, External commercial borrowings etc. When the non-resident Indians park their funds in India, it is also a type of external debt and is called NRI deposits. If the external debt is denominated in Indian Rupee, it is called Rupee Debt.

India’s Current Debt Position

The outstanding internal and external debt and other liabilities of the Government of India at the end of 2016-2017 is estimated to amount to Rs. 74,38,181.45, as against Rs. 68,91,913.58 crore at the end of 2015-2016(RE). The following table shows the current position on 31st March, 2017.

For your examinations, there are some important observations regarding debt position of India. Most of India’s debt is internal (97%) and we are not under huge external debt. India fares much better than its BRICS counterparts except China. Further, India’s borrowing from the International Monetary Fund has been falling since 2014. This is quite comfortable position because despite liberalization, privatization and globalization that set in in 1991, Indian Economy has not fallen into the trap of external debt.

Per Capita Debt

There has been a rise in the per capita debt on March 31, 2016 as compared to March 31, 2015. There has been a rise of 9.2% in per capita total debt (internal and external) as on March 31, 2016 as compared to March 31, 2015. The per capita internal debt increased by 9.3% while per capita external debt increased by 5.1% during the given period. In absolute terms, the per capita total debt increased by Rs. 4,525/-, per capita internal debt by Rs.4,446/- and per capita external debt by Rs.80/- during this period.

External Debt Sustainability

Every country needs to meet its current and future external debt service obligations. If these obligations are met in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth – then it would be called external debt sustainability. If not, then the condition would be called a debt burden. The external debt sustainability can be measured by several indicators such as Debt to GDP ratio; Foreign debt to exports ratio; Government debt to current fiscal revenue ratio etc. Further, external debts can be generally paid via exports and thus huge external debt puts undue pressure on exports.

Sovereign Default

A failure or refusal of the government of a sovereign state to pay back its debt in full is called Sovereign Default. Sovereign Default may be accompanied by a formal declaration of a government not to pay (repudiation) or only partially pay its debts (due receivables), or the de facto cessation of due payments.

Union Budget 2017-18

The stated agenda of the government for Union Budget 2017-18 is TEC: Transform, Energize and Clean India. Transform means to transform the quality of the governance and quality of life of our people. Energize means to energise the various sections of the society, especially the youth and the vulnerable, and enable them to unleash their true potential. Clean India means to clean the country from evils of corruption, black money and non-transparent political funding.

Farmers / Agriculture in Union Budget 2017-18

The budget announcements for farmers / agriculture were focussed on the objective of doubling the farmers’ income in five years. Towards this, the key announcements made are as follows:

Record Credit Target

The agricultural credit target was fixed Rs. 10 Lakh Crore for 2017-18, which is highest ever so far for a particular year.  Efforts would be taken to ensure adequate flow of credit to the under serviced areas, the Eastern States and Jammu & Kashmir.

Linking PACS to CBS

All the 63000 functional Primary Agriculture Credit Societies will be linked with the Core Banking System of the District Central Cooperative Banks. Integration of PACS with the Core Banking System will not only improve efficiency of delivery and recovery of credit, but will also reduce losses of PACS, and will help improve their viability. Government will support NABARD for this purpose and it will be done in 3 years at an estimated cost of Rs. 1,900 crore.

Expansion in Coverage of PMFBY

Government will expand the coverage of Pradhan Mantri Fasal Bima Yojana and the coverage under the scheme will be increased from 30% of the cropped area in 2016-17 to 40% in 2017-18 and 50% in 2018-19. For this, a provision of Rs. 9000 crore has been made. Further, the sum assured under this scheme has more than doubled from 69000 crore in Kharif 2015 to Rs. 141,625 Crore in Kharif 2016.

Higher Allocation for Long Term Irrigation Fund

A higher allocation towards Long Term Irrigation Fund (LITF) was announced. The LITF is a dedicated fund in NABARD with initial corpus of Rs. 20,000 crore announced in Union Budget 2016-17. Its objective is to fund and fast track the implementation of incomplete major and medium irrigation projects in the country. The money for this fund comes from various sources including the Budgetary Allocations and GOI bonds released by NABARD. In the Union Budget 2017-18, the fund size has been increased by another Rs 20,000 crore, taking the total fund size to Rs 40,000 crore.

Increasing coverage of e-NAM

e-NAM (National Agriculture Market), a single-window online service integrating mandis (agriculture markets), was launched in April 2016 to let farmers and traders view all APMC (agriculture produce market committee)-related information and services, including commodity arrivals and prices, and buying and selling trade offers. This market helps the farmers to bid for the best price across markets.

In the budget 2017-18, the government has announced mission to link 585 Mandis to the portal by March, 2018. As of now, around 250 markets have been covered. In the new budget, an assistance of up to Rs 75 lakh has been announced for every e-NAM.

Model law in contract farming

Currently, NITI aayog is finalising a model law on contract farming. Once in place, this law would integrate farmers who grow fruits and vegetables with agro processing units for better price realisation and reduction of post-harvest losses

Thus, budget emphasizes that agriculture sector is still a critical sector in the Indian economy and goes a step ahead to promote productivity and production.

Banking Sector in Union Budget 2017-18

The budget 2017-18 has come with a big boost for the agriculture market due to increased push on infra, boost to affordable housing, fiscal deficit target of 3.2% etc. They key provisions for the banking sector are as follows:

New Bankruptcy Bill for Financial Firms

It was announced that a bill relating to resolution of financial firms will be introduced in the Parliament. We note here that for non-financial firms, there is already an Insolvency and Bankruptcy Code in place. With the new act for financial firms in place, the comprehensiveness of the resolution system will be ensured in India.

Setting up the CERT-Fin

The finance minister announced setting up of a Computer Emergency Response Team to strengthen security of the financial sector. This will work in close coordination with all financial sector regulators and other stakeholders. Setting up of CERT-Fin at a time when India is promoting digital economy would ensure cyber security that is critical for safeguarding the integrity and stability of our financial sector.

Recapitalization of Banks

The government has provided Rs. 10000 Crore for recapitalization of banks in 2017-18 in line with the ‘Indradhanush’ roadmap. Looking at the NPA levels, this amount does not seem to be enough though.

Increased lending targets in Mudra Yojana

This this budget, the government has planned to increase the lending targets to Rs. 2.44 Lakh crore from Rs. 1.22 Lakh crore under Pradhan Mantri Mudra Yojana. This scheme has immensely contributed in providing funds to the unfunded and increasing lending targets would enable small business owners to meet their funding needs adequately.

Promotion to Digital Economy

Following are specific announcements made for promotion of digital economy:

  • To promote the usage of BHIM app, the government has announced two schemes viz. Referral Bonus Scheme for individuals and a Cashback Scheme for merchants.
  • Aadhar Pay, a merchant version of Aadhar Enabled Payment System will be launched.
  • Government will encourage SIDBI to refinance credit institutions which provide unsecured loans, at reasonable interest rates, to borrowers based on their transaction history.
  • The digital payment infrastructure and grievance handling mechanisms shall be strengthened.

Further, the government proposes to create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems. Necessary amendments are proposed to this effect in the Finance Bill 2017.

Healthcare in the Budget 2017-18

The major issues in the healthcare sector in India are low government spending and high out of pocket expenditure on health. There was an expectation of increased budget share of healthcare sector to meet these challenges and the dual challenges posed by communicable and non-communicable diseases. The key budget announcements are as follows:

Increased allocation for Health Ministry

In the latest budget, the allocation for Ministry of Health and Family Welfare increased from Rs.39,688 crore in 2016-17 to Rs.48,853 crore in 2017-18, thus increasing from 1.97% to 2.27% of total budget. At the same time, it is overall a 23.1% increase in allocation for the health sector. This increase is though welcome, but appears to be more lopsided towards human resources (medical education).

Action plan to eliminate diseases and bring down IMR & MMR

The Government has prepared an action plan to eliminate Kala-Azar and Filariasis by 2017, Leprosy by 2018 and Measles by 2020 and Tuberculosis by 2025.  Similarly, action plan has been prepared to reduce IMR from 39 in 2014 to 28 by 2019 and MMR from 167 in 2011-13 to 100 by 2018-2020.

Mahila Shakti Kendras

Rs. 500 Crore have been announced in the budget to set up “Mahila Shakti Kendras” at village level in 14 Lakh ICDS Aangabadi centres. These centres will work as one stop convergent support services for empowering rural women with opportunities for skill development, employment, digital literacy, health and nutrition. We note here that government does not seem to be very clear in what it is going to achieve in Rs.500 crore. They could enhance the already existing Mahila Samakhya scheme rather than leaving that and lunching a new scheme. That programme was run by HRD ministry and last year it was incorporated in NRLM but has now virtually shut down.

Promoting institutional deliveries

This scheme was earlier announced by PM under which Rs.6,000 each will be transferred directly to the bank accounts of pregnant women who undergo institutional delivery and vaccinate their children.

Transformation of Health Sub Centres

As per the budget, the government will transform 1.5 lakh Health Sub Centres into Health and Wellness Centres, which shall also be used to promote generic drugs. But,  how the financial resources for the same will be mobilized is not clear as the government has not given any roadmap for ensuring financial resources for these sub-centres.

Promotion of Diplomate of National Board (DNB) Courses

The government will take steps to roll out DNB courses in big District Hospitals; strengthen PG teaching in select ESI and Municipal Corporation Hospitals; and encourage reputed Private Hospitals to start DNB courses. DNBs are considered equivalent to MD/MS/DM/MCh.

Two new AIIMS

The government has announced two new All India Institutes of Medical Sciences (AIIMS) in Jharkhand and Gujarat. This is welcome step but we note that already announced and opened new AIIMS are not fully functional and are grappling with issues of human resources.

Smart Cards for Older people

The government has announced to introduce Aadhar Based Smart Cards for senior citizens containing their health details. This launch will be through a pilot in 15 districts during 2017-18. One of the important side benefit of health cards is that it helps in consolidating the Electronic Health Record (EHR) in the country.

For Pharma sector

The government announced to bring amendment in D&C Rules to ensure affordable drugs and promote generic medicines. Further, new rules for regulating medical devices will also be formulated to attract investments.

Unaddressed Issues with Healthcare

Despite increased budget and new announcements, there are several problems which still remain unaddressed. Firstly, not much has been done to promote affordable healthcare in private sector which caters to 80% outpatient and 60% of inpatient care in the country. The healthcare in tier-II and tier-III cities is in shambles in both public and private sectors. Secondly, nothing much has been proposed to focus on prevention and preventing healthcare. Currently, the government provides a tax exemption Rs.50000/- on preventive health check up under section 80-D of IT act. There was a need to raise this limit to at least Rs. 20000/- but that has not been done. Thirdly, nothing much has been done to enhance long term financing options for the healthcare industry despite the fact that healthcare was included in infra-structure subsectors in 2012.

Education in Budget 2017-18

The outlay on education sector this year has seen a rise of 9.9% from Rs.72,394 crore to Rs. 79,685.95 crore. Of the total outlay, Rs. 46,356.25 is for the school sector and the rest for higher education.

The outlay is for a range of activities including learning assessment in schools; revamping UGC; setting up of a national testing agency to conduct higher education entrance exams; and freeing nodal education bodies from tedious administrative work. The key proposals are discussed as follows:

Measuring annual learning outcomes

The budget has proposed to introduce a system of measuring annual learning outcomes in our schools. The idea is that such kind of framework will establish standards of Governance, Transparency and Self- Regulation and can be used to classify schools into different categories based on a variety of input and output measures. We note here that the Ministry of HRD had already come with a draft document in January on learning outcomes tat set the minimum achievement standards for class 1 to 8.

Innovation Fund for Secondary Education

The government will set up an Innovation Fund for Secondary Education to encourage local innovation for ensuring universal access, gender parity and quality improvement.  This would also include ICT enabled learning transformation and the focus will be on 3479 educationally backward blocks.

National Testing Agency

The budget has declared a plan to establish a National Testing Agency as an autonomous and self-sustained premier testing organization to conduct all entrance examinations for higher education institutions. We note that such agency may conduct entrance exams for admission to Indian Institutes of Technology (IITs), other engineering colleges and UGC-NET. We note here that the idea of NTA is not new but was recommended in the national education policy 1986. However, governments have never implemented this. Once this agency is in place, there may be big losses for IITs and UGC in the form of foregone examination fee. Currently, multiple agencies are conducting multiple tests; and if there is one body whose single point agenda is to conduct exams, then it is a a very good idea and a major higher education reform in the country. It will free IITs, CBSE, AICTE, UGC etc. from the administrative responsibilities so that they can focus more on academics.

SWAYAM

The government is already working on a SWAYAM initiative to leverage information technology. It will have at least  350 online courses. This would enable students to virtually attend the courses taught by the best faculty; access high quality reading resources; participate in discussion forums; take tests and earn academic grades.  The budget documents say that the access to SWAYAM would be widened by linkage with DTH.

Unaddressed Issues

The budget has not addressed several key issues in education sector. For example, there was a demand in the industry that the “education services” should be declared as zero rated supply in the GST regime. Further, there was a demand for ‘State Policy Reform Fund’ to incentivise states that implement measures such as merit-based selection and promotions. This also remains unaddressed. There is nothing much for teacher education; education quality and capacity building of existing institutions; Setting up of specialized research and training institutes with focus on areas such as standardized assessments, school leadership training, early literacy & numeracy, pedagogy etc. There was also a demand that the higher Educational Institutions should be free to set up campuses overseas; and they should be give a line of credit towards that. This would help to increase India’s soft power.

Railways & Transport Sector in Budget 2017-18

The Budget 2017-18 was independent India’s first budget in which Railway Budget was presented as part of the Union Budget itself. The entire transport sector was given Rs. 2.41 Lakh Crore. The Key announcements for Railways and other transport sector are as follows:

Railways

In the latest budget, a 22% rise in the Railways Budget was announced. The key announcements on railways are as follows:

Rail Safety Fund

Government will create a Rail Safety Fund (Rashtriya Rail Sanraksha Kosh) with a corpus of Rs. 100,000 Crore over a period of 5 years. This fund will be used for track improvement, bridge rehabilitation works, rolling stock replacement, human resource development, improved inspection system, safety work at level crossings, among other things.

Withdrawal of Service Charge on Rail Tickets booked through IRCTC

It was announced that the service charge on rail tickets booked through IRCTC will be withdrawn.

Other announcements on Railways
  • As many as 500 rail stations will be made differently abled-friendly by providing lifts and escalators.
  • Government will take steps to launch dedicated trains for pilgrimage and tourism jobs.
  • A new metro rail policy will be announced
  • By 2019, all coaches of Indian Railways to be fitted with bio-toilets.
  • Railways will integrate end to end transport solutions for selected commodities through partnerships.
  • Unmanned railway level crossings to be eliminated by 2020
Road; Airlines
  • The outlay for National Highways was enhanced by 11% to Rs. 64000 Crore in 2017-18.
  • 2,000 km of coastal connectivity roads have been identified for construction and development. This will facilitate better connectivity of ports and remote villages. The development of coastal connectivity roads will facilitate better connectivity with ports and remote villages. It is an important step towards development of integrated transportation network in India.
  • Pradhan Mantri Gram Sadak Yojana PMGSY will have an allocation of Rs.27,000 crore. Pradhan Mantri Gram Sadak Yojana has an objective of providing all-weather road connectivity to rural habitations which are not connected at present. The rise of budgetary allocation is a significant initiative to boost the rural economy enabling employment generation, trade, more efficient supply chains and lower inventory costs.

Further, the Airport Authority of India Act will be amended to enable effective monetisation of land assets. We note here that the Airports Authority of India owns extensive land in and around the airport. Allowing AAI to unlock land will provide them enough resources to fund airport expansion plans in the country. The resources, so raised, will be utilised for airport upgradation and better passenger services.

Other Sectors in Budget

Defence & Aerospace in Budget, 2017-18

The outlay for Defence in the Budget 2017-18 stands at Rs. 274113 Crore with a modest hike of 6% in allocation from the previous year. With this, currently, the defence budget stands at 1.62% of the GDP.

Major Weapon Purchases not likely

The given allocation is not going to cater to the major weapons purchases and this is also in contradiction to a defence ministry panel report which recommended 2.5% of the GDP for defence budget. Further, despite the overall increase in revenue budget pertaining to defence, the figure also included OFB and DRDO expenses and thus, overall budget outlay for defence procurement is down by Rs. 1,60,996 Crore. Further, there are chances that a large part of the allocation will be eroded by GST and Custom Duties. So, in summary, the budget is not at all good for defence and seems to have ignored the defence requirements.

Environment in Budget 2017-18

This year, the environment ministry has got an increase of around 19% in its budgetary allocation. The Project Tiger, Project Elephant, NTCA etc. have got increased allocation. The key proposals are as follows:

Waste to Energy Plants

The government is establishing pilot plants for environment friendly disposal of solid waste and conversion of biodegradable waste to energy at New Delhi and Jaipur railway stations. There are plans to establish five such more plants.

Piped Supply of Water for Open Defecation Free villages

Open Defecation Free (ODF) villages are now being given priority for piped water supply.

Bio-toilets

By 2019 all coaches of Indian Railways will be fitted with Bio-Toilets.

Unaddressed Issues

Budget could do better for environment. There was a long pending demand of a Technology Up gradation Fund for the Chemical industry to support the effluent treatment plants, chemical waste disposal plants etc. Further, there was a demand to reduce levy on clean energy cess for manufacturers who adopt clean energy.

Rural Population in the Budget 2017-18

The Finance Minister has made some announcements in the Budget 2017-18 for rural population keeping in focus the aim of providing employment & basic infrastructure. These announcements are as follows:

  • Fixing aim to make 1 Crore households free from poverty by 2019
  • Fixing aim to make 50000 gram panchayats free from poverty by 2019
  • Highest ever MGNREGA allocation at Rs. 48000/- Crore.

Further, as a part of a sub mission of the National Rural Drinking Water Programme, government announced a proposal to provide safe drinking water to over 28,000 arsenic and fluoride affected habitations in next four years.

Youth in the Budget 2017-18

Towards the government agenda of Energising youth through education, skills and jobs, the government has made following announcements for youth:

  • To introduce a system of measuring annual learning outcomes in our schools.
  • At least 350 online courses to be launched on SWAYAM platform
  • To extend Pradhan Mantri Kaushal Kendras to more than 600 districts.
  • To establish 100 India International Skills Centres across country.
  • To launch Skill Acquisition and Knowledge Awareness for Livelihood Promotion programme (SANKALP) to provide market relevant training to 3.5 crore youth.
  • To launch a new scheme for creating employment in leather and footwear industries.
  • To launch Incredible India 2.0 Campaign.
  • Himalayan Region Sports Festival Scheme has been allocated an amount of Rs. 15 crore for 2017-18

There are hige gaps in skill ecosystem of the country and there is a need to focus on pillars of viability, quality and capacity in skill development.

The Poor and the Underprivileged

Keeping a focus on strengthening the systems of social security, health care and affordable housing; the following announcements were made in Union Budget for the Poor & Underprivileged:

  • Affordable housing will be given infrastructure status. This will also attract higher investment in affordable housing sector.
  • National Housing Bank will refinance individual housing loans of about Rs 20,000 crore in 2017-18.
  • Government will prepare an action plan to reduce IMR {Infant Mortality Rate} from 39 in 2014 to 28 in 2019; and Maternal Mortality Rate from 167 in 2011-13 to 100 by 2018-19.
  • Two new AIIMS will be set up in Jharkhand and Gujarat.
  • To simplify, rationalise and amalgamate the existing labour laws into four codes wages; industrial relations; social security & welfare; and safety & working conditions.

Infrastructure Sector

With agenda of Growth & stability by stronger institutions, the budget has made the following key announcements on Infrastructure sector:

  • Foreign Investment Promotion Board (FIPB) to be abolished.
  • A bill related to curtailing the menace of illicit deposit schemes will be introduced.
  • A bill related to resolution of financial firms to be introduced.
  • Arbitration and Consolation Act 1996 to be amended to streamline the institutional arrangements for resolution of disputes on infrastructure related contracts.
  • Time bound listing of identified CPSEs on stock exchanges
  • Proposal to create integrated oil major.

Public Service” in the Budget 2017-18

Some important announcements were made towards Effective governance and efficient service delivery through people’s participation.

  • Government will utilize the Head Post Offices as front offices for rendering passport services.
  • A web based interactive Pension Disbursement System for Defence Pensioners will be established.
  • The government will rationalize the number of tribunals and merge tribunals wherever appropriate.

The government has given message that it would as far as possible go for maximum governance and minimum government.

Water Sector

  • The Government has already established a Long Term Irrigation Fund (LTIF) in Nabard. The recent announcements make its total corpus to be of size of Rs.40000 Crore.
  • The Government will set up a dedicated Micro-Irrigation Fund in NABARD to achieve the goal – more crop per drop. This fund will have an initial corpus of Rs.5000 Crore.
  • During 2017-18, another 5 lakh farm ponds will be taken up. This will greatly to drought proofing of gram panchayats.
  • The budget has proposed to provide safe drinking water to over 28,000 arsenic and fluoride affected habitations in the next four years. This will be a sub mission of the National Rural Drinking Water Programme (NRDWP).

Current fiscal position

The Government has remained adhered to the fiscal consolidation path. Though it has enhanced budgetary expenditure in critical areas such as infra, farming etc. but at the same time, adhered to the Fiscal Deficit ratio of 3.5% in 2016-17 and set a target of 3.2% for 2017-18, and 3% for 2018-19.

Also we note that in January 2017, the FRBM review committee chaired by NK Singh had submitted its report, in which it has recommended a fiscal deficit of 3% target in next three years. This committee had also introduced the concept of an “Escape Clause” which allows deviation up to 0.5% of GDP from the stipulated fiscal targets.

Key Direct Tax Proposals in the Budget 2017-18

The main direct tax proposals in Budget 2017-18 are as follows:

  • The tax rate for income between Rs. 2.5 Lakh to Rs. 5.00 Lakh has been reduced from 10% to 5% for individuals, HUFs and Association of Persons.
  • For senior citizens (60-80 years), the tax rate has been reduced from 10% to 5% in respect of the incomes between Rs. 3 to 5 Lakh.
  • A surcharge of 10% has been introduced for persons/ HUF/ AOP earning between Rs. 50 Lakh to Rs. 1 Crore.
  • Corporate tax rate reduced to 25% for companies with less than Rs. 50 Crore turn over.
  • Individuals and HUFs carrying on business or profession no longer required to maintain books of account if their income is below Rs. 250,000 and sales/turnover/gross receipts is below Rs. 25 lakhs.
Key tax proposals in Budget to curb the cash economy

Curbs on cash economy, for example – expenditure incurred in cash exceeding Rs. 10,000 for acquisition of asset to be ignored; any payment in cash above Rs. 10000 to a person in a day to be denied deduction; Cash donations above Rs. 2000 not to be allowed as deduction; Cash transaction of above Rs. 300,000 to be prohibited {this is now Rs. 200,000};

Direct taxes towards promotion of affordable housing sector

The Budget has given following relaxations for the development of affordable housing sector:

  • While computing the size of residential unit “carpet area” to be considered instead of “built-up area”;
  • The restriction of 30 square meters on the size of residential units to apply only to projects located within the municipal limits of Chennai, Delhi, Kolkata or Mumbai;

Further, the time limit for completing the project is to be increased from existing three years to five years.

Key changes in indirect taxes

Though the custom duties, central excise duties and service taxes for individual items keep changing from budget to budget, the:

  • The effective rate of customs duty remains unchanged at 29.44%.
  • The effective rate of Excise Duty (ED) remains unchanged at 12.5%.
  • Effective rate of service tax remains unchanged at 15%.

With the passing of the crucial GST bills, these rates would become irrelevant and new four stage GST rates would be applicable.

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