Understanding Union Budget

Important Documents for understanding Budget: Click here
A budget is a financial statement comprising estimates of government revenues and expenditures for an financial year (April to March).

Usually Budget is presented by Financial minister on the last day of February.  The day of presenting budget changes in an election year. In this case only a temporary budget comprises of expenditure for 3 to 4 months. This budget is called Vote on account budget.

Let us have a look at the different terms in the header.

Actuals : This gives you actual figures of 2011 - 12 Budget. 
Budget estimates : This gives you 2012 - 13 Estimated Budget.
Revised Estimates: Based on the actuals upto 10 months, estimated budget figures are revised.
Budget estimates : Budget estimates for 2013 - 14 

2013 - 14 Budget

Revenues: are the source of income realized by the government and are divided into:

1. Revenue receipts : which consists of revenue from regular sources like 
a. Taxation revenues: eg., receipts from corporate tax, income tax, excise tax, Excise duty, custom duty, service tax etc.
b. Non tax revenue: which include interest on loans, dividends from Public sector units, Fees and stamp duties. 

2. Capital receipts: Which refer to those inflows to government that are not in the nature of regular income, But are repayments / recoveries, or proceeds from sale of assets.  Other receipts like  Disinvestment (selling some shares of a PSU) comes under this head.  Borrowings are simply the deficit which can be covered by taking loans from market. 


Non plan expenditure: These are on going expenditure not covered under the 5 - year plans.  
Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments.

The government from 2009-10 created a new category called "grants for creation of capital assets" for segregating certain revenue expenditure as capital spends which could help it to bring down the ballooning revenue deficit with increasing allocation for social sector spending such as under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme and the Member of Parliament Local Area Development Fund (MPLAD).  MGNREGA and MPLAD alone account for 20% of the grants for creation of capital assets.  Many of this expenditure was focused on creation of employment generation rather than on creation of assets

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

Plan expenditure: 
India has adopted economic planning as a strategy for economic develop­ment. For stepping up the rate of economic development five-year plans have been formulated. So far ten five-year plans have been completed. The expenditure incurred on the items relating to five year plans is termed as plan expenditure. Such expen­diture is incurred by the Central Government.

A provision is made for such expenditure in the budget of the Central Government. Assistance given by the Central Government to the State Governments and Union Territories for plan purposes also forms part of the plan expenditure. Plan expenditure is sub­divided into Revenue Expenditure and Capital Expenditure.This expenditure involves funding for programmes and projects covered by the 5 - year plans as decided by the various ministerial bodies. 

Under the above heads there are two components:
a. Revenue expenditure - It is payments incurred for day - to - day running of government departments and various services offered to citizens.  This also comprises of spending towards subsidies, interest payments.  This spurs consumption in economy.

b. Capital expenditure: This expenditure spurs asset creation, resulting in increased investment with spending diverted towards cost associated with acquisition of assets that may include investments in shares, infrastructure as well as loans and advances given out by government. 

Other Important Terms: 

Public debt: The money borrowed by the government is eventually a burden on the people of India, and is, therefore, called public debt. It is split into two heads: internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources).

Fiscal deficit: The money borrowed by the government is eventually a burden on the people of India, and is, therefore, called public debt. It is split into two heads: internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources). Usually the government spends more than what it earns through various sources. This shortfall, which is met with borrowed funds, is called fiscal deficit. Technically, it is the excess of government expenditure over 'non-borrowed receipts' — revenue receipts plus loan repayments received by the govt plus miscellaneous capital receipts.  Fiscal deficit for FY13 is estimated at INR.5.64 lakh crore, revenues of INR 9.18 lakh crores less expenditure of INR 14.82 lakh crores.
Fiscal deficit is measured as a percentage of GDP, hence INR 5.64 lakh crore / GDP of INR 100.74 lakh crores work out to estimated fiscal deficit of 5.6% of GDP. 

Revenue Deficit: It is the excess of revenue expenditure over revenue receipts. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero. In such a situation, the government borrowing will not be for consumption but for creation of assets.

Effective revenue deficit: This is an even tighter number than the revenue deficit. It is revenue deficit less grants for creation of capital assets.

Primary deficit: It is the fiscal deficit less interest payments made by the government on its earlier borrowings.

Deficit and GDP: Apart from the numbers in rupees, the budget document also mentions deficit as a percentage of GDP. This is because in absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then it's not such a bad thing, especially if it is being used to create production capacities.