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Union Budget Process
An introduction
Presentation at
Press Information Bureau
New Delhi
February 15, 2008
P.R. Devi Prasad
OSD (FRBM)
5/3/201702/07/07
Dept. of Economic Affairs
Ministry of Finance
1
Presentation Scheme
1. Budget: fiscal policy and Indian legislative objective
2. Budget: citizen, parliament, constitution
3. Budget: legal framework
4. Budget: format / documentation / documents/ printing
5. Budget: preparations / consultations
6. Budget: FRBM Act, 2003 & medium-term framework
7. Budget: macroeconomic context
8. Budget: expenditure composition, policies & reforms
9. Budget: debt management
Fiscal Policy
 Represents formulation and implementation of government sector activities
through budget
 Achieves budget balance though size of government, type of budget
financing and revenue & expenditure composition
 Covers all levels of government including quasi government
 Seeks internal & external balance, lowers debt, ensures long-term
sustainability
 Provides public goods; promotes private investment; engineers pro-poor
growth
 Reduces poverty and provides good governance
Issues: impact on interest rates, aggregate demand, output growth, competitiveness,
credit rating, crowding out private sector;
Legislative Objective of fiscal responsibility
and budget management
“To Provide for the responsibility of the Central Government to
ensure inter-generational equity in fiscal management and
long-term macro-economic stability by achieving sufficient
revenue surplus and removing fiscal impediments in the
effective conduct of monetary policy and prudential debt
management consistent with fiscal sustainability through limits
on the Central Government Borrowings, debt and deficits,
greater transparency in fiscal operations of the Central
Government and conducting fiscal policy in a medium term
framework and for matters connected there with or incidental
thereto.”
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Budget & the Citizen
Railway budget is separate, but Constitutionally, Railway receipts are part of CFI
Not on
Constitutional
strength
but by practice
Non
Tax
Revenue
Four*
Services
b
Tax
Revenue
N
O
N
P
L
A
N
c
a
4
States
CFI
Other
Receipts
P
Market
Borrowings
S
U
citizen
3
P
L
A
N
Grants
/Donor
support
S
g
R
E
V
E
N
U
E
1
C
A
P
I
T
A
L
d
Interest
receipts
2
f
Loan
repayment
Depts.,
e
Application of Funds
Consolidated
Fund Of India
5
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*Economic Services
Fiscal Services
Social Services
&
Other General Services
Budget & the Parliament
• Presentation on last business day in February
• Examination by parliamentary standing committees
• Vote on Account before 31st March
• Approval by parliament within 75 days
• Seeking supplementary demand for grants- 1st , 2nd & 3rd
• Submission of C&AG Reports
• Examination by PAC
• Regularization of excess expenditure
No taxation without representation; Lok Sabha & Money bill: why supplementary? Why regularization?
how to work with Budget Division? Why to avoid excess expenditure? Lessons from C&AG reports!
6
Aligning between DDG and Outcome Budget of the Ministry.
Budget & the Constitution
AFS- Anchor to all documents: Art 112
Trigger to
All Documents
While the following provide for
•
Procedure in Parliament with respect to Estimates
… 113
•
Appropriation Bills
… 114
•
Supplementary, additional or excess grants
… 115
•
Votes on account, votes of credit and exceptional grants
… 116
•
Special provisions as to financial Bills
… 117
•
Consolidated Fund
…
…
… 266
•
Contingency Fund
…
…
… 267
•
Finance Commission
…
… 280
•
Expenditure defrayable by the Union out of its revenues
•
Laws/Rules for Custody, etc., of Consolidated Funds,
Contingency
…
…
… 282
Funds and moneys credited to the
public accounts
•
…
…
…
Borrowing by the Government of India
… 283
… 292
7
*Annual Financial Statement
Budget Documents in the context of CFI
Constitutional mandate in Article. 266
• All taxes, revenues, grants, loans,
repayments, proceeds from treasury bills,
way & means advances go into CFI
(A)
• Other public money goes into
Public Account of India
(B)
• No money to be appropriated from CFI
except through law passed by Parliament
(C)
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Relate of A, B, & C to various Documents/ statements
Explore relevance of A,B & C to Fiscal Balance
…a stylized peep into the Budget
(excluding charged estimates)
• Objectives
– in Spending, Taxing, Balancing, Investing, Macro-economic
stability, growth & global positioning
• Risks & Risk proofing, leak plugging
– in pass-thru of public money;
– contingent liabilities eg: guarantees, PPP terms, legal liabilities
• Transfer payments
– transfer objectives, transferring routes, vs. Operational issues
• Impact on equity*, efficiency** & entitlements***
*Intergenerational. Regional. Public Vs. Private sectors, Farm & non-Farm sector.
Rural Vs Urban. Spenders Vs. Savers. ** Capital Vs. Revenue. Productivity (ICOR)
***States Vs. Union Government. Through Finance Commission’s recommendations.
BPL Vs. APL. Children & Aged. Women Vs. Others
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Budget & Accounts Protocol
Controller General of Accounts
– Accounts Management
– Expenditure tracking (Monthly)
– Finance A/Cs presentation to
Parliament through MoF
CAG’s
Audit
Reports
on
Finance
Accounts
for
the
year T-1
– Quarterly FRBM Statements
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Issues: Periodicity of Accounts; Time lag and aligning
Provisional, Provisional Actual A/cs, Flash figures, Actual/Audited A/cs
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Budget Format
• Receipts
– Revenue receipts
• Tax
• Non-tax
– Non-Debt Capital
• Expenditure
– Charged (discussion
only)/ Voted (discussion
& voting)
– Capital/Revenue
• Loan repayments
• Disinvestment (till
2006)
– Plan*/Non-Plan
• Debt
Issues: Source and logic of the inputs influencing these entries
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* Developmental expenditure within the framework of 5-Year Plans
Budget Making
What
• Expenditure
Who
Dept. of Expenditure
• Revenue
– Non-Tax
– Tax
• Deficit
Dept. of Economic Affairs
Dept. of Revenue
Dept. of Economic Affairs
for its Control* & financing**
– Fiscal,
– Revenue &
– Primary Deficits
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*FRBM Legislation
** Reserve Bank Coordination (Costs, price, instruments, scheduling)
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Budget: Annual preparations
Start in Sept. with issue of Budget Circular
• Extensive consultations involving
– line ministries
– other stake holders:
DoE
DEA & DoR
farmers, labour unions, business,
FIs, economists & other civil society groups
• Intense internal assessment about
– spending priorities
– revenue mobilization
– aligning with policy goals
DEA
DoR
DEA
DEA: Dept. of Economic Affairs. DoE: Dept. of Expenditure. DoR: Dept. of Revenue
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Issues: Coordination between line Departments, Planning Commission & CGA
Aligning expenditure, physical progress and capacity to absorb as also compliance to legal ceilings
Triggers -Target time - Goals
Budget Circular - 29th February - FRBM Act - Annual Plans
Inputs
Source
Output presented in
1
SBE/ spending performance
Line Ministries
Demands for Grants
2
Pre-budget meetings
Line ministries/ PC &
CGA
Non-Plan in Demands for
Grants
3
NTR/ guarantees/ assets
profile/NTR arrears
Line ministries
Receipts Budget statements
4
Plan allocations
PC, DoE & Line
ministries
GBS: Plan in Demands for
Grants
5
State entitlements
FC & DOE
Transfers to States
6
Revenue receipts
DoR (CBDT/CBEC)
BE & RE
7
Debt/liability profile &
Interest liability (instrument
specific)
RBI, CAAA
RE & BE, Receipts Budget
statement
8
Resource Gap
MoF
Deficit targets
Core Budget Documents = 13+
Presented by MoF and line Ministries
1. Key to Budget Documents
2. Annual Financial
Statement
3. Budget at a Glance
4. Budget Speech
9. Explanatory Memorandum
10. Appropriation Bill
11. Demands for Grants
•
•
12. FRBM Statements
5. Budget Highlights
•
6. Action Taken on Budget
•
Announcements
7. Receipts Budget
8. Finance Bill
•
Customs & Excise
Notifications
Exp. Budget Vol-1
Exp. Budget Vol-2
•
•
Macro-Economic framework for
Year T+1
Medium term fiscal policy for
Years upto T+3
Fiscal policy strategy for the Year
T+1
Deviations statement for Year T
13. Detailed Demand for Grants*
Pink Bold italics: Constitutionally mandated: Blue Bold: legally mandated
White : supporting documents: * of respective ministries
15
Few more Documents
Related*
•
Economic Survey
•
Supplementary
Demand for Grants
•
Finance Accounts
•
FRBM Statements
–
Q4 of Year T-1
–
Q3 of Year T
•
Outcome Budgets
•
Annual Reports
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Discuss: *How & why to relate ?
Relevant*
•
Finance Commission Report
(Accepted Recommendations)
•
Five Year Plan Documents
(Annual Plans & Evaluation Reports)
•
RBI Reports relating to
–Credit /Policy
–Macroeconomic &
Monetary Developments
–State Budgets and
–Annual Report
•
PSUs’ Annual Reports
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* How & when to look for relevance ?
13+Budget Documents
…a framework to understand
• Accounting framework
– CAG, CGA Accounts
– Public Account & CFI: Charged Vs. Voted
– Revenue Vs. Capital; Tax and non-Tax Receipts
• Performance perspective
– Accounting the Resources & Counting the Results
– Outcome budget, Annual Report
– CAG Finance Accounts, Audit Reports
• Time-frame
– Past year, Current Year, Ensuing Year & Future Years (Medium Term) Viz.,
years T-1, T, T+1, T+2, T+3
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Issues: Classification: Reconciling the Provisional: Provisional Actual: & Actual
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Together – the Budget Documents…
…reveal Government resources flow & ...
… Answer the questions like:
•
Whether the results matched with the resources used?
•
How much money will go to health, education, pay, pensions, poverty
alleviation, interests payments, defence etc., ?
•
How much money will go for research & development ?
•
How much money will go to pay down the debt?
•
Will taxes go up or down?
•
How much money will be borrowed?
•
What is the fiscal impact of all this ?
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Would you like to try few more questions ?
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FRBM
Framework
A c c o u n t a b I l I t y*
Disclosures
Budget
Making
F
R B
M
Act
Budget
Management
Budget
Review
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•(a) limits on Fiscal & Revenue Balance, debt & guarantees,
•(b) Disclosures, (c) H1 performance indicators, (d) Transparency
19
India’s FRBM Act – Managing The Mandate
Legal Frame work
Constitution, FRBM Act, Public Debt Act, etc.,
Borrowing by the Government of India - Art. 292
The executive power of the Union
extends to borrowing upon the security of the
Consolidated Fund of India
within such limits, if any,
as may from time to time be fixed by Parliament
by law and to the giving of guarantees within
such limits, if any, as may be so fixed.
FRBM Goals
Annual
Revenue Deficit
• Reduce by
>0.5% of GDP
Fiscal Deficit
• Reduce by
>0.3% of GDP
Contingent liabilities
• Assume < 0.5%
GDP
Medium Term
• Reduce to “zero”
by 2008-09 &
build surplus
later
• Reduce to 3% of
GDP by 2008-09
Fiscal Performance
:
22
Source: Budget at a glance 2007-08
GDP &
Fiscal Indicators
Y=C+I+G+(X-M)
• GDP: Gross Domestic Product
– indicates annual national wealth production
added at every stage of production of goods & services:
(value
CSO brings out
Advance, Quick and Quarterly estimates)
• Economic Growth
-
GDP Growth: indicates how fast a nation is getting richer
(Real Vs. Nominal Growth & WPI)
Issues:
What causes higher GDP growth - Increase in Output:
What causes increase in Output – Increase in productivity & employment:.
What causes increase in productivity – increase in efficiency.
What cause increase in efficiency - enhanced/effective technology & raised skills:
5/3/201702/07/07 What raises investment and skills - Creative people with money;
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How to do that - Help more people to be creative & help them to have access to more money.
Framework of Fund Applications & GDP
CFI
Public Accounts [Art. 266 (2)]
National investment Fund
Savings
Revenue
Capital
Plan
Plan
Non-Plan
Non-Plan
Services on which Funds are applied
Adds to
GDP Growth
+
Fiscal
+
+
Social
Economic
General
=
24
Focusing Expenditure analysis on …
•
Macroeconomic framework*
–
•
Fiscal framework for budgeting
–
•
Revenue, Expenditure & Borrowing and basis for assumptions
Fiscal Objective of Budget Making$
–
•
Growth objective of Budget making
Optimal budgeting, net worth
Balancing exercise@
–
Revenue balance, Fiscal balance, Primary balance
–
Golden Rule (exception to balancing exercise)
•
Legal framework
•
Parliamentary Accountability
The cause-and-effect:
*
A higher economic (GDP) growth yields higher tax revenue growth:
$ Higher tax revenues yield greater fiscal flexibility for accomplishing government's fundamental tasks:
5/3/201702/07/07
@
A low level of debt liability increases net worth of government; takes less and leaves more with people
eg: low taxes, early debt redemption
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... A Framework to Analyse Expenditure
• Policy framework
–
Economic/Growth policy viz., plan, non-plan
–
Fiscal policy viz., revenue, expenditure, borrowing
• Institutional framework
–
Finance Commission, Planning Commission, Line Ministries, RBI
–
Centre Vs. States resources
• Legal framework
–
Tax law, Debt law, FRBM law, Accounting Rules, Spending Rules (GFR)
• Accounting framework
–
Heads of Accounts, Surrender of savings, re-appropriation, provisional, final, actual, audited
numbers
5/3/201702/07/07
Issues: How to leverage the framework to influence for ‘right’, ‘more’ & ‘better’ spending
Budget & Debt Management
for deficit financing
• Objectives
– Minimize costs and risks in long & medium term
– Develop/ maintain efficient market for government securities
– Enlarge savings options
• Process
– Preference to domestic debt (that finances about 90% of deficit)
– ‘No debt’ from external commercial sources
–
–
–
–
Increasing reliance on marketable debt instruments
Elongation of maturity of government securities
Average tenor in 2005-06 is 15 years, longest tenor 30 years
Institutional and administrative reforms to make debt market modern and deeper
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