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04/11/2302/07/07 1
Dept. of Economic AffairsMinistry of Finance
Union Budget Process Union Budget Process
An introduction
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.”
04/11/23 4
04/11/2302/07/07 5
Non Tax
Revenue
Grants/Donor support
MarketBorrowings
Other Other ReceiptsReceipts
Tax Revenue
CFICFI P
S
U
S
PLAN
NNOONN
PPLLAANN
RREEVVEENNUUEE
CAPITAL 2
34
FourFour*ServicesServices
1
Application of Funds
States
Depts.,
citizen
Budget && the Citizenthe Citizen
a
b
c
d
ef
g
**Economic Services Fiscal Services Social Services & Other General Services
Railway budget is separate, but Constitutionally, Railway receipts are part of CFI Not on Constitutional
strength
but by practice
Taxes,
Fee &
Saving
s,
Interest receipts
Loan repayment
Consolidated Fund Of India
6
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!
Aligning between DDG and Outcome Budget of the Ministry.
7
Budget & the Constitution
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 … 282
• Laws/Rules for Custody, etc., of Consolidated Funds,
Contingency Funds and moneys credited to the
public accounts … … … 283
• Borrowing by the Government of India … 292
AFS- Anchor to all documents: Art 112 Trigger to All Documents
*Annual Financial Statement
8
Budget Documents in the context of CFI
• 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)
Constitutional mandate in Article. 266
Explore relevance of A,B & C to Fiscal BalanceRelate of A, B, & C to various Documents/ statements
9
…a stylized peep into the Budget
• 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***
((excluding charged estimates)excluding charged estimates)
*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
04/11/2302/07/07 10
Budget & Accounts Protocol
– Accounts Management
– Expenditure tracking (Monthly)
– Finance A/Cs presentation to Parliament through MoF
– Quarterly FRBM Statements
Controller General of Accounts
Issues: Periodicity of Accounts; Time lag and aligning Provisional, Provisional Actual A/cs, Flash figures, Actual/Audited A/cs
CAG’s Audit Reports
on Finance
Accounts for the
year T-1
11
Budget Format
• Receipts– Revenue receipts
• Tax• Non-tax
– Non-Debt Capital• Loan repayments
• Disinvestment (till 2006)
• Debt
• Expenditure– Charged (discussion
only)/ Voted (discussion & voting)
– Capital/Revenue
– Plan*/Non-Plan
* Developmental expenditure within the framework of 5-Year Plans
Issues: Source and logic of the inputs influencing these entries
04/11/2302/07/07 12
Budget Making
• Expenditure Dept. of Expenditure
• Revenue– Non-Tax Dept. of Economic Affairs
– Tax Dept. of Revenue
• Deficit Dept. of Economic Affairs
for its Control* & financing**
– Fiscal, – Revenue &– Primary Deficits
*FRBM Legislation** Reserve Bank Coordination (Costs, price, instruments, scheduling)
What Who
04/11/2302/07/07 13
Budget: Annual preparations
• Extensive consultations involving
– line ministries DoE– other stake holders: DEA & DoR farmers, labour unions, business, FIs, economists & other civil society groups
• Intense internal assessment about
– spending priorities DEA– revenue mobilization DoR– aligning with policy goals DEA
Start in Sept. with issue of Budget Circular
Issues: Coordination between line Departments, Planning Commission & CGA Aligning expenditure, physical progress and capacity to absorb as also compliance to legal ceilings
DEA: Dept. of Economic Affairs. DoE: Dept. of Expenditure. DoR: Dept. of Revenue
Triggers -Target time - Goals
Budget Circular - 29- 29thth February - FRBM Act - Annual Plans 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
9 Fiscal Policy/ Strategy/GDP for ensuing year
MoF FRBM Statements
15
Core Budget Documents = 13+
1. Key to Budget Documents
2. Annual Financial Statement
3. Budget at a Glance
4. Budget Speech
5. Budget Highlights 6. Action Taken on Budget
Announcements
7. Receipts Budget
8. Finance Bill• Customs & Excise
Notifications
Presented by MoF and line Ministries
9. Explanatory Memorandum
10. Appropriation Bill
11. Demands for Grants • Exp. Budget Vol-1• Exp. Budget Vol-2
12. FRBM Statements• 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 mandatedWhite : supporting documents: * of respective ministries
04/11/2302/07/07 16
Few more Documents
• Economic Survey
• Supplementary Demand for Grants
• Finance Accounts
• FRBM Statements– Q4 of Year T-1– Q3 of Year T
• Outcome Budgets
• Annual Reports
• 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
Related* Relevant*
Discuss: *How & why to relate ? * How & when to look for relevance ?
04/11/2302/07/07 17
13+Budget Documents
• 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
…a framework to understand
Issues: Classification: Reconciling the Provisional: Provisional Actual: & Actual
04/11/2302/07/07 18
Together – the Budget Documents…
… 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 ?
…reveal Government resources flow & ...
Would you like to try few more questions ?
04/11/2302/07/07 19
Budget Making
Budget Management
Budget Review
FRBM Framework
F R B M ActF R B M Act
•(a) limits on Fiscal & Revenue Balance, debt & guarantees, •(b) Disclosures, (c) H1 performance indicators, (d) Transparency
A c c o u n t a b I l I t y*Disclosures
Legal Frame work
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.
Constitution, FRBM Act, Public Debt Act, etc.,
IndiaIndia’’s FRBM Act s FRBM Act –– Managing The Mandate Managing The Mandate
FRBM Goals
• Reduce by
>0.5% of GDP
• Reduce by >0.3% of GDP
• Assume < 0.5% GDP
• Reduce to “zero” by 2008-09 & build surplus later
• Reduce to 3% of GDP by 2008-09
Revenue Deficit
Fiscal Deficit
Contingent liabilities
Annual Medium Term
Fiscal Performance
: 22
Source: Budget at a glance 2007-08
04/11/2302/07/07 23
GDP & Fiscal Indicators
• GDP: Gross Domestic Product– indicates annual national wealth production (value
added at every stage of production of goods & services: 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: What raises investment and skills - Creative people with money;
How to do that - Help more people to be creative & help them to have access to more money.(Note: The above slide and issues are framed using publicly available sources)
Y=C+I+G+(X-M)
24
Framework of Fund Applications & GDP
+ + +
CFI
Revenue Capital
Plan
Non-Plan
Plan
Non-Plan
Public Accounts [Art. 266 (2)]
National investment Fund
EconomicSocialFiscal
Services on which Funds are applied
General
Ad
ds
to
GD
P G
row
thS
avin
gs
Po
ve
rty
Red
uc
tion
&
Partia
l
Imp
ac
t
=
04/11/2302/07/07 25
Focusing Expenditure analysis on …
• Macroeconomic framework*– Growth objective of Budget making
• Fiscal framework for budgeting– Revenue, Expenditure & Borrowing and basis for assumptions
• Fiscal 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 AccountabilityThe 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:
@ A low level of debt liability increases net worth of government; takes less and leaves more with people eg: low taxes, early debt redemption
04/11/2302/07/07
... 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
Issues: How to leverage the framework to influence for ‘right’, ‘more’ & ‘better’ spending
04/11/2302/07/07 27
Budget & Debt Management
• 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
for deficit financing