Chapters :

Public Finance - 01

Public finance is the study of the financial activities of governments and public authorities. It describes and analyses the expenditures of governments and the techniques used by governments to finance these expenditures. Public finance analysis helps us to understand why certain services have come to be supplied by government, and why governments have come to rely on particular types of taxes.

Fiscal policy aims at using its three major instruments – taxes, spending and borrowing – as balancing factors in the development of the economy. Fiscal policy is a policy under which government uses its expenditure and revenue programme to produce desirable effects and avoid undesirable effects on the national income, production and employment.

Fiscal policy deals not only with the quantity but the quality of the public finance as well. Fiscal policy can achieve important public policy goals like growth, equity, promotion of small scale industries, encouragement to agriculture, export promotion, development of sound social and physical infrastructure etc.

BUDGET

Evolution of Budgeting

Budgeting is the process of estimating the availability of resources and then allocating them to various activities of an organization according to a pre-determined priority.

The Constitution of India has a provision (Art. 112) for such a document
called Annual Financial Statement to be presented in the Parliament before
the commencement of every new fiscal year—popular as the Union Budget. 

The union budget has two purposes:

  1. To finance the activities of the union government
  2. To achieve macroeconomic

Annual Financial Statement (AFS) provided under Article 112 shows estimated receipts and expenditure of the Government of India for the following year, estimates as well as revised estimates for the current year as also expenditure for the previous year.

  • The receipts and disbursements are shown under the three parts, in which

Government Accounts are kept viz. (i) Consolidated Fund (ii) Contingency Fund and

(iii) Public Account.

  • Government Budget, therefore, comprises Revenue Budget and Capital Budget.

The elected representatives of the people in the parliament are the authority to disburse the funds needed for the government to use it for fiscal policy, taxation, allocation for schemes and state governments etc.  The mechanism to allocate funds is undertaken by the budgeting process and the reserves of the government treasury are discussed below.

Consolidated Fund of India

According to Article 266 (1) of the Indian constitution, all revenues and loans raised by the issue of treasury bills, internal as well as external loans and all credits received by the Union Government in repayment of loans shall form a consolidated fund authorized the ‘Consolidated Fund of India’ for the Union Government.

All legitimately sanctioned payments on the behalf of GOI are made from this fund. No money can be spent from this fund except by way of grants that the Parliament makes.

Public Account of India

Public Account is constituted under Article 266 (2) of the Constitution of India. The receipts under Public Account do not constitute ordinary receipts of Government. Parliamentary approval for expenses from the Public Account is in this way not required. Government schemes Fund, National Investment fund, National Calamity and contingency fund, defence fund, Postal insurance, National small savings fund, provident fund form part of Public Accounts, etc.

Contingency Funds of India

According to the Article 267(I) of the Indian constitution is in the nature of an impress (money preserved for a specific purpose) which is placed at the President’s disposal to enable him/her to make advances to meet emergency unexpected expenditure, pending approval by the Parliament. It is functioned by Finance secretary.

However, authorization of parliament is needed to recharge this fund from the consolidated fund. Each state in India has their own consolidated and contingency funds.

Budget process

The budget is prepared by the Finance Minister with the assistance of number of advisors and bureaucrats. Various accounting and finance related organisations send in their opinions and suggestions .The budgeting exercise in India remains mainly the domain of bureaucrats to participate and influence the outcomes.

Normally, the budget-making process starts in the third quarter of the financial year. The budget has four stages viz.

(1) estimates of expenditures and revenue

(2) First estimate of deficit

(3) Narrowing of deficit and

(4) Presentation and approval of budget.

Budget documents

The Union Budget comprises various documents. The first one is the speech of the Finance Ministry, which he reads in the Lok Sabha. The Budget speech provides the direction in which the government wishes to move in the coming financial year, the growth targets and the major thrust areas. The Finance Minister spells the broad tax policy measures in his speech. The speech lists the problems being faced by the country on the economic front and indicates the government’s response to them. The speech also includes various expenditures and tax proposals.

The other important documents are:

Key to Budget: This document provides an understanding of the budget documents

Budget Highlights: This statement gives the key features of the budget

Annual Financial Statement: Annual Financial statement is the main document. This statement shows the receipts and payments of the government under the three parts in which government accounts are kept.

Consolidated Fund- Resources raised by the government through taxes, loans, dividends from PSUs and banks form the Consolidated Fund.

Contingency Fund- It is imprest at the government’s disposal to meet unforeseen expenditure.

Public Account- The amount collected by the government acting as a banker .e.g. PF, small savings collections.

Finance Bill: The Finance Bill includes the tax proposals and the tax rates .It provided the fine print of the budget

Memorandum: Explanatory Memorandum provides a quick overview of tax provisions contained in the Finance Bill.

Budget at a Glance: 

Budget at a Glance provides an overview of government finances. It’s more like a balance-sheet of the Union. It gives a broad break up of tax revenues, other receipts, expenditure-plan and no-plan allocation of outlays by ministries and resource transfer to states and Union Territories. Progress towards implementation of Budget proposals announced in previous years are listed in the Implementation Budget

Expenditure Budget: Expenditure Budget Volume I and II explain the provisions made. While Volume I explains the provisions ministry-wise, Volume II analyses expenditure trend over the years with regard to Plan and non-Plan expenditure.

Receipts Budget: Receipts Budget gives details of revenue receipts and capital receipts and explains the estimates so as to make them intelligible to an ordinary citizen. It also include trend of receipts over the years and details of external assistance

Customs & Central Excise: This document gives the customs and excise notifications

Implementation of Budget Announcements:  This contains status of implementation on initiatives announced by the Finance Minister in the Budget Speech

The documents mandated by the FRBM Act (2003)

Macro-Economic Framework Statement: The Macro-economic Framework Statement, as enjoined by the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act), contains an assessment of the growth prospects of the economy with specific underlying assumptions. It contains assessment regarding the GDP growth rate, fiscal balance of the Central Government and the external sector balance of the economy.

Medium Term Fiscal Policy Statement: The Medium-term Fiscal Policy Statement, as enjoined by the FRBM Act sets forth a three year rolling target for specific fiscal indicators along with underlying assumptions. The statement includes an assessment of sustainability relating to balance between revenue receipts and revenue expenditure and the use of capital receipts including market borrowings for generation of productive assets.

Fiscal Policy Strategy Statement: The Fiscal Policy Strategy Statement, as enjoined by the FRBM Act, contains the policies of the Central Government for the ensuing financial year relating to taxation, expenditure, lending and investments, administered pricing, borrowings and guarantees. It outlines the strategic priorities of the Government in the fiscal area, how the current policies are in conformity with sound fiscal management principles and rationale for any major deviation in key fiscal measures.

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