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Blog / 01 Feb 2020

(Daily News Scan - DNS English) Decoding Budget

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(Daily News Scan - DNS English) Decoding Budget


Very soon, on 1ST Feb, the Union Budget will be presented for the upcoming financial year 2020-21. The budget will be presented by the Finance Minister Nirmala Sitharaman. Preparing the budget is not an easy task. It takes a lot of time and efforts of various departments of the government for several months to come up with a budget. The Union Budget is not just a statement of accounts but a charter of the government’s economic policies. Before, the budget is presented amongst us all, let us know about the budget, its procedures and find the answers to all the questions related to the budget.

First let us understand what is a budget?

The budget is a financial plan or an estimate set by the Union government for the next financial year. Basically it is an exercise, determining how far the government can exceed its expenditure over its revenues, given that the government is required to meet a fiscal deficit target that is provided by the Fiscal Responsibility and Budget Management Act (FRBM) Act.

Fiscal deficit is the level of borrowing that a government does in a year. The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. Targets for the fiscal deficit are set depending on percentage of nominal GDP. This means if the nominal GDP is higher, the government can borrow more money from the market to fund its expenditure. The nominal GDP is nothing but the value of all goods and services produced in the country at current market prices.

The General Budget has two major parts: Revenue and Expenditure. Assessing the revenues from different central taxes is the primary function of the Department of Revenue and the expenditure estimates for the current and the next year for various expenditure heads are assessed by the Department of Expenditure. The Department of Expenditure also assesses the resources of the Public Sector Undertakings (PSUs).

Let us now know the key steps of budget making.

The first step is - The Finance Ministry has to first ascertain the nominal GDP of the current financial year.

Second step - Then it has to take this number and project the likely nominal GDP for the coming year.

Third step - Given the nominal GDP, the government can look at the FRBM Act target and figure out the absolute level of fiscal deficit (or borrowings or the difference between the expenditure and revenues) that it can have.

Fourth step - After having a sense of how the overall economy will do in the coming year, the next logical step for a government making the Budget is to figure out how much money would it get in terms of revenues.

Fifth step - By now, the government knows what its revenues are likely to be and maximum allowable fiscal deficit. Now it is the turn of determining the level of expenditure. The idea is to contain the level of total expenditure in such a matter that fiscal deficit is not breached.

Sixth step - Once the government has the fix on the total expenditure, it can go about allocating the absolute amount of money it intends to spend on different schemes.

The Finance Secretary coordinates overall budget making process. All of them keep the Finance Minister informed and seek directions from time to time. The Chief Economic Advisor assists the concerned departmental officer in this process. A large number of officials and support staff of the finance ministry, who are directly associated with the budget making and printing process, have to remain out of touch from the outside world. This is done to ensure complete secrecy and prevent leakages before the budget presentation.