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Presented by
Dr. Tarun Das
Professor, IILM
Budgeting-Basic Concepts 1
Contents
1. Plan-Budget Interface
2. Constitutional Provisions
3. Budget Formulation and
Presentation
4. Various Funds
5. Budget Documents
6. Basic Concepts
7. Different Concepts of deficits
8. Audit and Accounting
Budgeting-Basic Concepts 2
1.1 Plan-Budget Interface
Fiscal Federalism- Centre, States and Local
Governments
Union List, State List and Concurrent List
Five-Year Plan and Annual Plans
Devolution of Resources from Centre to
states and CPSEs, and from states to local
bodies and SPSEs.
Budgeting-Basic Concepts 3
1.2 Channels of Central
budgetary support
(a) Finance Commission-constituted every
five years u/a 280 of the Constitution to make
vertical and horizontal sharing of taxes &
duties. Also recommends grants in aid to the
States u/a 275(1). Recently, govt has
accepted recommendations of the Twelfth
Finance Commission.
(b) Planning Commission- modified Gadgil
formula
(c )Finance Ministry-u/a 275 (1)
Budgeting-Basic Concepts 4
2.1 Constitutional Provisions
Budgeting-Basic Concepts 5
2.2 Constitutional Provisions
(d) Article 115: provides for supplementary
grants in case of expenditure overruns.
(e) Article 116: Provides for Vote on
Account.
(f) Article 117: A money bill as specified u/a
110 shall not be introduced or moved
except on the specific recommendation by
the President.
(g) Article 265: No tax shall be levied or
collected except by authority of law.
Budgeting-Basic Concepts 6
3.1 Budget Preparation
1. Preparation starts from October
2. Ministries send initial BEs.
3. Current year RE, next year BE and plan
outlay fixed in December
4. Finance Minister holds pre-budget
meetings in January
5. Tax proposals given final shape by
third week of February
6. Budget placed in Parliament on the last
working day of February
Budgeting-Basic Concepts 7
3.2 Passing of Budget
1. General Budget is debated in both
houses of Parliament in March
2. Vote on Account by end of March
3. Demands for Grants are examined by
various Standing Committees of
Parliament in April
4. Demands for grants are debated and
passed in April-May
5. Finance Bill passed in May
6. After President’s signature, it becomes
Finance Act in June
Budgeting-Basic Concepts 8
4. Different Funds and
Accounts
(a) Consolidated Fund of India- All receipts of the
govt automatically accrue to this Fund. All
expenditures are incurred from it with prior
approval of the Parliament.
(b) Public Fund and Accounts- provident/
pension/insurance funds, reserves, small saving.
Govt is the custodian and not the owner of these
funds. Govt acts like a banker.
(c) Contingency Fund with the president
(d) Sectoral Funds (sugar development fund, oil
development fund), Cess (for education, road
construction, national calamity etc.)
Budgeting-Basic Concepts 9
5.1 Budget Documents
1. Key to Budget Documents
2. Budget at a Glance
3. Annual Financial Statement
4. Revenue Budget
5. Capital Budget
6. Charged on and voted expenditure
7. Demands for Grants
8. Vote on Account
9. Appropriation Bills
10. Finance Bill/ Finance Act
11. Economic Survey
Budgeting-Basic Concepts 10
5.2 Public Finance Statistics
1. Ministry of Finance
b) Budget Documents
c) Economic Survey
d) Public Finance Album
e) Economic and Functional Classification
of the Central Government Budget
f) External Assistance
g) Report on External Debt
2. Reserve bank of India
a) Report on State Finances
3. International Monetary Fund
a) Government Finance Statistics (GFS)
Budgeting-Basic Concepts 11
6.1 Basic Concepts
1. Budget is the account of govt
revenues and govt expenditure, and
govt receipts and govt payments.
2. Receipts and Revenues- All revenues
are receipts, but all receipts are not
revenues. Receipts are classified as
revenue receipts and capital receipts.
• Revenue receipts consist of those
receipts which do not have obligations
for repayments such as taxes and
duties, interest earnings, rents,
dividends, profits, grants etc.
Budgeting-Basic Concepts 12
6.2 Basic Concepts
• Capital receipts consist of loans from
domestic and foreign sources and have
attendant obligations of amortization and
interest payments.
3. Expenditures and payments- Similarly, all
expenditures are payments, but all
payments are not expenditure. Repayments
of loans are not expenditure.
4. Requited and unrequited transactions-
Requited transactions are those in which
money is paid or received in exchange of
goods or services. But, transfers and grants
are unrequited expenditure as nothing is
received in return of money.
Budgeting-Basic Concepts 13
6.3 Basic Concepts
1. Budget is account of government
receipts and government expenditure
2. Both Receipts and Expenditure have
two accounts- Revenue and Capital.
3. Revenue Account is the current
account and is closed within a year.
But capital account is not normally
closed within a year and continues for
a number of years until all obligations
are met by the govt.
4. Govt has no obligations to anybody for
revenue receipts. But, govt has
obligations for capital receipts.
Budgeting-Basic Concepts 14
6.4 Basic Concepts
5. Like receipts, expenditure has also two
accounts- revenue and capital.
Revenue expenditures relate to current
expenditure such as wages and salaries,
maintenance, subsidies, grants, interest
payments. These expenditures do not lead to
asset creation or value addition, while capital
expenditures (such as expenditures on plant,
machinery, land, property etc.) lead to asset
creation.
Budgeting-Basic Concepts 15
6.5 Basic Concepts
6. Plan and non-plan expenditure- If any project
or program is approved by the Planning
Commission as a part of the National Five Year
Plan or Annual Plan, expenditure for that
project or program is called Plan Expenditure
and all other expenditures are classified as
Non-Plan Expenditures.
7. Developmental and non-developmental-
Internationally, expenditures are classified as
Developmental and Non-Developmental
Expenditures. Any expenditure which leads to
higher production and economic development
is called developmental expenditure, all others
are classified as Non-Developmental
expenditures.
Budgeting-Basic Concepts 16
6.6 Classification of
There is noExpenditure
one-to-one correspondence
among these classifications.
Cross-Classification of expenditure in
Budget 2006-07 (Rupees billion)
Budgeting-Basic Concepts 17
6.7 Classification of Expenditure
(a) Interest payments- Revenue, non-plan, non-
developmental exp
(b) Food subsidy- Revenue, non-plan, non-
developmental expenditure
(c) Fertiliser subsidy- Revenue, non-plan,
developmental expenditure
(d) Construction of national highways- Capital,
plan, developmental expenditure
(e) Construction of border roads- Capital, plan,
non-developmental expenditure
Budgeting-Basic Concepts 18
6.8 Classification of Expenditure
Budgeting-Basic Concepts 19
6.9. Classification of Receipts
1. Revenue and capital receipts
2.Revenue receipts- Taxes and Non-taxes
Taxes- Direct (personal income, corporate
income, dividends tax) and indirect
(customs, excise, services tax)
Non-taxes- Interest receipts, profits,
dividends, fees, service charges, grants
3. Capital receipts include recovery of loans,
disinvestment of government equity,
market and other borrowings, public funds
4. Non-debt creating receipts include
revenue receipts, recovery of loans and
disinvestment of govt equity.
Budgeting-Basic Concepts 20
7.1 Different Concepts of
Deficits
Revenue deficit= Revenue expenditure
less revenue receipts
Capital deficit= Capital expenditure less
capital receipts
Budget deficit= Total expenditure less total
receipts= Revenue deficit +Capital deficit
Gross Fiscal Deficit= Total expenditure less
Non-Debt receipts= Total Expenditure less
(Revenue receipts+recovery of loans+
disinvestment of govt equity)
Gross Primary deficit= Gross Fiscal Deficit
less interest payments
Budgeting-Basic Concepts 21
7.2 Different Concepts of
Deficits
Net Fiscal Deficit= Gross Fiscal Deficit
less Net Lending
Net Primary Deficit= Net Fiscal Deficit
less Net Interest Payments
Net Lending = Loans given by the
central govt to the States and PSUs less
recoveries of past loans from them
Net Interest Payments = Interest
payments less interest receipts
Net RBI Credit to the central govt =
RBI’s holdings of Treasury Bills, govt of
India dated securities, rupee coins, and
loans and advances taken from RBI.
Budgeting-Basic Concepts 22
7.3 Budget 2006-07 at a glance
Items Rs. Billion
Budgeting-Basic Concepts 25
7.6 Medium Term Fiscal
Indicators
Items 2005- 2006- 2007- 2008-
06 RE 07 BE 08 Tar 09 Tar
Budgeting-Basic Concepts 27
9.1 Review Questions
1. Write short notes on:
(a) Revenue expenditure and capital
expenditure
(b) Revenue receipts and capital receipts
(c) Requited and unrequited expenditure
(d) Vote on Account, Appropriation Bill and
Finance Bill
(e) Consolidated Fund, Public Funds and
Sectoral Funds
(f) Revenue Deficit, Gross Fiscal Deficit
and Net Fiscal Deficit
(g) Gross Primary Deficit and Net Primary
Deficit
Budgeting-Basic Concepts 28
9.2 Review Questions
2. Without any explanation, classify the following
expenditures under revenue and capital
expenditure, plan and non-plan expenditure,
developmental and non-developmental
expenditure:
(a) Interest payments
(b) Food subsidy
(c) Fertilizer subsidy
(d) Construction of nation highways
(e) Construction of border roads
(f) Salary of staff of a National University
(g) Salary of staff of a National University under
construction
(h) Construction of a government school
(i) Grants to a private school
Budgeting-Basic Concepts 29
9.3 Central Govt Budget (Rs.
Billion)
Items 2005-06RE 2006-07
Budgeting-Basic Concepts 31
Answer to Question 9.3
Items 2005-06 2006-07
Budgeting-Basic Concepts 35