Union Budget: understanding its formulation and implications

(Source – The Hindu, International Edition – Page No. – 11)

Topic: GS3 – Indian Economy – Government Budgeting

Context

The Union Budget outlines the government’s financial plans, including expenditure, revenue, and deficit targets. This article discusses how the Union budget impacts economic growth, income distribution, and fiscal policies.

Overview of the Union Budget

• The Union Budget is a financial plan presented by the Finance Minister.
• It includes details about the government’s spending, taxes, and economic activities.
• The main components are expenditure, receipts, and deficit indicators.

Expenditure in the Budget

• Expenditure is divided into two types:
  • Capital Expenditure: Spending on creating long-lasting assets like new schools and hospitals.
  • Revenue Expenditure: Spending that doesn’t create assets, like salaries, subsidies, and interest payments.
• Expenditure is further classified into:
  • General Services: Basic services like administration.
  • Economic Services: Spending on infrastructure, rural development, and agriculture.
  • Social Services: Expenditure on education, healthcare, and welfare programs.
  • Grants-in-aid: Money given to other bodies or sectors.
• Development expenditure includes spending on economic and social services and is classified as capital or revenue.

Government Receipts

• Receipts are the government’s earnings, classified into:
  • Revenue Receipts: Earnings from taxes and non-tax sources that don’t add to liabilities.
  • Non-debt Capital Receipts: Earnings like loan recoveries or proceeds from selling assets, which don’t create debt.
  • Debt-creating Capital Receipts: Earnings from loans or borrowings that increase government liabilities.

Deficits in the Budget

• Fiscal Deficit: Difference between total expenditure and receipts. It shows how much the government borrows.
• Primary Deficit: Fiscal deficit minus interest payments.
• Revenue Deficit: Fiscal deficit minus capital expenditure.

Impacts of the Budget on the Economy

• Government expenditure creates demand in the economy.
• Taxes and other revenues reduce income in the private sector, leading to reduced demand.
• To analyze the budget, we look at trends in expenditure and revenue in relation to GDP.

Income Distribution

• The Budget affects different income groups in different ways.
• Welfare schemes like subsidies help the poor, while tax reductions benefit businesses.
• Although these decisions increase the fiscal deficit, they have distinct effects on income distribution.

Fiscal Rules

• Fiscal rules set targets for managing government debt and deficits.
• In India, these rules are based on the N.K. Singh Committee recommendations.
• Fiscal rules help guide government expenditure and tax policies. 

Practice Question:  Examine the major components of the Union Budget and discuss its implications on economic growth, income distribution, and fiscal policy in India. (250 Words /15 marks)

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