Union Budget of India: What it is and why it is so important

Business Standard explains the importance of Union Budget of India and the whole process of its making and passing in Parliament

In a federal country like ours, the constitution of India demarcates the governance structure through a three-tier system – the Union government, state governments, and local governments. In the scheme of distribution of power among them, the central or Union government enjoys the highest position. 

Under Article 112 of the Constitution of India, the central government is constitutionally bound to lay down the ‘annual financial report’ of the country. This report is commonly known as the Union Budget of India.

The Union Budget holds the same character as the budgets of other levels of government, except in the source of revenue and expenditure.

The Union Budget comprises the most extensive account of the Indian government, and it can be considered the statement of the government’s income and expenditure. Presented in Parliament every year, the Budget document details how much money the Union government expects to raise in the coming financial year, and how and where it intends to spend that money.

The Union budget gives the statement of receipts and expenditure of three consecutive years: 

1) Actuals for the preceding year

2) Estimates for the present year

3) Estimates for the coming year

The Union Budget also includes the Finance Bill and Appropriation Bill, both of which are to be passed by both Houses of Parliament before implementation on April 1 of the new financial year.

Union Budget is usually presented in Parliament on the last working day of February by the Finance Minister of India and it comes into effect a little more than a month later from April 1. 

However, for the first time, the Union Budget for the 2017-18 financial year was presented on the first working day of February by Finance Minister Arun Jaitley. 

UNION BUDGET HISTORY

R K Shanmukham Chetty was the first finance minister of India to present a Union Budget after the country’s Independence. He presented the Jawaharlal Nehru-led central government’s Budget on November 26, 1947, for the time up to March 31, 1948. That Budget had estimated the government’s total revenues at Rs 171.15 crore and fiscal deficit at Rs 24.59 crore.

When Indira Gandhi, the then prime minister who also held the finance portfolio, rose to present her government’s Budget in 1970, she became the first woman finance minister of India to present a Budget in Parliament.

In 2001, Yashwant Sinha, the erstwhile finance minister in the National Democratic Alliance (NDA) government led by Atal Bihari Vajpayee of the Bharatiya Janata Party (BJP), broke the colonial practice of announcing the Union Budget at 5 in the evening. Instead, he delivered his Budget speech at 11 am on the last working day of February.

Former prime minister of India Morarji Desai, who presented 10 Union Budgets in his role as finance minister, is crediting with presenting the highest number of Union Budgets in the history of Independent India. 

The Budget presented by Finance Minister Arun Jaitley for the financial year 2017-18 was unprecedented in that, for the first time ever, a Railway Budget was not presented separately. This practice was discontinued and both Union Budget and Railway Budget were merged and presented together. 

Business Standard coverage of the past five Union Budgets

Budget 2018 

Budget 2017

Budget 2016

Budget 2015

Budget 2014

NEED FOR A UNION BUDGET

In a parliamentary democracy like India, where the Constitution is the supreme document with defined roles for the government to function effectively, it is imperative for the government to work for the welfare of the state and its citizens. 

The government holds manifold power in running a country – from law and order to protecting the national security, enhancing the economic stability and fostering social reforms.

To discharge these functions effectively and upgrade the country’s economic and social structure, the government requires adequate resources.

In India, the government cannot borrow, tax or spend money arbitrarily. A prudent planning and budgeting is required to allocate the limited resources so that they can be employed effectively and the economy can flourish. Besides, proper earning is a prerequisite to be able to allocate resources in the best interest of the country. These factors make a properly planned Union Budget necessary, besides, of the course, the fact that Article 112 of the Constitution of India madates that the central government bring out an annual financial report. 

Here are some key objectives that explain the need for a Union Budget:

Reallocation of resources: One of the most important factors that makes a Union Budget the need for a society is that it helps in reallocating resources for the government’s profit maximisation to push public welfare.

Reducing inequality in society: Economic inequality is inherent in any society. It is through budgetary policies that the government tries to bridge the economic gap in the society. For instance, higher tax income from the rich and more welfare schemes for the poor help reduce social inequality in the society.

Controlling prices: The Budget also absorbs economic fluctuations in the society. A well-drafted Budget foresees and handles inflation and deflation, thus preventing an economic stability in the country. Policies of surplus Budget during inflation and deficit budget during deflation helps maintain stability of prices in the economy.

Resource management: Budget manages the demand for public enterprises which directly connects with public interest. The Union Budget also helps manage the effective and efficient use of economic resources.

HOW BUDGET IS MADE AND PASSED

The department of economic affair under the Ministry of Finance is the nodal agency responsible for producing the Union Budget.

Budget is made through a consultative process involving the finance ministry, the NITI Aayog, and the various spending ministries.

According to Article 112, The President of India is responsible of presenting Budget in the Lok Sabha. However, Article 77 (3) says the union Finance Minister of India has been made responsible by the President of India to prepare the annual financial statement and present it in Parliament.

Budget formulation:

In the last week of August or the first fortnight of September every year, the Budget division in the department of economic affairs issues a circular to all the Union ministries, state ministries, Union Territories, autonomous bodies and defence bodies, for preparing the estimates for the next year.

Once the ministries and departments give their demands, a consultation among the Union ministries and the department of expenditure of the finance ministry takes place.

Concurrently, the department of revenue and the department of economic affairs of the finance ministry hold meetings with stakeholders, farmers, economists, civil society groups and businessmen to take their views. The revenue-earning ministries provide the estimate for their revenue receipts of the current financial year (revised estimates) and next financial year (Budget Estimates) to the finance ministry.

The ministries are required to provide three different kinds of figures related to their expenditure and receipt during the process of Budget representation – Budget Estimates, Revised Estimates, and Actuals.

In the final stage, the Budget division consolidates all these figures to be presented in the Budget and prepares the final Budget document.

The printing of Budget documents begins a week before the Budget presentation in Parliament. Given the confidentiality of information, the employees involved in creating the Budget stay back in North Block, where the finance ministry is situated, for the whole time until the Budget presentation. 

At the end of this process, the finance minister takes the permission of the President of India for presenting the Union Budget in Parliament.

BUDGET PRESENTATION IN PARLIAMENT

The Union Budget is presented in Parliament on a date that is fixed by the President. First, the Finance Minister of India delivers the Budget speech in the Lok Sabha. The speech has two parts – Part 1 comprises general economic affairs of the country and Part 2 relates to taxation proposals.

The ‘annual financial statement’ is laid on the table of the Rajya Sabha, or the Upper House of Parliament, after the finance minister concludes his speech in the Lok Sabha.

No discussion takes place on the day the Budget is presented. The Budget documents are made available to the Members of Parliament, after the Finance Bill has been introduced in the Lok Sabha.

HOW THE BUDGET IS PASSED

The general discussion on the Budget takes place a day after the Budget is presented in Parliament. Budget debate is split into two parts:

General Discussion: It happens for days in the Lok Sabha. The finance minister participates in the debate and in the end answers all the queries related to the Budget. After the general discussion is over, the House is adjourned for a fixed period.

Detailed Discussion: During the fixed gap period, the related standing committees scrutinise the different estimates of the proposed expenditure by the different ministries. After the standing committees submit their report, the Lok Sabha votes on the demands for grants.

The Rajya Sabha can only discuss these demands for grants but not vote.

On the last day of the discussion on demands for grants, the Speaker puts all the outstanding Demands of Grants to the vote in the House.

The demand for ‘Grants Appropriation Bill’ is put to vote in the Lok Sabha. It gives power to the government to spend from the consolidated fund of India. This is also required to be passed by both Houses of Parliament and receive assent of the President within 75 days of its introduction.

The Finance Bill is also introduced in the Lok Sabha after the general Budget. The Finance Bill contains fresh taxation proposals and variations in the existing duties. The Finance Bill is only taken into consideration only after the Appropriation Bill is passed.

List of documents required in Parliament before budget speech:

Explanatory memorandum, explaining the nature of receipts and expenditure by the government, during the current demand for grants (ministry-wise). Other documents required are: 

· Budget speech

· Budget at a glance

· Custom and central excise notification

· Receipt budget

· Expenditure budget

· Finance Bill

· Memorandum explaining the Finance Bill

· FRBM Act-related documents

· Macroeconomic framework statement

· Medium-term fiscal policy statement

· Fiscal policy strategy statement

· Statement of revenue foregone

· Implementation of Budget announcement.