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What is Budget?


A budget is an estimation of the revenue and expenses over a specified future period of time. The government publishes annual budget which is being prepared for the coming financial year. In this budget, receipts that are expected to arise and expenses that are expected to be incurred are mentioned.

Financial year refers to a year as reckoned for taxing or accounting purposes. In India, financial year starts on 1 April and ends on 31 March.

Budget consists of three set of figures:

  1. Actual data: Actual data are of the preceding year’s economic activity (expenditure and receipts). For instance, the budget presented on 1 February 2017 would contain actual figures for the financial year 2015-16.
  2. Provisional estimates: Provisional estimates are the estimates of revenue and expenditure of the current year. These are called provisional estimates as the budget is presented on 1 February. Thus, the actual data are available of 9 months. Based on these actual figures, estimates are made for the remaining period of the year.

For instance, the budget presented on 1 February 2017 would contain provisional estimates for the financial year 2016-17.

  1. Budgetary estimates: Budgetary estimates are the estimates of revenue and expenditure of the coming year. For instance, the budget presented on 1 February 2017 would contain budgetary estimates for the financial year 2017-18.

Estimates are arrived at by one of the following three methods:

  1. Advanced estimates: These estimates are made before the actual occurrence of economic activity.
  2. Revised estimates: Revision in estimates (made earlier) based on changes in the economic scenario or actual occurrence of some economic activity.
  3. Quick estimates: These estimates are based on sample survey. Information gathered from the sample is used to predict the overall economic activity.

Which Government Body  Makes National Income Estimates in India?

Since 1955, the national income estimates have been prepared by the Central Statistical Organisation (CSO). The CSO is a governmental agency in India under the Ministry of Statistics and Programme Implementation.

The CSO is responsible for the coordination of statistical activities in the country and evolving and maintaining statistical standards. Its activities include national income accounting, economic censuses, human development statistics, gender statistics, energy statistics, etc.

How the Budget Is Made?

  • The budget is made through a consultative process involving the Ministry of Finance, NITI Aayog, and spending ministries. The Budget Division of the Department of Economic Affairs in the Ministry of Finance is the nodal body responsible for producing the budget.
  •  The Finance Ministry issues guidelines on spending by various ministries. On the basis of these guidelines, various ministries present their demands. In September, the Budget Division issues a circular to all union ministries, states, union territories, autonomous bodies, departments, and the defence forces for preparing the estimates for the next year.
  • After the ministries and departments send their demands, extensive consultations are held between the union ministries and the Department of Expenditure of the Finance Ministry vq,
  • At the same time, the Department of Economic Affairs and the Department of Revenue meet the various interest groups such as farmers, businesspersons, etc. to take their views.
  • After the pre-budget meetings, a final call on the tax proposals is taken by the Finance Minister. The proposals are discussed with the Prime Minister before the budget is finalized.

Economic Survey

The Finance Ministry of India presents the Economic Survey in the Parliament every year, just before the Union Budget . It is the ministry’s view on the annual economic development of the country.

Economic survey reviews the developments in the Indian economy over the previous 12 months, summarizes the performance on major development programmes, and highlights the policy initiatives of the government and the prospects of the economy in the short to medium term. This document is presented to both the houses of Parliament during the budget session.

The first draft of the economic survey is prepared by the Department of Economic Affairs in the Finance Ministry. Then this draft is cleared by the Chief Economic Advisor and Secretary of Economic Affairs. The final version is scrutinized by the Finance Secretary and Finance Minister. Most of the data are given by CSO.

Zero-base Budgeting

Zero-base budgeting (ZBB) is a method of budgeting in which all the expenses must be justified for each new period. ZBB starts from a “zero base”, and every expenditure by each ministry is analysed for its needs and costs.

ZBB was introduced in India under the Ministry of Science and Technology in 1983 on a pilot basis. However, ZBB could not be implemented on a larger scale because it involves a lot of paper work, is time consuming, and is a costly exercise.

Zero-base Budgeting versus Traditional Budgeting

Traditional budgeting calls for incremental increases over previous budgets, such as a 5% increase in spending, as opposed to the justification of all the expenses required in ZBB.

Traditional budgeting analyses only new expenditures, while ZBB starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures.

Performance Budgeting and Outcome Budgeting

The conventional budget indicates the resources allocated to various ministries but does not focus so much on the use of those resources to achieve results.

The modern budgeting aims at linking of funds to the results or ultimate objectives for which funds were given. There are also differences regarding the ultimate objective of the government programmes—whether “output” or “outcome” should be considered the basis to ensure government accountability. Outputs such as roads to rebuilt, number of vaccinations done, and area to be irrigated are more tangible and in the control of government officials. This type of budgeting that links expenditure with output is called performance budgeting.

Performance budgeting is not new in India. Since 1968, government departments have been preparing performance budgets, trying to link financial aspects to physical results. However, this remained a supplementary device without any perceptible impact on resource allocation.

Outcomes, on the other hand, are indicators showing the progress in achieving programme objectives, such as decline in diseases, improvement in agricultural production, and achievements in education. These are not directly under the control of the government officials on account of the effect of many factors. This type of budgeting that links expenditure with outcome is called outcome budgeting.

The government introduced “Outcome Budget” in 2005. Outcome budgets are separately placed by the departments in the later part of the budget session. Unfortunately, these outcome budgets escape the notice of the analysts, while they should have been vigorously debated in public forums. Outcome budgeting requires measurement of performance indicators, specification of standards, and a monitoring and evaluation system. Our budgeting system is not evolved enough to facilitate outcome budgeting.

Gender Budgeting

Gender budget does not refer to a separate budget for women. Instead, the gender budget is an attempt to ensure that some part of the budget is definitely spent on women. As a result, separate women cells have been created in various ministries to ensure that a section of grants is allocated dedicatedly for women.

Performance Monitoring and Evaluation System

In 2009, a performance monitoring and evaluation system (PMES) was introduced for some ministries and departments. Under the PMES, each ministry/department is required to prepare a result framework document (RFD), which is being implemented for various ministries/departments in a phased manner. In 2013-14, 84 ministries/departments were covered under the RFD system.

Under the RFD system, long-term vision, mission, and annual targets for each ministry/department are given. The actual performance of a ministry/department is compared with the targets assigned. RFD leads to transparency, accountability, and responsibility of the ministries/departments for their respective areas of performance.

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