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Budget Preparation: Process

Budget process is a massive exercise. The exercise has different stages and each stage kicks off at a different stage of Budget making process. In this write-up we shall discuss finer points of Budget making process of Government of India.

The two sides of Budget

Like our family budget, 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). The Budget Division is a part of the Department of Economic Affairs. 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.
  1. Resources side
    Leaving aside the tax receipts the other sources of the revenue which goes into the budget are the dividends paid by the PSUs on the government shareholdings including the interim dividends and the capital receipts on account of the disinvestment of the government share holdings. Besides external receipts on account borrowing from international agencies like World Bank, ADB etc., are also estimated and included in the assessment of the gross budgetary resources of various programmes under various Ministries. Resources of the public sector undertakings including their operating surplus and the borrowings by them also constitutes an important component of the gross budgetary resources and goes to fund their plan. General policy is to fund the plans of the PSUs through their own resources except in some strategic and economically vital areas where the budgetary support is provided based on the recommendations of the Planning Commission This assessment of the Internal and External Budgetary Resources(IEBR) conducted by the Department of Expenditure forms part of the total plan resources and is also reflected in the budget documents. To estimate the earnings of PSUs, the Government invites CMDs or the Finance Directors of PSU’s to North Block. A Joint Secretary level officer of the Ministry of Finance holds one to one meeting with the PSU Chairman and estimates revenue. He passes on the information to Expenditure Secretary, who in turn, passes on the information to Finance Secretary. This exercise starts usually in the month of August —September. This revenue forms a part of plan expenditure. Now comes role of the Ministries of the Government. Each Ministry has a Financial Advisor. The Financial Advisor is called by the Ministry of Finance and asked about the expenditure of the amount allocated to his Ministry. Generally, Ministries are not able to spend the allocated amount but some may overspend as well. Based on the inputs of different ministries Revised Estimate (RE) is prepared. Revised Estimate means as to how much is actually required by the Ministry. As a part of the Expenditure Management, Government has issued instructions to various Ministries to adhere to the quarterly expenditure schedule and to avoid bunching of the expenditure in the last quarter. Additional funds are also provided in the RE stage. Important is the estimates of the non-plan requirement for the next year. Plan allocations are to be provided by the Planning Commission later based on the total Gross Budgetary Support (GBS) indicated by the Ministry of Finance. This exercise starts in the month of October-December. As is known, the Department of Revenue, Ministry of Finance has two Boards – Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). By mid January, these Boards give the figure of tax collection upto December 31st. For remaining three months, tax collection is assumed on the basis of previous trends. The Boards also estimate the tax revenue expected in next financial year. The integrity of the budget making depends on the realistic nature of these estimates particularly in the face of the fiscal discipline imposed by the FRBM Act. It is a happy development in the past two or three years the estimates are generally not very wide off the mark.
  2. The Expenditure side
    Parallel to all these, Planning Commission goes into stock taking mode. It starts meeting with individual Ministries in the month of September-October and reviews ongoing schemes of the Ministries, considers allocation for them etc. It may decide to stop some ongoing scheme or merge two similar schemes. Thus an estimate of Plan Budget is prepared. Planning Commission conveys to the Ministry of Finance that it requires so much amount to run planned schemes for next financial year. Finance Minister and the Deputy Chairman of Planning Commission discuss the demand in detail. This way Plan Expenditure is ready. Different Ministries are also asked to tell about their fund requirement, which forms a part of budget estimate. Side by side, Department of Economic Affairs is meeting the representatives of Trade Unions, Industry Chambers, Economists and other groups. In budget making exercise, suggestions of different stakeholders are kept in mind.

FM has to decide with his team

By this time, Finance Minister is in a position to estimate as to how much it will get through taxes and how much it has to spend in coming financial year. Finance Minister has other constraints also. He has to abide by FRBM Act and cut fiscal deficit. Keeping in mind all these, the Finance Minister with his team decides whether some new taxes should be levied to collect more tax, how to widen tax net in order to earn more revenue. While doing so the suggestions from various interest groups are duly taken into account.

GDP assessment

The Department of Expenditure and the Department of Economic Affairs sit to decide GDP assessment for next year. Generally a nominal growth in GDP is projected. Actual growth in GDP is nominal growth of GDP reduced by inflation figure.

The Budget speech of FM

Now comes the Budget speech. It is fine tuned to the last minute. Around 15th of February, some of the budget documents are almost ready and goes for printing to a press located in North Block itself. Security Agencies cordons off the press and entry is almost prohibited.

Few Important Terms

Appropriation Bill: It is presented to Parliament for its approval, so that the government can withdraw from the Consolidated Fund the amounts required for meeting the expenditure charged on the Consolidated Fund. No amount can be withdrawn from the Consolidated Fund till the Appropriation Bill is voted is enacted
Capital Budget: It consists of capital receipts and payments. It also incorporates transactions in the Public Account. It has two components: Capital Receipt and Capital Expenditure.
Capital Expenditure: It consists of payments for acquisition of assets like land, buildings, machinery, equipment, as also investments in shares etc, and loans and advances granted by the Central government to state and union territory governments, government companies, corporations and other parties.
Capital Receipt: The main items of capital receipts are loans raised by the government from public which are called market loans, borrowings by the government from the Reserve Bank of India and other parties through sale of Treasury Bills, loans received from foreign governments and bodies and recoveries of loans granted by the Central government to state and union territory governments and other parties. It also includes proceeds from disinvestment of government equity in public enterprises.
Central Plan: It consists of the government’s budget support to the Plan and the internal and extra budgetary resources raised by public enterprises.
Consolidated Fund: It is made up of all revenues received by the government, loans raised by it, and also its receipts from recoveries of loans granted by it. All expenditure of the government is incurred from the Consolidated Fund and no amount can be withdrawn from the Fund without authorisation from Parliament
Contingency Fund: It is an imprest placed at the disposal of the President and is used by the government to incur all its urgent and unforeseen expenditure. Parliamentary approval for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained and the amount spent from the Contingency Fund is recouped to the Fund.
Demands for Grants: It is a statement of estimates of expenditure from the Consolidated Fund and is required to be voted by the Lok Sabha. Generally, one Demand for Grant is presented in respect of each ministry or department.
Expenditure Budget: It contains expenditure estimates made for a scheme or programme under both revenue and capital heads. These estimates are brought together and shown on a net basis at one place by major heads.
Finance Bill: This contains the government’s proposals for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament. It is submitted to Parliament along with the Budget for its approval.
Fiscal Deficit: It is the difference between the revenue receipts plus certain non-debt capital receipts and the total expenditure including loans (net of repayments). This indicates the total borrowing requirements of the government from all sources.
Fiscal Deficit = Revenue Receipts (net tax revenue + non-tax revenue) ± Capital Receipts (only recoveries of loans and other receipts) — Total Expenditure (plan and non-plan)
Non-Plan Expenditure: It includes both revenue and capital expenditure on interest payments, the entire defence expenditure (both revenue and capital expenditure), subsidies, postal deficit, police, pensions, economic services, loans to public enterprises and loans as well as grants to state governments, union territory governments and foreign governments.
Plan Expenditure: It includes both revenue and capital expenditure of the government on the Central Plan, Central assistance to state and union territory plans. It forms a sizeable proportion of the total expenditure of the Central government.
Public Account: It is an account in which money received through transactions not relating to the Consolidated Fund is kept. Besides the normal receipts and expenditure of the government relating to the Consolidated Fund, certain other transactions enter government accounts in respect of which the government acts more as a banker, for example, transactions relating to provident funds, small savings collections, other deposits etc. Such money is kept in the Public Account and the connected disbursements are also made from it. Public Account funds do not belong to the government and have to be paid back some time or the other to the persons and authorities who deposited them. Parliamentary authorisation for payments from the Public Account is not required
Revenue Budget: It consists of the revenue receipts of the government (which is tax revenues plus other revenues) and the expenditure met from these revenues. It has two components: Revenue Receipt and Revenue Expenditure.
Revenue Deficit: It refers to the excess of revenue expenditure over revenue receipts. Revenue Expenditure: It is meant for the normal running of government departments and various services, interest charges on debt incurred by the government and subsidies. Broadly speaking, expenditure which does not result in creation of assets is treated as revenue expenditure. All grants given to state governments and other parties are also treated as revenue expenditure even though some of the grants may be for creation of assets.
Revenue Deficit = Total Revenue Expenditure — Total Revenue Receipts
or = Non-plan Expenditure + Plan Expenditure — (net tax revenue + non tax revenue)
Revenue Receipt: It includes proceeds of taxes and other duties levied by the Centre, interest and dividend on investments made by the government, fees and other receipts for services rendered by the government.


Dollar($) v/s rupee
Dollar Main Inflow: (supply)
  • through export
  • through FII investment in share and Dept market
  • repatriation fund sent back to India by NRI
  • Capital receipt Loan.
Dollar main Out flow (demand)
  • paid for Import
  • withdrawal of funds by FII
  • Capital loan repayment

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