PRE BUDGET SEMINAR

Union Budget and Public Expenditure Management

A Presentation by

Dr. K. B. L.Mathur
Former Economic Adviser, Ministry of Finance Government of India

FEBRUARY 19, 2011

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1. Growth Rate and Level

2. Savings and Investment 3. Role of Union Budget 4. Plan Budget Link

i)

Direct
Plan Assistance to states. Rs.92,492 crores for 2010-11 (B.E) Plan Expenditure: Budget Support: Expenditure on Social Services Central Government expenditure (Plan and Non-Plan) on Social Services like Education, Health, Welfare, Rural Development Scheme was about 19 per cent of total Central Government Expenditure. Centrally sponsored scheme Major Programme specific funding to states through the CSS. About 90 per cent central grant for NREGS, MDM and about 50 per cent grant for several other schemes. See statement 18 of Expenditure Budget Vol. I for direct transfer of central Plan assistance to state/district level autonomous bodies/implementing agencies. Total transfers of Rs.107552 crores in 2010-11 BE.

ii) Indirect IEBR of PSUs For 2010-11 out of the total Plan outlay of central PSUs of Rs.2,78,634 crore Central Budget support is Rs.34,749 crores. Policy Initiatives Bhart Nirman and Flagship Programmes: Irrigation, drinking waters, rural road, rural houses, rural electrification, tele connectivity. - National Rural Health Mission. - National Urban Renewal Mission. Incentives disincentives Tax preferences are provided to individual / corporates through the budget to promote savings, exports, balanced regional development, infrastructure, employment, charity, rural development, research, cooperative sector and accelerated depreciation for capital investment.
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2008-09 Total Annual Plan Outlay 6,93,492

Central Plan Outlay Budget Support IEBR of CPSUs

State Plan Outlay Central Assistance States own Resources

3,88,078 2,04,128 1,83,950

3,05,414 78,828 2,26,586

Source: Union Budget and Planning Commission.

1. Institutional Arrangement

2. Policy Framework
3. Dynamics of Interaction 4. Documents and Approval Process

Under Article 112 of the Constitution, a statement of estimated receipts and expenditure of the Government of India has to be laid before Parliament in respect of every financial year which runs from 1st April to 31st March. This statement titled Annual Financial Statement is the main Budget document. The Annual Financial Statement shows the receipts and payments of Government under the three parts in which Government accounts are kept: (i) Consolidated Fund, (ii) Contingency Fund and (iii) Public Account.

Under the Constitution, Budget has to distinguish expenditure on revenue account from other expenditure. Government Budget, therefore, comprises (i) Revenue Budget; and (ii) Capital Budget.

The Finance Ministry comprises:

Department of Economic Affairs Department of Expenditure

Department of Revenue
Department of Disinvestment Department of Financial Services (since June, 2007)

Economic Division Budget Division Capital Markets Division Infrastructure Division Fund Bank Division (including UN Branch) Foreign Trade Division Aid Accounts & Audit Division Administration Division Bilateral Cooperation Division Integrated Finance Division

Establishment Division Pay Research Unit Plan Finance-I Division State Plan Schemes Finance Commission Division

Plan Finance-II Division

Staff Inspection Unit Chief Advisor Cost Office Controller General of Accounts Central Pension Accounting Office (CPAO)

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 Central

Board of Excise and Customs Central Board of Direct Taxes Narcotics Control Division Central Economic Intelligence Bureau Directorate of Enforcement Set up for Forfeiture of Illegally Acquired Property State Taxes Section Financial Intelligence Unit, India (FIU-IND) Integrated Finance Unit
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 Policy framework Economic/Growth policy: Growth Rate, Plan size, Development, Regional balance etc. Fiscal policy: Fiscal Deficit, Revenue Deficit, Revenue, Expenditure etc, Institutional framework Budget Division, Department of Expenditure, Department of Revenue, P.M.O., Planning Commission, Central Government Ministries, RBI, Law Ministry State Governments Legal framework Tax law, Debt law, FRBM law, Accounting Rules, Spending Rules, Capital Markets law

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 Initiating the Budgetary Process: The Budget formulation process for the ensuing financial year (April-March) starts in the month of September of the current year when the Budget Division in the Department of Economic Affairs, Ministry of Finance, issues a budget circular seeking statement of budget estimates from various Ministries and other organizations concerned. Specific Performa are enclosed with the budget circular along with the time frame within which the information is to be sent to the Budget Division.

The process for 2011-12 Budget started with the issue of Budget Circular in Mid September. Last year the circular was of 109 pages with 44 Appendices and 27 annexes.

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 Simultaneously, the Planning Commission also addresses letters to different Central Ministries and State Governments seeking their annual plan proposals. The Planning Commission through a process of detailed discussions finalises the plan allocations for different Ministries in which the budget support component is clearly specified so as to fix the budgetary outgo for the plan schemes of the Central Ministries/Departments. In the case of states, the Planning Commission after detailed reviews and discussions finalises the magnitudes of central assistance to be extended to the states which is an outgo from the Union Budget. Special attention is given to the budgetary support to be given to Central Ministries and assistance given to the states for programs/projects which are financed through external assistance. Thus, necessary plan allocations as well as central assistance allocation for externally aided projects is provided for as far as possible. For the purpose, there is a continuous interaction between the External Finance Division of the Department of Economic Affairs and the Planning Commission.

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 Expenditure Estimates : The process of preparation of expenditure estimates starts from the issue of the budget circular. The financial advisers (FAs) forward this circular to the Ministry/Department with which they are associated for obtaining the required information. The ministries in turn collect estimates from organisations under their control or prepare the same for their own activities. These are scrutinized by the budget. units of the ministries and submitted to the FAs. The FAs review and examine these estimates before sending the same in the form of their recommendations to the Budget Division in the Ministry of Finance.

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These recommendations classified under separate demand for grants in details up to the object head and labelled as statement of budget estimates (SBEs), are discussed by the Secretary (Expenditure) with each FA in a series of meetings where the ministrys budget division is also represented. After these discussions the budget division conveys budget ceilings to each FA for revising all the estimates within the ceilings and sending the SBEs in the final form. The final SBEs are to be sent to the budget division in two stages. In the first stage, the SBEs include (i) revised non-plan expenditure for the current year and budget estimate for the next year, and (ii) revised plan expenditure for the current year. At the second stage of SBEs, FAs send to the budget division budget estimates for plan expenditure for the next year as approved by the Planning Commission. Meanwhile, the Controller of Aid Accounts & Audit (CAA&A) also sends the estimates on external debt, repayment of external loans and other payments.

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 Revenue Estimates : The budget division obtains revenue estimates from a large number of organisations. Estimates on central taxes and duties are obtained from the Revenue Department in the Ministry of Finance. The Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC) provide revised estimates on direct and indirect tax revenues respectively, initially for the current year and later the budget estimates for the next year after several interactions depending on proposals under consideration at various stages. The Chief Controllers of Accounts (CCAs) and Accountants General (AGs) of Union Territory (UT) administrations send to the budget division estimates of taxes, duties etc. for the UTs concerned. Chief Controller of Accounts (CCAs) of different ministries send to the Budget Division their estimates on various types of receipts (non-tax) including those from public accounts after getting the same approved from obtained by the budget division directly from the State Accountants General (SAGs).
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 For external aid receipts the CAA&A prepares the estimates after obtaining information from different credit units of the external finance division of the Department of Economic affairs, and sends the same to the budget division. Finally, the budget division obtains from the RBI estimates on possibilities as well as sources of market borrowings which may be required by the government. This process continues over a long period from October till the time of giving a final shape to the budget as the various alternatives to fill the gap between receipts and disbursements are to be worked out till the end.

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 Flow of Estimates : The various estimates on receipts and expenditure keep flowing in the budget division from October till the budget is given a final shape towards the end of the February. In the process there are to and fro movements also for several estimates amongst the different units of the Ministry of Finance and also amongst the Budget Division of Ministry of Finance, Planning Commission, different ministries, state governments and other organizations of which RBI is most important. apart from the receipt estimates which are finalized only in the middle of February, it is on the plan expenditure of the central ministries, central assistance to the states and resources of the central public sector enterprises that the changes in the estimates continue over the period owing to discussions at various levels and in different stages. The annual plan discussions in the Planning Commission with the central ministries and the states continue, at times, till the end of January and it is only after finalisation of these estimates that the FAs of different ministries can send final SBEs for central plan expenditure to the budget. In working out these estimates Planning Commission associates the plan finance division of the Department of Expenditure, the external finance division of the Department of Economic Affairs, etc.
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 An Overview : With different flows of estimates, overall estimates of resources and expenditure continue to be made by the budget division. From December onwards the broad estimates are reviewed, discussed and simulated under the overall guidance and supervision of the Additional Secretary (Budget), who obtains guidance from Secretary (Expenditure), Secretary (Economic Affairs), Chief Economic Adviser, Secretary (Revenue) and the Finance Secretary. This group receives an overall guidance from the Finance Minister. Meanwhile, the Finance Minister invites a group of leading economists, representatives of industry and trade, labour and trade unions, consumer organizations, small scale sector and science and technology sector, for pre-budget discussions and receives their suggestions for the budget. The Finance Minister also consult the members of the Consultative Committee of Parliament for the Ministry of Finance. After the presentation of the budget in the Parliament, the Parliamentary Standing Committee reviews the budget proposals, the budget proposals are debated in the Parliament and various bills are passed to approve the budget.
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At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented in fulfillment of the requirement of Article 110(1)(a) of the Constitution, detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution. It is accompanied by a Memorandum explaining the provisions included in it. Budget Documents

1.Annual Financial Statement 2.Budget at a Glance 3.Budget Speech 4.Budget Highlights 5.Action Taken on Budget Announcements 6.Receipts Budget 7.Financial Bill 8.Customs & Excise Notification

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9.Explanatory Memorandum 10. Appropriation Bill 11. Demand for Grants Exp. Budget Vol-I Exp. Budget Vol-2

12. FRBM Statements Macro-Economic Framework for Year T+1

Medium term fiscal policy for Years upto T+3

Fiscal policy strategy for the year T+1 Deviations statement for Year T 13. Detailed Demand for Grants 14. Economic Survey (A day before The Presentation of the Budget)

15. Outcome Budget: With effect from Financial Year 2007-08, the Performance Budget and the Outcome Budget hitherto presented to Parliament separately by Ministries / Departments, are merged and presented as a single document titled Outcome Budget

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After the presentation of the budget in the Parliament, the Parliamentary Standing Committee reviews the budget proposals, the budget proposals are debated in the Parliament and various bills are passed to approve the budget. After the Demands for Grants are voted by the Lok Sabha, Parliaments approval to the withdrawal from the Consolidated Fund of the amounts so voted and of the amount required to meet the expenditure charged on the Consolidated Fund is sought through the Appropriation Bill. Under Article 114(3) of the Constitution, no amount can be withdrawn from the Consolidated Fund without the enactment of such a law by Parliament. The whole process beginning with the presentation of the Budget and ending with discussions and voting on the Demands for Grants requires sufficiently long time. The Lok Sabha is, therefore, empowered by the Constitution to make any grant in advance in respect of the estimated expenditure for a part of the financial year pending completion of procedure for the voting of the Demands. The purpose of the Vote on Account is to keep Government functioning, pending voting of final supply. The Vote on Account is obtained from Parliament through an Appropriation (Vote on Account) Bill.

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1. Expectations

2. Constraints
3. Issues in Public Expenditure Management - Weaknesses of PEM in India - Issues outlined by P. Ms Advisory Council

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 The presentation of Union Budget before the Parliament and the Budget Speech of the Finance Minister has always remained a major Annual event in the country. Of late, Media has created a hype over this event and discussions start in visual media and press much before the event outlining the expectations. The expectations from the Union Budget vary from individual to groups and to institutions. Thus salaried class expects a relief on direct taxes, business expects a relief in indirect taxes, economists analyze it for macro-economic variables, politicians respond depending on their party affiliation and common man responds to it depending on his level of understanding.

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 The whole exercise of budget making is so huge and complex that very little is understood about the constraints and limitations of a budget with reference to the expectations generated. In terms of balancing of revenue and expenditure there are limitations of raising revenue through taxes for containing inflationary tendency. In terms of expenditure the committed expenditure is so huge that the flexibility with a finance minister to change the expenditure pattern within a year is extremely limited. Expenditure on account of interest payment, defence and pensions account for almost 59 per cent of the total non plan expenditure. If subsidies and grant to States are added, the expenditure on these five items would account for 81 per cent of total non-plan expenditure which itself is about 68 per cent of total expenditure.
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(Rs. in cores)

2001-02 (BE) A. B. Total Expenditure Total Non-Plan Expenditure 362310 261116

2009-10 10,20,838 6,95,689

Interest
Defence Pension C. =INT+DEF+PEN C as % of B C as % of A

107460
154266 14436 176162 67.47 48.62

2,25,511
1,41,703 34,980 4,02,194 57.81 39.40

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(Rs. in cores)

2001-02 (BE)
Subsidies Grant to States Sub+ GRA D. =C+Sub+GRA D as % of B D as % of A Police Tax Collection 31210 15327 46537 222699 85.29 61.47 7248 2214

2009-10
1,11,276 48,570 1,59,846 5,62,040 80.79 55.06 25,390 6,627

C.

=D+PO+TA
E as % of B E as % of A

232161
88.91 64.08

5,94,057
85.39 58.19

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The process of Budget preparation usually has extremely tight time schedules. Following are the due dates of different estimates flows for the 2010-11 Budget. Due dates for rendition of estimates by Ministries/Departments to Budget Division of Department of Economic Affairs
Due Dates 1. 2. Interest Receipts/Recoveries of loans Capital Receipts (including Public Account transactions) October 23, 2009 October 23, 2009

3.
4. 5. 6.

Statement of Budget Estimates* proposed

Revenue Receipts Statement of Budget Estimates (Final) SBE with BE 2010-11(Plan) and statement showing provision for externally aided projects in Central Plan

October 23, 2009

November 27, 2009 Immediately after ceilings are communicated Within 3 days of receipt of the Plan allocation from P.C.

*enclosing the receipt estimates also for review at the pre-Budget meeting.

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 Revenue deficit refers to the excess of revenue expenditure

over revenue receipts.

Fiscal deficit is the difference between the revenue receipts plus certain non-debit capital receipts and the total

expenditure including loans, net of repayments. This indicates

the total borrowing requirements of Government from all sources.

Primary deficit is measured by fiscal deficit less interest

payments.

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