Budget Simplified

Unlike the regular weekly Saturday Skype session, the Skype session was planned on Sunday this time owing to the request by Apurva. The Union Budget for financial year FY16 (1^st April 2015 to 31^st March 2016) was presented on the Saturday by the finance minister and she wanted to listen and understand the budget and then discuss the same with me. “There was too much talked about and written about this year’s budget, since this was going to be the first full fledge budget by the newly elected government. I watched the entire budget speech by the finance minister but honestly could not understand much of it. Can you please explain?” the curiosity on the face of Apurva was clearly evident and was obvious too. For most of the common man, budget and terms used in the budget are too technical and their connection with the budget is only through next day’s newspaper, which explains things that will get cheaper and other things that will get costlier for them. But I always felt the need of simplifying the budget for common man, as everyone should understand it from the macro level and know the economic environment, opportunities and challenges in front of the country. “The Budget prepared by Finance Minister is no different than what your mother prepares monthly, budget in simple term corresponds to future planning.”, I started explaining her.

It is a very tough task for the finance minister to plan for the entire year’s receipts that the government will generate and expenditure the government should incur so as to have growth oriented, healthy economy. “How does one quantify growth for a country?” asked Apurva. Like for individuals, the way we assess their growth from their income and increase in the income year over year, the country’s growth can be calculated using a parameter called as GDP, Gross Domestic Product. It is calculated as the total amount of goods and services produced in the country. There are different methods of calculating GDP, such as Production method, Income method etc. India adopts production method, but this year there is a slight change in the way GDP of the country would be calculated. Unlike the method used traditionally where the total amount of Goods and services produced were quantified using factor cost, i.e. the cost at which the goods and services were produced, now it will be calculated using the market price. This new method adopted by India is in sync with the international standards of calculating GDP. In FY15 (ending on March 31^st 2015) the total size of India economy is expected to be $2.1 trillion----| Rs. 12600 (000 cr). This real GDP number also indicates growth of 7.4% as compared to the previous year. As per the economic survey of India 2015 presented before the budget day, the growth in the GDP for India, is expected to be 8.5% in FY16 which mean the real GDP for the country will be $2.28 trillion ----| Rs. 136.71 (000 Cr).

“The budget was full of Jargon with terms such as fiscal deficit, revenue deficit, planned expenditure, unplanned expenditure, revenue expenditure/receipts, capital expenditure/receipts etc., can you please explain them to me in simple terms?” asked Apurva. This is when it gets too technical for the common man to decode these jargon and they prefer staying away from it and concentrate on what impacts them. My task was very challenging, I had to keep it as simple as possible.

The diagram above shows over all summary for Outflow and Inflow of rupees for India. Both the inflow and outflow are categorized into Revenue and Capital receipts/expenditure.

The revenue and capital expenditure and further classified into planned and unplanned expenditure.

All the figures are in Rs. crore.

Planned Expenditure

Earlier India had a planning commission, which is now replaced by NITI (National Institute of Transforming India) Aayog which lays down the 5 year central plan for India. The planned expenditure allocation both in revenue as well as capital sector corresponds to amount allocated to implement various schemes detailed in the plan. The planned expenditure also corresponds to grant/assistance to state and union territories.

FY 16: 465003

Unplanned Expenditure

Unplanned Expenditure correspond to amount allocated for expenses required for activities other than one present as part of 5 year central plan.

Non-plan revenue expenditure is accounted for by subsidies, and wage and salary payments to government employees, pensions, police, and economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments.

Non Plan revenue expenditure also includes interest payments on the previous debt. This debt arises because India has been running fiscal deficit traditionally.

FY16 : 1312471

Fiscal Deficit

Fiscal deficit is total expected outflow (Revenue+ Capital Expenditure) minus total expected inflow (Total Non-debt Capital Receipt + Revenue Receipt for the center). It is important to note that the revenue receipt include those of the center only and revenue receipts for the states are not included. States would include these revenue receipts in their state budget.

It is also important to know that fiscal deficit is different than the Revenue deficit.

FY16: 3.9% of GDP

Revenue Deficit

Revenue deficit refers to the excess of revenue expenditure over revenue receipts and does not include capital expenditure and non-debt capital receipts.

FY16: 2.8% of GDP

Primary Deficit

Primary Deficit = Fiscal Deficit – Interest Payment on the loan raised due to previous deficits.

Primary deficit indicates the absolute deficit in the financial year generated which is devoid of the impact of the loans raised for funding fiscal deficits of the previous years.

Current Account Deficit

Current account deficit as we already know corresponds to different between imports and exports

All the deficits i.e. current account deficit, revenue deficit and fiscal deficit are reported as % of GDP

Revenue Expenditure

Revenue expenditure is for the normal running of the government's department and various services, interest charged on debt incurred by government, subsidies etc.

FY16: 1536045

Capital Expenditure

Expenditure incurred to acquire, build assets, infrastructure or to upgrade existing infrastructure facilities.

FY16: 241429

Revenue Receipts

Revenue receipts corresponds total tax and non-tax receipts collected by the central government.

FY16: 1141574

Tax Receipt

Tax receipts can be income based which is known as direct tax or additional amount to be paid for availing a particular set of services at predefined rate known as indirect tax.

Center FY16: 919842

Direct Tax are for Individual as well for the corporate. In this budget the finance minister has proposed to reduce the corporate tax from 30% to 25% over next four years by discontinuing the exemption present earlier which used to reduce 30% tax to effective 23%. For individuals there is no change in the tax slabs.

Indirect Tax corresponds to different set of taxes such as excise duty, custom duty, service tax, value added tax etc. The indirect tax structure is very complex and government has announced all the different indirect taxes with a single tax known as Goods and Service Tax GST applicable from 1^st April 2016.

Non Tax Receipt                                                      

Apart from Tax receipt, government can also generate revenues through means such as auctioning of Telecom Spectrum, Coal Mine Blocks etc.

FY 16: 221732

Capital Receipt

Non Debt Capital Receipts

Capital receipts consists of Non Debt receipts which corresponds to recovery of loan by the Center to State governments & Union Territories and proceeds or by diluting part of (selling off) its stake in public sector companies.

FY 16: 80252

Borrowing

The other part of capital receipts are required to fund the fiscal deficit. This is done by raising of loans the market by means of Bonds, government borrowings from the RBI (raises inflation) & other parties, and loans received from foreign governments.

FY 16: 543607

FY16_India_Inflow_Overview_Data

The above diagram shows the total receipts and expenditures categories wise allocated by the finance minister of India Shri. Arun Jaitley in his budget for FY16.

“I now understand the components of the budget and its significance. I have realized that preparing a budget is not a simple task. I would now be in the position to appreciate my mother who does this exercise monthly for running of our house, Of course running the country would be more difficult I understand! Let us connect next Saturday, I eagerly waiting for you to take me to the world where there are no interest rates, as you had promised during last call, Good Night.”, with those words we ended the Skype call to connect once again next Saturday…