Unit 3: Budget

• Concept of Budget and budget cycle in India

• Types of Budget: Line Budget, Performance Planning Budget, Zero Based Budget
• Budget Making: Role of the Finance Ministry
Introduction
• The Budget is a statement of the estimated receipts and proposed expenditures of the Government for
an upcoming financial year i.e. a period that runs from 1st April to 31st March of the ensuing year.
• The Indian Constitution refers to the budget as the ‘Annual financial statement’ (Article 112). In other
words, the term ‘budget’ has nowhere been used in the Constitution.
• It serves as a comprehensive financial plan that reflects the economic strategy and policy priorities of
the Government.
• The Budget is formulated and enacted annually by the Union Government as well as State Governments.
• The Budget of the Union Government is called the Union Budget, and the Budget of the State
Government is called the State Budget.

Components of Union Budget

The Union Budget of India or the Annual Financial Statement encompasses three primary components:
• Budget Estimates of receipts and expenditures for the upcoming fiscal year (also known as the Budget
Year).
• Revised Estimates of receipts and expenditures for the current fiscal year.
• Provisional Actuals of receipts and expenditures for the previous fiscal year.
 Components of Union Budget contd.
The budget consists two parts:
[Link] Budget:
1. The Revenue Budget comprises revenue receipts and expenditure met from these revenues.
[Link] revenue receipts include both tax revenue (like income tax, excise duty) and non-tax
revenue (like interest receipts, profits).
[Link] expenditure is expenditure for the normal running of government departments
and various services, interest charges on debt incurred by government, subsidies etc.
[Link] Budget:
1. Capital budget is an account of assets and liabilities of the government which takes into
consideration changes in capital.
[Link] receipts are receipts of the government which create liabilities or reduce financial
assets, e.g., market borrowing, recovery of loan, etc.
[Link] expenditure is the expenditure of the government which either creates assets or
reduces liability.
Stages in Enactment of Budget
The budgetary process in India goes through the following six stages in the
Indian Parliament:
[Link] of Budget
[Link] Discussion
[Link] by Departmental Committees
[Link] on Demands for Grants
[Link] of Appropriation Bill
[Link] of Finance Bill
Presentation of Budget
• The budgetary process in India begins with the Presentation of the Budget.
Traditionally, the Union Budget of India was presented on the last working
day of February. However, since 2017, the presentation of the Union
Budget has been advanced to 1st February.
• There shall be no discussion of the budget on the day of presentation.
Budget Speech
• The Finance Minister presents the budget with a speech known as “Budget
Speech”.
• At the end of the speech in the Lok Sabha, the Budget is laid before the
Rajya Sabha. This is a crucial part of the budgetary process in India.
Presentation of Economic Survey
• The Economic Survey is a report prepared by the Ministry of Finance, which indicates the
status of the national economy. It is also a significant part of the budgetary process in
India.
• The Economic Survey is presented to the Parliament one day or a few days before the
presentation of the Budget. Earlier, it used to be presented to the Parliament along with the
Budget.
General Discussion
• After the first stage, the budgetary process goes through the second stage of General
Discussion.
• The General Discussion takes place in both Houses of Parliament and lasts usually for
three to four days.
• At this stage, the Lok Sabha can discuss the Budget as a whole or any question of principle
involved therein. The Finance Minister has a general right of reply at the end of the general
discussion on the Budget.
• No cut motion can be moved nor the budget can be submitted to vote at this stage.
Scrutiny by Departmental Committees
• In the budgetary process, after the General Discussion on the budget is over, both Houses of
Parliament are adjourned for about three to four weeks. During this gap period, the 24
Departmental Standing Committees (DSCs) of Parliament examine and discuss in detail
the demands for grants of the concerned Ministries, prepare reports on them, and then submit
those reports to both Houses for their consideration.
Voting on Demands for Grants
• Based on the reports of the Departmental Standing Committees of the Parliament, the Lok Sabha
takes up voting on the Demands for Grants in the budgetary process.
• A “Demand for Grant” becomes a “Grant” after it has been duly voted upon by the Lok Sabha.
• The following points are to be noted w.r.t Voting on Demand for Grants in the budgetary process:
• The Demands for Grants are presented ministry-wise.
• The voting on Demands for Grants is the exclusive privilege of the Lok Sabha. The Rajya
Sabha has no power of voting on Demands for Grants.
• Each Demand is voted separately by the Lok Sabha.
• The voting on Demand for Grants by the Lok Sabha is confined to the votable part of the
budget in the budgetary process. The expenditure “charged” to the Consolidated Fund of
India can only be discussed by the Lok Sabha, but not submitted to vote.
Cut Motion
As a part of the budgetary process, before voting, the Lok Sabha discusses the details of the
budget and can move motions to reduce any Demand for Grants. The ‘Cut Motion’ are of three
types – Policy Cut Motion, Economy Cut Motion, and Token Cut Motion.
• Policy Cut Motion: The Policy Cut Motion represents the disapproval of the policy
underlying the demand for a grant. This motion states that the amount of the demand be
reduced to Rs 1. The members can also advocate an alternative policy.
• Economy Cut Motion: The Economy Cut Motion represents the economy that can be
affected by the proposed expenditure. This motion states that the amount of the demand be
reduced by a specified amount.
• Token Cut Motion: The Token Cut Motion ventilates a specific grievance that is within the
sphere of responsibility of the Government of India. This motion states that the amount of the
demand be reduced by Rs 100.
Guillotine
• Under the budgetary process, on the final day allocated for discussion and voting on the
Demands for Grants, the Speaker of Lok Sabha puts all the remaining demands to vote and
disposes of them, whether they have been discussed by the members or not. This procedural
method is commonly referred to as the ‘guillotine’.
Passing of Appropriation Bill
• The Indian Constitution states that ‘no money shall be withdrawn from the Consolidated
Fund of India except under appropriation made by law’ in the budgetary process. This means
that in order to enable the Union Government to withdraw money from the Consolidated Fund of
India under the demands for grants approved by it, the Parliament needs to enact the
corresponding Appropriation Bill.
• Accordingly, in the budgetary process, after the Demands for Grants are voted on and passed by
the Lok Sabha, an Appropriation Bill is introduced to provide for the appropriation, out of the
Consolidated Fund of India, of all money required to meet:
• The grants were voted on by the Lok Sabha, and
• The expenditure “charged” on the Consolidated Fund of India.
• No such amendment can be proposed to the Appropriation Bill in either House of the
Parliament that will have the effect of:
• Varying the amount or altering the destination of any grant voted, or
• Varying the amount of any expenditure charged on the Consolidated Fund of India.
• The Appropriation Bill becomes the Appropriation Act after it is assented to by the President. This
Act authorizes or legalizes the payments from the Consolidated Fund of India.
Vote on Account
• The constitutional requirement of ‘appropriation made by law’ means that the Union
Government cannot withdraw money from the Consolidated Fund of India till the enactment of
the Appropriation Bill. However, the whole budgetary process of the enactment of the
Appropriation Bill takes time and usually goes on till the end of April. But the Union
Government needs money to carry on its normal activities after the 31st of March (the end of
the financial year).
• To overcome this functional difficulty, the Indian Constitution has authorized the Lok Sabha to
make any Grant in Advance with respect to the estimated expenditure for a part of the
financial year, pending the completion of the voting of the Demands for Grants and the
enactment of the Appropriation Bill. This provision in the budgetary process is known as
the ‘Vote on Account’.
• The following points are to be noted w.r.t. Vote on Account in the budgetary process:
• The Vote on Account is passed or granted after the General Discussion on a Budget is over.
• The Vote on Account is generally granted for two months for an amount equivalent to one-
sixth of the total estimation of the Union Budget.
• In an election year when the Lok Sabha is to be dissolved or a new Lok Sabha is constituted, the Vote on
Account may be taken for a longer period (for about 3 to 5 months).
Passing of Finance Bill
• The ‘Finance Bill’ means the bill ordinarily introduced in each year to give effect to the
financial proposals of the Government of India for the next financial year and includes a
bill to give effect to supplementary financial proposals for any period.
• The Finance Bill becomes the Finance Act after it is assented to by the President. In the
budgetary process, the Finance Act legalizes the income side of the budget and completes
the process of the enactment of the budget.
• During the stage of the passing of the Finance Bill, a Member of Parliament (MP) can
discuss matters relating to general administration, local grievances within the sphere of the
responsibility of the Government of India, or the monetary or financial policy of the Union
Government.
• The following points are to be noted w.r.t. Finance Bill
• The Finance Bill is subjected to all the conditions applicable to a Money Bill.
• Unlike the Appropriation Bill, the amendments (seeking to reject or reduce a tax) can be moved in
the case of a Finance Bill.
• According to the Provisional Collection of Tones Act of 1931, the Finance Bill must be
enacted (i.e., passed by the Parliament and assented to by the President) within 75 days.
Types of Budget: Line Budget, Performance
Planning Budget, Zero Based Budget
Introduction
• Budget and budgetary process in government is probably a 19th century
phenomenon. The budget classification in India, for a long time even after
Independence, continued to be carried out in the format of the line-item
method though it is outdated in several respects, especially making its
evaluation difficult. There are two types of public budgets.
1. ‘Operating budget’ which is planned for a short term or year-to-year
basis. In India, this is called ‘Annual Financial Statement’ (a statement of
estimated receipts and expenditures).
2. ‘Capital budget’, which is planned for a longer period (building bridges,
or big projects).
Line-Item Budgeting
• Line-item budgeting is seen as a traditional form of budgeting. It was
developed during the early 20th century. The line-item budget covers inputs
only, meaning that each line on a paper-sheet has an item or object (for
example a wooden chair) on the left side followed by the cost (for example,
Rs. 1000) on the right side. The line-item budget rapidly became linked
with “governmental honesty, efficiency and less inflexibility”. A major
disadvantage of the line-budget is that it is not tied to performance. Given
its relative simplicity, this type of budget is quite popular among local
governments. Year-to-year allocations in line-item budgets differ very little
so there is a degree of sluggishness when it comes to assessing how much
“should” be spent on health, this and that.
Performance Budgeting
• Performance budgeting, also called programme budgeting is a special tool of
development administration. Performance budgeting is essentially a
technique of presenting government operations in terms of functions,
programmes, activities and projects. It gives administrators a high level of
personal responsibility in the use of budgeted resources. Line-item
budgeting sees administrators as clerks whereas performance budgeting sees
them as managers.
• According to Viswanathan(1972), performance budgeting is “a
comprehensive operational document, conceived, presented and
implemented in terms of programmes, projects and activities, with their
financial and physical aspects closely interwoven”
Among the purposes sought to be achieved by performance budgeting, the
following are the most important:
• to link the programming and budgeting together so that it serves as a
management tool;
• to enable the legislature to exercise control over the executive in a better
way;
• to help in the formulation and review of policy and plans for integration with
budget;
• to supply yardsticks of efficiency; and
• to facilitate effective accounting and audit.
PBB helps organizations become more efficient and effective by:
• Linking funding to results: PBB connects the funding of programs to the
benefits they provide.
• Measuring performance: PBB evaluates an organization's performance by
considering resource usage, results achieved, and objectives met.
• Improving transparency: PBB makes the budget process more transparent.
• Improving accountability: PBB helps improve accountability by providing
performance indicators.
PBB is commonly used by government agencies to show how taxpayer funds
are used to provide services. It can help cities shift their budget focus to city
priorities, rather than department-specific goals.
• The central points of performance budgeting are:
• (1) the amount of work done is measured; and
• (2) the quality (or the results) of that work is measured.
• These two measures impact on how much money a department will receive in the future
(Holzer and Schwester, 2011). Performance budgeting, also called programme budgeting
is primarily concerned with efficiency and economy in government. Under it
administrative skills tend to dominate agency decision making with budget analysis
focused on precision accounting and control. Its focus is on workcost measurement - -
also called unit costs. It is by far the best analytical technique for the assessment of
budgetary matters. However, the performance budgeting is not without shortcomings. It
does not select the best programme from among all the possible alternatives. It only
assesses the programme that is in existence. Departments that over-perform may receive
more money, while those that under perform may receive less. Critics argue that using
performance measurement as a basis for determining the size of the allocations is
counterintuitive. Also, some might argue that measuring performance is inherently
problematic, that is designing performance indicators is subjective.
Zero-Based Budgeting
• Zero-based Budgeting (ZBB) is the latest technique which has been developed in
the budget process during the 1970s. It is a system of budgeting that requires all
spending for each programme and agency to be justified and approved for
each new period, that is, each year. ZBB was first adopted in the United States in
preparation of the fiscal 1973 budget of the state of Georgia when Jimmy Carter
was the Governor of the State.
• After Jimmy Carter became the President of USA, in 1977, he has adopted ZBB
throughout the federal government. In contrast to PPB, ZBB made rapid headway.
According to Henry, ZBB involves “the allocation of resources to agencies on the
basis of those agencies periodically re-evaluating through intense consultation the
need for all of the programs for which the agency is responsible and justifying the
continuance or termination of each program in the agency’s budget proposal”.
• ZBB is unconventional as it challenges the need for a programme at any funding
level. It also rejects the principle of incrementalism, which assumes that next
year’s budget will begin at or near the funding level of the current year’s budget.
• Its three operational elements are:
(i) identification of decision units;
(ii) analysis of decision packages, each reflecting a different level of effort for
carrying out the work in the decision unit;
(iii) ranking of decision packages, in descending order of importance.
• Thus, in a ZBB system, all department heads must defend their programmes and
consequently their level of funding each year. Rather than earmarking additional
funds that are required annually, the department head is required to show how
different levels of funding would impact the delivery of a given programme’s
services.
• ZBB is advantageous in that it allows department heads to set priorities, letting the
budget makers know where cuts are more acceptable and where increases would be
desirable. It makes sense to allow department heads to set these priorities, given that
they are in a position to know how best to carry out a department’s programmes.
ZBB is used primarily when budget costs are out of control.
Advantages of Zero-Based Budgeting: Holzer notes the following advantages of ZBB:
1) Results in efficient allocation of resources, as it is based on needs and benefits.
2) Drives managers to find out cost-effective ways to improve operations.
3) Detects inflated budgets.
4) Useful for service department where the output is difficult to identify.
5) Increases staff motivation by providing greater initiative and responsibility in decision making.
6) Increases communication and coordination within the organisation.
7) Identifies and eliminates wastage and obsolete operations.
Disadvantages of Zero-Based Budgeting: According to Holzer, the following are the disadvantages of
ZBB:
8) It is difficult to define decision units and decision packages, as it is very time-consuming and
exhaustive.
9) Department heads are forced to justify every detail related to expenditure. Very often the R & D
department is threatened whereas the production department benefits.
10) It is necessary to train managers. ZBB should be clearly understood by managers at various levels.
Otherwise the reforms cannot be successfully implemented.
11) It is also difficult to administer and communicate the budgeting because more managers are involved in
the process.
Budget Making
Five steps of Budget formation
The Department of Economic Affairs in the Ministry of Finance prepares the Union
Budget every year, which is then presented by the Finance Minister. This budget
serves as a financial plan for the country and outlines the estimated earnings and
expenditures of the government for the upcoming fiscal year. Let's take a look at
the five essential steps involved in the development of the Union Budget:

1. Initial Processes: The Budget-making process begins around six months before
the Budget is presented. The Finance Ministry sends Budget Circulars to relevant
ministries and departments, providing them with necessary instructions and
guidelines. These circulars are then distributed among disbursing and field officers,
who share details about their department's financial expenditures and receipts for
the current and past fiscal year, as well as their financial requirements for the
upcoming fiscal year.
• 2. Accumulation and Authorization of Data: The data and estimates provided by ground-
level officials are carefully examined by top officials within their departments. Once
approved or revised if necessary, the data and estimates are sent to the concerned ministries
for further examination. Finally, the data and estimates make their way to the Finance
Ministry, where they are scrutinized and correlated with the current economic state and
available resources to determine their feasibility.
• 3. Composing the Budget: After thorough analysis, the Finance Ministry allocates revenues
to various administrative ministries and develops new public welfare schemes. In cases
where there are disputes regarding resource allocation, the Finance Ministry seeks
consultation from the Union Cabinet or the Prime Minister, whose decision is considered
final. Once the resources are allocated for future expenditures, the Finance Ministry, in
collaboration with the Central Board of Direct Taxes and the Central Board of Excise and
Customs, prepares a report on the estimated revenues to be generated in the upcoming fiscal
year. These reports are then consolidated to create the final Union Budget. Throughout this
process, the Finance Ministry engages with stakeholders in the public domain, such as
farmers and small business owners, to gather insights and ensure an efficient budget.
• 4. Printing the Budget: The printing process of the Union Budget commences with a
traditional ceremony called the "halwa ceremony." During this ceremony, the Finance
Minister and other officials and staff involved in the process consume halwa, a
traditional Indian dessert. Following the ceremony, the printing of the Union Budget
begins. Throughout this stage, all officials and staff members involved in the Budget-
making process remain confined to the ministry premises, cut off from the outside
world, as they possess privileged knowledge of the Budget before it is presented in
Parliament.
• 5. Presenting the Budget: The Finance Minister presents the Union Budget in
Parliament. In recent years, the Budget has been presented on a fixed date, February 1.
In election years, the Budget is presented twice. Initially, an interim budget, known as
a vote on account, is presented, which provides an estimate of expenditures and
receipts for the next two to four months. After the election, the new government
presents the final Budget for the remaining fiscal year. These are the essential steps
involved in the development of the Union Budget, which plays a significant role in
shaping the financial landscape of the country.
ROLE OF MINISTRY OF FINANCE
In the entire process from budget formulation to enactment the, Ministry of Finance plays a key role. The activities relating
to preparation of budgetary estimates, consolidation of estimates of revenues and expenditure and presenting in the form of
annual financial statement is the function of the Ministry of Finance. It has the responsibilities of:
• Advising on fiscal and monetary policies;
• Raising the financial resources to meet the expenditure targets;
• Examining the desirability of the demands of various ministries and departments;
• Consolidation and scrutiny of budget estimates;
• Preparation of appropriation and finance bills in consonance with constitutional provisions;
• Review of standing charges, outgoing schemes, new projects;
• Preparation of economic classification of budget;
• Scrutinising all proposals of spending departments;
• Maintaining the financial discipline;
• Ensuring compliance with the budgetary laws;
• Enforcing effective control of budgetary expenditure;
• The Ministry of Finance with various departments and divisions has an important role in the gigantic task of budgetary
cycle from preparation to execution. Its main concern is to ensure a proper balance between revenues and expenditure
and judicious use of public resources.