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Union Budget Process An introduction

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  1. Union Budget Process An introduction Presentation at Press Information Bureau New Delhi February 15, 2008 P.R. Devi Prasad OSD (FRBM) Dept. of Economic Affairs Ministry of Finance

  2. PresentationScheme Budget: fiscal policy and Indian legislative objective Budget: citizen, parliament, constitution Budget: legal framework Budget: format / documentation / documents/ printing Budget: preparations / consultations Budget: FRBM Act, 2003 & medium-term framework Budget: macroeconomic context Budget: expenditure composition, policies & reforms Budget: debt management

  3. Fiscal Policy Represents formulation and implementation of government sector activities through budget Achieves budget balance though size of government, type of budget financing and revenue & expenditure composition Covers all levels of government including quasi government Seeks internal & external balance, lowers debt, ensures long-term sustainability Provides public goods; promotes private investment; engineers pro-poor growth Reduces poverty and provides good governance Issues: impact on interest rates, aggregate demand, output growth, competitiveness, credit rating, crowding out private sector;

  4. Legislative Objective of fiscal responsibility and budget management “To Provide for the responsibility of the Central Government to ensure inter-generational equity in fiscal management and long-term macro-economicstability by achieving sufficient revenue surplus and removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability through limits on the Central Government Borrowings, debt and deficits, greater transparency in fiscal operations of the Central Government and conducting fiscal policy in a medium term framework and for matters connected there with or incidental thereto.” 3/10/2014 4

  5. Budget&the Citizen b citizen States c a Depts., g d e f Not on Constitutional strength but by practice Railway budget is separate, but Constitutionally, Railway receipts are part of CFI Non Tax Revenue Four* Services Tax Revenue Grants /Donor support P L A N N O N P L A N CFI Other Receipts Market Borrowings P S U S 4 3 C A P I T A L Interest receipts R E V E N U E Loan repayment Taxes, Fee& Savings, 2 1 Consolidated Fund Of India Application of Funds 3/10/201402/07/07 5 *Economic Services Fiscal Services Social Services & Other General Services

  6. Budget & the Parliament Presentation on last business day in February Examination by parliamentary standing committees Vote on Account before 31st March Approval by parliament within 75 days Seeking supplementary demand for grants- 1st , 2nd & 3rd Submission of C&AG Reports Examination by PAC Regularization of excess expenditure No taxation without representation; Lok Sabha & Money bill: why supplementary? Why regularization? how to work with Budget Division? Why to avoid excess expenditure? Lessons from C&AG reports! Aligning between DDG and Outcome Budget of the Ministry. 6

  7. Budget & the Constitution While the following provide for Procedure in Parliament with respect to Estimates … 113 Appropriation Bills … … … 114 Supplementary, additional or excess grants … 115 Votes on account, votes of credit and exceptional grants … 116 Special provisions as to financial Bills … 117 Consolidated Fund … … … 266 Contingency Fund … … … 267 Finance Commission … … … 280 Expenditure defrayable by the Union out of its revenues … 282 Laws/Rules for Custody, etc., of Consolidated Funds, Contingency Funds and moneys credited to the public accounts … … … 283 Borrowing by the Government of India … 292 AFS- Anchor to all documents: Art 112 Trigger to All Documents 7 *Annual Financial Statement

  8. Budget Documents in the context of CFI All taxes, revenues, grants, loans, repayments, proceeds from treasury bills, way & means advances go into CFI (A) Other public money goes into Public Account of India (B) No money to be appropriated from CFI except through law passed by Parliament (C) Constitutional mandate in Article. 266 8 Relate of A, B, & C to various Documents/ statements Explore relevance of A,B & C to Fiscal Balance

  9. …a stylized peep into the Budget Objectives in Spending, Taxing, Balancing, Investing, Macro-economic stability, growth & global positioning Risks & Risk proofing, leak plugging in pass-thru of public money; contingent liabilities eg: guarantees, PPP terms, legal liabilities Transfer payments transfer objectives, transferring routes, vs. Operational issues Impact on equity*, efficiency** & entitlements*** (excluding charged estimates) *Intergenerational. Regional. Public Vs. Private sectors, Farm & non-Farm sector. Rural Vs Urban. Spenders Vs. Savers. ** Capital Vs. Revenue. Productivity (ICOR) ***States Vs. Union Government. Through Finance Commission’s recommendations. BPL Vs. APL. Children & Aged. Women Vs. Others 9

  10. Budget & Accounts Protocol Accounts Management Expenditure tracking (Monthly) Finance A/Cs presentation to Parliament through MoF Quarterly FRBM Statements Controller General of Accounts CAG’s Audit Reports on Finance Accounts for the year T-1 3/10/201402/07/07 10 Issues: Periodicity of Accounts; Time lag and aligning Provisional, Provisional Actual A/cs, Flash figures, Actual/Audited A/cs

  11. Budget Format Receipts Revenue receipts Tax Non-tax Non-Debt Capital Loan repayments Disinvestment (till 2006) Debt Expenditure Charged(discussion only)/ Voted(discussion & voting) Capital/Revenue Plan*/Non-Plan Issues: Source and logic of the inputs influencing these entries 11 * Developmental expenditure within the framework of 5-Year Plans

  12. Budget Making Expenditure Dept. of Expenditure Revenue Non-TaxDept. of Economic Affairs Tax Dept. of Revenue Deficit Dept. of Economic Affairs for its Control* & financing** Fiscal, Revenue & Primary Deficits What Who 3/10/201402/07/07 12 • *FRBM Legislation • ** Reserve Bank Coordination (Costs, price, instruments, scheduling)

  13. Budget: Annual preparations Extensive consultations involving line ministries DoE other stake holders: DEA & DoR farmers, labour unions, business, FIs, economists & other civil society groups Intense internal assessment about spending priorities DEA revenue mobilization DoR aligning with policy goals DEA Start in Sept. withissue of Budget Circular DEA: Dept. of Economic Affairs. DoE: Dept. of Expenditure. DoR: Dept. of Revenue 3/10/201402/07/07 13 Issues: Coordination between line Departments, Planning Commission & CGA Aligning expenditure, physical progress and capacity to absorb as also compliance to legal ceilings

  14. Triggers -Target time - Goals Budget Circular - 29th February - FRBM Act - Annual Plans

  15. Core Budget Documents = 13+ Key to Budget Documents Annual Financial Statement Budget at a Glance Budget Speech Budget Highlights Action Taken on Budget Announcements Receipts Budget Finance Bill Customs & Excise Notifications Explanatory Memorandum Appropriation Bill Demands for Grants Exp. Budget Vol-1 Exp. Budget Vol-2 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 statementfor Year T 13. Detailed Demand for Grants* Presented by MoF and line Ministries 15 Pink Bold italics:Constitutionally mandated: Blue Bold:legally mandated White : supporting documents: * of respective ministries

  16. Few more Documents Economic Survey Supplementary Demand for Grants Finance Accounts FRBM Statements Q4 of Year T-1 Q3 of Year T Outcome Budgets Annual Reports Related* Relevant* • Finance Commission Report • (Accepted Recommendations) • Five Year Plan Documents • (Annual Plans & Evaluation Reports) • RBI Reports relating to • Credit /Policy • Macroeconomic & • Monetary Developments • State Budgets and • Annual Report • PSUs’ Annual Reports 3/10/201402/07/07 16 Discuss:*How & why to relate ? * How & when to look for relevance ?

  17. 13+Budget Documents Accounting framework CAG, CGA Accounts Public Account & CFI: Charged Vs. Voted Revenue Vs. Capital; Tax and non-Tax Receipts Performanceperspective Accounting the Resources & Counting the Results Outcome budget, Annual Report CAG Finance Accounts, Audit Reports Time-frame Past year, Current Year, Ensuing Year & Future Years (Medium Term) Viz., years T-1, T, T+1, T+2, T+3 …a framework to understand 3/10/201402/07/07 17 • Issues: Classification: Reconciling the Provisional: Provisional Actual: & Actual

  18. Together – the Budget Documents… … Answer the questions like: Whether the results matched with the resources used?  How much money will go to health, education, pay, pensions, poverty alleviation, interests payments, defence etc., ? How much money will go for research & development ?  How much money will go to pay down the debt? Will taxes go up or down? How much money will be borrowed? What is the fiscal impact of all this ? …reveal Government resources flow & ... 3/10/201402/07/07 18 Would you like to try few more questions ?

  19. FRBM Framework F R B M Act A c c o u n t a b I l I t y* Disclosures Budget Making Budget Management Budget Review 3/10/201402/07/07 19 • (a) limits on Fiscal & Revenue Balance, debt & guarantees, • (b) Disclosures, (c) H1 performance indicators, (d) Transparency

  20. India’s FRBM Act – Managing The Mandate Legal Frame work Constitution, FRBM Act, Public Debt Act, etc., Borrowing by the Government of India - Art. 292 The executive power of the Union extends to borrowing upon the security of the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed.

  21. Reduce by >0.5% of GDP Reduce by >0.3% of GDP Assume < 0.5% GDP Reduce to “zero” by 2008-09 & build surplus later Reduce to 3% of GDP by 2008-09 FRBM Goals Medium Term Annual Revenue Deficit Fiscal Deficit Contingent liabilities

  22. Fiscal Performance : 22 Source: Budget at a glance 2007-08

  23. GDP & Fiscal Indicators Y=C+I+G+(X-M) • GDP: Gross Domestic Product • indicates annual national wealth production (value added at every stage of production of goods & services: CSO brings out Advance, Quick and Quarterly estimates) • Economic Growth - GDP Growth: indicates how fast a nation is getting richer(Real Vs. Nominal Growth & WPI) Issues: What causes higher GDP growth - Increase in Output: What causes increase in Output – Increase in productivity & employment:. What causes increase in productivity – increase in efficiency. What cause increase in efficiency - enhanced/effective technology & raised skills: What raises investment and skills - Creative people with money; How to do that - Help more people to be creative & help them to have access to more money. (Note: The above slide and issues are framed using publicly available sources)

  24. Framework of Fund Applications & GDP CFI Public Accounts [Art. 266 (2)] National investment Fund Revenue Capital Savings Plan Plan Non-Plan Non-Plan Services on which Funds are applied Adds to GDP Growth Poverty Reduction & Partial Impact Fiscal Social Economic General + + = +

  25. Focusing Expenditure analysison … • Macroeconomic framework* • Growth objective of Budget making • Fiscal framework for budgeting • Revenue, Expenditure & Borrowing and basis for assumptions • Fiscal Objective of Budget Making$ • Optimal budgeting, net worth • Balancing exercise@ • Revenue balance, Fiscal balance, Primary balance • Golden Rule (exception to balancing exercise) • Legal framework • Parliamentary Accountability The cause-and-effect: *A higher economic (GDP) growth yields higher tax revenue growth: $ Higher tax revenuesyield greater fiscal flexibility for accomplishing government's fundamental tasks: @ A low level of debt liability increases net worth of government; takes less and leaves more with people eg: low taxes, early debt redemption

  26. ...A Framework to Analyse Expenditure Policy framework Economic/Growth policy viz., plan, non-plan Fiscal policy viz., revenue, expenditure, borrowing Institutional framework Finance Commission, Planning Commission, Line Ministries, RBI Centre Vs. Statesresources Legal framework Tax law, Debt law, FRBM law, Accounting Rules, Spending Rules (GFR) Accounting framework Heads of Accounts, Surrender of savings, re-appropriation, provisional, final, actual, audited numbers 3/10/201402/07/07 Issues: How to leverage the framework to influence for ‘right’, ‘more’ & ‘better’ spending

  27. Budget & Debt Management for deficit financing • Objectives • Minimize costs and risks in long & medium term • Develop/ maintain efficient market for government securities • Enlarge savings options • Process • Preference to domestic debt (that finances about 90% of deficit) • ‘No debt’ from external commercial sources • Increasing reliance on marketable debt instruments • Elongation of maturity of government securities • Average tenor in 2005-06 is 15 years, longest tenor 30 years • Institutional and administrative reforms to make debt market modern and deeper