Understanding the Union budget in its entirety is a difficult process as it involves complex terms, which are key indicators of the country’s financial performance.
Finance Minister Piyush Goyal is all set to present the much-awaited interim budget on February 1, 2019.
Like every year, the finance minister will announce an annual report on expenditure and revenue plans for the next financial year during his budget address.
However, understanding the budget in its entirety is a difficult process as it involves complex terms, which are indicators of the country’s financial performance.
A large number of people often ignore key terms such as inflation, fiscal deficit, capital expenditure, revenue receipts, surplus budget, deficit budget, divestment, bad loans, balanced budget, and many more.
Here are all the terms explained in detail to help you expand your budget vocabulary:
Union Budget (Annual financial statement)
The budget is also known as the annual financial statement, which is presented by the government to highlight its expenditure and receipts. It is mandated by Article 112 of the Constitution.
The annual financial statement is one of the main aspects of a government’s budget and the Constitution mandates a government to present the same on the floor of the parliament.
The budget also outlines the estimates of the government's accounts for the next fiscal year, known as budget estimates.
The budget for the coming financial year has to be sanctioned by the parliament.
Without its approval, the government cannot draw from the Consolidated Fund of India.
An interim budget is usually presented by a government in the final year of its tenure.
While it is similar to a full budget or a normal budget, the government has to obtain a vote on account in the Parliament to sanction funds from the Consolidated Funds of India till the full budget is approved after the polls by the elected government.
As part of the process, the Parliament is also required to approve a vote on account to give the government spending rights until a full budget after elections.
If a government is re-elected, it can then get an approval for the full budget.
Meanwhile, a newly-elected government is allowed to tweak the recommendations in interim budget or opt for a complete makeover of the financial plan.
As the name suggests, revenue expenditure is also called income statement expenditure. It denotes short-term cost-related assets that are not capitalised.
These expenditures are recurring in nature and are incurred by the government regularly. Such expenses are incurred on a recurring basis by the government towards paying salaries and maintaining fixed assets.
Capital expenditure or Capex
While capital expenditure or capex is a broad economic term used by several companies, it is a very important term in a budgetary context.
It usually denotes funds used by a company (government) to acquire, maintain or upgrade physical assets such as property, new infrastructural projects or buying new equipment.
Capital expenditure is classified as a long-term expenditure and usually includes expenses incurred by the government towards asset building, including developmental and infrastructural projects.
When a government spends money on big-ticket projects, the expenses incurred are usually categorised as capital expenditure. Such expenses are not recurring in nature.
Customs duty is the levy charged on when certain goods are imported into/exported out of the country. These expenses are also passed on to the end customer. Since customs is outside the purview of GST, the government has room to announce changes in its budget presentation.
Goods and Services Tax (GST)
Goods and Services Tax (GST) was implemented on July 1, 2017 in a bid to subsume a number of indirect taxes. It is levied on the supply of goods and services.
Since its impleentation, it has garnered mixed reactions with some people lauding the "one nation, one tax" system while others continue to criticise the way it was implemented.
Decisions pertaining to the GST is approved by the GST Council, which is trying to simplfy the indirect taxation system further in terms of slab reduction. As of now, India's GST has five slabs -- 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent.
While Finance MInister Piyush Goyal is expected to speak on GST during the interim budget presentation, no changes can related to indirect taxes will feature in the interim budget.
All taxes including income tax and corporate tax are included under direct taxes. As per reports, the government may announce some changes in personal income tax in the interim budget. However, governments have historically refrained from implementing big ticket tax changes in interim budgets. Indirect taxes, however, will not be a part of budget as they now fall under GST.
Current Account Deficit (CAD)
Current Account Deficit (CAD) is a measurement of the country's trade, where the value of imported goods and services exceeds the value of exports. It is a component of the country's balance of payments.
Plan and non-plan expenditure
There are usually two components of expenditure - plan and non-plan expenditure.
As the name suggests, plan expenditure are the budget esitmates that are determined after dicussion with all stakeholders or ministries.
Non-plan expenditure, on the other hand, mostly involves revenue expenditure, though it also included capital expenditure.
These are majorly expenses incurred by the government on interest payments, statutory transfers, to state/UTs, pension payments and salaries of government employees.
Non-plan expenses constitue a major part of the government's budgetary expenses. Debt servicing, defence expenditure and interest payments comprise the biggest expenses under the category.
When the government’s net income or revenue generation is less than the projected net income, a revenue deficit occurs.
This is a situation where the actual amount of revenue or expenditure is not in line with budget revenues and expenditure. It is a key indicator to determine whether the government is overspending from its regular income.
Revenue surplus is the exact opposite of a revenue deficit. It is a situation where the net realised income or revenue generation is more than the projected net income. The actual revenue and expenditure are more than the budget estimates.
You will probably hear this term a number of times during Jaitley's budget speech. Inflation is a quantitative measure of the rate at which select products and services in an economy are increased over a certain period of time.
When the price of a certain basket of commodities increases due to internal or external economic factors, it can be termed as a rise in inflation. Usually expressed as a percentage, a rise in inflation indicates a decrease in the country’s currency value and subsequently purchasing power.
In a nutshell: A rise in inflation significantly impacts citizens as it reduces their purchasing power and it can often lead to a financial crisis if not suppressed in due course. Its antonym is deflation, which indicates a decline in prices of goods and services.
Another term you are likely to hear during a budget speech is the fiscal policy.
Fiscal policy is a blueprint of estimated taxation and government spending. Fiscal policy denotes adjustments in spending level and tax rates, serving as a key instrument to monitor the country’s economic position.
It goes hand in hand with the monetary policy, through which the Reserve Bank of India (RBI) influences the nation’s money supply.
However, previous budgets are an indication that fiscal policies are now ironed out by policymakers to fulfill people’s interest rather than focusing on growth.
How fiscal policy works: Fiscal policy is based on theories of British Economist John Maynard Keynes and is also known as Keynesian economics.
Fiscal policy is the instrument used by the government to influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending.
Using fiscal policy, the government can curb inflation, increase or decrease employment and maintain a health monetary reserve. Fiscal policy plays a huge role in determining the economic health of a country.
This is another term that you may have often come across on business newspapers or heard on primetime debates. You may hear the term being used multiple times during this year’s budget address as India continues to drown in a pool of deficit.
Fiscal deficit is basically the difference between total revenue and total expenditure of the government.
When a government’s total expenditure exceeds total revenue, excluding any external borrowings, it is termed as fiscal deficit. However, fiscal deficit differs from debt, which can be an accumulation of many yearly deficits.
Why is it important?
It is very important for developing countries like India as the total generated revenue is not enough for the government to meet all its revenue and capital expenditure.
Since the government requires a large sum of money to fund infrastructural development, developing countries often run on a fiscal deficit towards asset creation.
This is why some economists argue that fiscal deficit is not really a bad indicator but a stance which indicates development.
However, India’s fiscal deficit (spending more than generated revenue) has touched an alarming rate and is likely to overshoot fiscal deficit limit. An ideal fiscal deficit should not exceed 4 per cent of the Gross Domestic Product (GDP).
In a nutshell: It is a situation where the government spends more than it earns in terms of revenue receipts. A government which runs on a fiscal deficit has to resort to more borrowing from banks, public institutions, and overseas investors. A high fiscal deficit can, however, drastically impact the economic progress of a country.
Divestment is another term that will find mention during the budget speech. It is the opposite of investment and the process involves sale of existing assets.
The government has been looking to divest many of its assets which have turned sour over the years. The government is expected to make key announcements on divestments as it looks to close the fiscal deficit gap.
Last year, Finance Minister Arun Jaitley had set a divestment target of Rs 72,000 crore but it is likely to fall short of the target by at least Rs 20,000 crore, according to Care Ratings.
The government is expected to set a divestment target of Rs 80,000 crore for the upcoming fiscal.
Balanced budget, surplus budget and deficit budget
A balanced budget is equivalent to an idealistic financial statement where the government’s estimated expenditure is equal to the revenue receipts in a financial year.
This form of budget is difficult to implement, especially for a developing economy like India where the government’s expenditure is more than its revenue generation.
A surplus budget is a scenario where the government’s estimated revenues exceed the expected expenditure for a particular financial year.
This is an indication the government is earning more from taxes but spending less on public welfare projects. A surplus budget comes in handy during times of recession as it paves way for reducing average demand.
Last but not the least, a deficit budget denotes the situation where the estimated government expenditure exceeds the expected revenue receipts for a particular financial year.
This budget is ideal for developing economies like India and helps generate additional demand and boosts economic growth.
While the government spends more to generate employment, which leads to more demand for goods and services and helps in economic recovery or progress. The government usually borrows from banks, citizens or accumulated reserves.