Types of Government Budget in India – Features and Elements

A government budget is a document prepared by the government and/or alternative entities presenting its anticipated revenues tax revenues/income tax, corporation tax, import taxes) and planned government expenditures/spending/expenditure for (Healthcare, Education, Defence, Roads, State Benefit) for the approaching financial year. In most parliamentary systems, the budget is given to the lawmakers and sometimes needs approval of the lawmakers. Through this budget, the government implements economic policy and realizes its program priorities.

Once the budget is approved, the utilization of funds from individual chapters is in the hands of government, ministries and alternative establishments. Revenues of the state budget consist principally of taxes, customs duties, fees and alternative revenues. State budget expenditures cowl the activities of the state, that are either given by law or the constitution. The budget in itself doesn’t appropriate funds for government programs, hence would like for additional legislative measures.

What is a Government Budget?

Budget is a vital part of the planning and control of the financial affairs of a nation and is made essentially because income and expenditure do not occur simultaneously. Budgets can be composed for a person, a group of people, a business, a government, or just on anything else that does and spends money.

The main elements of the budget are:

• It is a statement of estimations of government receipts and expenses.
• Budget measures concern a fixed period, generally a year.
• Expenditure and sources of finance are planned in accordance with the purposes of the government.
• It needs to be approved by Parliament or Assembly or some other authority before its implementation.

Impact of Budget

A budget impacts society at three levels

• It serves aggregate fiscal discipline through the controlled expense, given the quantum of revenues
• Resources of the country are allocated based on social priorities
• It contains effective and efficient programs for the delivery of goods and services to achieve its targets and goals.

Definition of Government Budget

The government budget is a yearly financial report explaining the revenues and spending for a financial year. This is often moved by the legislature, sanctioned by the chief executive or president, and delivered by the Finance Minister to the country. The budget is also known as the Annual Financial Statement of the nation.

The government plans expenses according to its objectives and then tries to allocate resources to meet the intended expenditure. The government earns money broadly from taxes, fees and fines, interest on loans given to states, and dividends by public sector enterprises. The government contributes mainly to securing and providing goods and services to citizens, on law and order, and Internal security, defense, staff salaries, etc.

In India, there is a constitutional provision to present a budget before Parliament for the ensuing financial year. The fiscal year commences on 1st April and ends on 31st March of next year. The budget is the most important information document of the government because the government implements its plans and programs in the budget.

Types of Budget

The Budget is Divided into Three Types

Balanced Budget

A balanced Budget is a budget in which total revenue or receipts are equal to total expenditure in a particular financial year. The benefits of a balanced budget are that it refrains government from impulsive expenditure. On the other hand, the disadvantage of a balanced budget is that at times of recession it does not offer any solution to problems like unemployment. Further, it also restricts the government from spending on public welfare.

Example:

Let’s assume that Mr. Shankar and his wife Amita Shankar earns Rs. 1,50,000 a year. But when Amita analyzes both of their expenditures for the whole year she discovers that they have spent Rs. 1,60,000. So, it could not be considered as a balanced budget because their expenditure exceeds their revenue.

But in some cases, people or countries spend less than they take in. Which creates an opportunity for them to save or pay down their debts. For example, let’s say that Mr. Sharma and his family earn Rs. 10,00,000 a year and their family’s total expenditure is 9,50,000 so we can say that a balanced budget exists in some cases because at least expenses don’t exceed revenues. Or in another case, If Mr. Sharma and his family income and expenditure are Rs. 10,00,000 then it will also be considered as a balanced budget as here revenue and expenditure are the same. But this case is very rare.

Balanced Budget: Total Revenue = Total Expenditure

Surplus Budget

A government budget is said to be a surplus budget when the expected government income is more than the government estimated expenditure. It indicates that the government is drawing more money from the taxes levied than the amount of government spending on public welfare. Such a budget can be performed at times of inflation to lessen the aggregate demand as a whole. Hence, at times of deflation and recession, the given budget is not a good option for the government.

Example:

Rashika is the head of a firm named ABC in India and wants to begin investing in a new product line. But she requires money to do that, so she takes a look at her company’s financial status. In it, she notices that the company has a revenue of Rs. 1,00,000 with costs of Rs. 1,20,000. So far, due to Rashika’s contribution from her accounts the company has been still in business. However, she talks to her managers to see if they could lower their costs to Rs. 80,000. Again, at the end of the following year, she checked the financial status of the company and noticed that the company had grown its revenue to Rs. 1,40,000 and decreased costs to Rs. 60,000.

Therefore, this gives the company a budget surplus for the year of Rs. 80,000. After paying all the expenses Rashika can use this money to launch her new lines of products. Hence, to promote growth and investment the budget surplus is an important part of a business which in turn can lead to new successes in the future.

Surplus Budget = Total Income – Total Expenditure

Deficit Budget

In simple terms, A deficit budget is a budget in which total receipts or revenue is less than the total expenditure. This implies that the estimated government expenditure is more than the expected government revenue in a particular year. It is the most common type of budget which is presented by the most popular democracies in today’s world. To generate additional demand and to boost the rate of economic growth this type of budget is helpful at the time of recession.

One merit and demerit of a deficit budget is that it enables the government to spend on public welfare and increases the burden on the government through accumulating debts respectively.

Example:

Let’s take a simple example, a government for a particular year takes in 110 billion in revenue and its expenditure for the same year is 130 billion. So, it is running a deficit of 20 billion. And that deficit is added to those from previous years, creating the country’s national debt.

Budget Deficit = Total expenditure – Total income

Components of Budget

The main components of budget are:

Revenue Budget: This consists of the Revenue Expenditure and Revenue Receipts.

• Revenue Receipts are receipts that do not have a direct impact on the assets and liabilities of the government. This consists of the money obtained by the government through tax (such as excise duty, income tax) and non-tax sources (such as dividend income, profits, and interest receipts).
• Revenue Expenditure is the expense of the govt. which does not impact its assets or liabilities. For example, this involves salaries, interest payments, pension, and administrative expenditures.

Capital Budget: This involves Capital Receipts and Capital Expenditure.

• Capital Receipts indicate the receipts which lead to a decrease in assets or an increase in responsibilities of the government. This consists of: (i) the money received by selling disinvestment such as shares of public enterprises, and (ii) the money earned in the form of borrowings or repayment of loans by states.
• Capital expenditure is accepted to create assets or to reduce liabilities. It consists of:

1. the long-term investments by the government on generating assets such as roads and hospitals, and
2. the money given by the government in the form of loans to the repayment of its borrowings.

Objectives of Government Budget

The main objectives of government budgets are below:

1. Reallocation of Resources: It serves to share resources keeping in view the social and economic advantages of the country.
2. Allowance or Tax Concessions: The government gives allowance and tax concessions to manufacturers to encourage investment.
3. Direct Production of Goods and Services: The government can use the production method immediately if the private sector does not give any interest.
4. Minimize Inequalities in Income and Wealth: In an economic system, income and wealth inequality is an integral part. So, the government intends to bring equality by requiring a tax on the elite class and spending extra on the well-being of the poor.
5. Economic Stability: The budget is also utilized to avoid business fluctuations to accomplish the aim of financial stability. Policies like deficit budget during deflation and excess budget during extension aid in balancing the prices in the economy.
6. Manage Public Enterprises: Many public sector industries are established for the social benefit of the people. The budget is planned to deliver different provisions for operating such business and giving financial help.
7. Economic Growth: A country’s economic extension is based on the rate of investment and saving. Hence, the budgetary plan focuses on providing adequate resources for investing in the public sector and raises the overall rate of investments and savings.
8. Decrease Regional Differences:It intends to reduce regional disparities by performing taxation and expense policy and raising the installation of production units in underdeveloped regions.

Importance of Budget for Government

Any political party which forms the government at the Centre has some social, political, and economic responsibilities. In countries with deep cultural, religious, and economic variables such as India, the government needs to allot resources carefully. Several factors such as uplifting underprivileged sections of the society, mitigating regional disparity, promoting fiscal inclusion, improving defense capabilities, giving proper educational facilities, and much more.

Proper Resource Pool Allocation

It attains budgeting, identifying measures of instability helps the government to allot resources in a helpful and sustainable manner. This is one of the most fundamental purposes behind framing a government budget. The government needs to ensure that funds reach where it’s required the most. Hence, using past data to identify sections of the society in need of economic welfare policies and achieving those policies assists the government to demonstrate effective governance and attain economic stability in the country.

Ensuring Economic Growth

A budget provides the government to control the imposition of taxes in different sectors. Investment and expense are some of the most notable factors according to the growth of a nation’s economy. The government can assist people to maintain more savings and investments by giving tax rebates and subsidies.

Growth of Business and Trading

Enterprises and businesses forward to the government budget as resources being allotted to different sectors that are unveiled. The government can assist business owners to change their policies accordingly and contribute to the country’s economic prosperity.

Mitigating Economic Divide

Economic differences and inequality are an imminent threat to any country’s economy. The government can address these kinds of threats by offering public and economic welfare policies for the underprivileged sections of the society in the budget.

Administering Operation of PSUs

Industries working in the public sector offer immensely to the country’s economy by giving employment to a lot of people and making revenues. A budget supports the government to focus properly on companies in the public sector by offering policies to aid their growth.

Other Types of Budgets

Below are the some other types of budgets:

Zero Based Budgeting

Zero-based budgeting is a system of budgeting in which all expenses are estimated each time a Budget is made and expenses must be maintained for each new period. It starts from the zero base and every function of the government is examined for its needs and cost. Budget is then made based on the needs.

Outcome Budget

The outcome Budget was first introduced in the year 2005. It analyses the progress of each ministry and department and what the esteemed ministry has done with its Budget expenditure. It estimates the development results of all government programs.

Gender Budgeting

The gender-budgeting is described as a gender-based assessment of Budgets. Including a gender viewpoint at all levels of the budgetary process, and restructuring incomes and expenses to promote gender equality. It is budgeting for gender equality. Through the Gender Budget, the Government maintains an amount to be spent on the development, Welfare, Empowerment schemes, and arrangements for Females.

Stages of Budget

Following are the stages through which the budget goes over in the parliament.

• First is the Presentation of budget
• Then after the presentation of the Budget, General Discussion starts which lasts for three to four days usually.
• Scrutiny by departmental committees
• After the Scrutiny by departmental Committees, the house proceeds for the discussion and voting on demands for grants.
• Passing of the appropriation bill
• After passing the appropriation bill, the Finance bill is passed as it contains taxation proposals.

Important Changes

There have been some important changes in the government budget like:

• The date of the presentation of a government budget is changed from the last working day of February i.e.28-Feb to February 1st.
• Scrapping the 92 years old practice by merging the railway budget with the union budget.
• British era practice of carrying budget documents in a briefcase was replaced with a “bahi-khata” which was inside a red cloth folder.

Conclusion

A yearly fiscal (financial)statement that outlines the expected government expense and expected government receipts or revenues for the coming fiscal year has three different types of budget. Thus, across the world with actual practice governments are rarely seen presenting a balanced budget or a surplus budget. But with a deficit budget, the government tries to bridge the gap between the income and expenditure by borrowing from its sources. Hence the deficit type of Budget is mostly used by different countries in the world as it refers to as a good tool to fight against recession.

Frequently Asked Questions

Q1. What is the Capital Budget?

Ans. It is the part of the budget that contains estimates of capital receipts and capital expenditure which causes changes in assets and liabilities of the Government.

Q2. What is a Revenue Budget?

Ans. It is a part of the budget that contains the estimate of revenue receipts and revenue expenditure which don’t cause any changes in assets and liabilities of the government.

Q3. How many types of budgets are there?

Ans. There are three types of Budgets namely:

• Balance Budget
• Deficit Budget
• Surplus Budget

Q4. What is the Government Budget?

Ans. It is the statement of estimated expenditure and receipt of the government for a particular year.

Q5. What is the fiscal year?

Ans. The Fiscal year is a 12 months period for which a government records its income and expenditure.

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