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All You Need to Know About the Union Budget of India

Editor, TRANSFIN.
Jan 29, 2021 5:23 AM 6 min read
Editorial

The Union Budget of India is an annual ritual of political showmanship grounded by economic realities. Referred to as the Annual Financial Statement in Article 112 of the Constitution, it is the most comprehensive report on the Government's finances and it outlines its spending plans for the forthcoming financial year.

More than a document, the Budget is a detailed prospectus of the Government's vision for the economy. As such, it is one of the most direct ways major reforms and economic overhauls can be brought about (hello, Budget of 1991).

When is the Union Budget Presented?

Every year, the Budget is usually presented by the Finance Minister in the Parliament at 11 AM on the first day of February (the chronology for the Interim Budget is different).

Historically, this timeline has vacillated. During the colonial era, the document was presented at 5 PM. And before 2017, the Budget was presented on the last working day of February.

The Budgetary allocations, however, kick in at the beginning of the following financial year on April 1st.

Fun Fact: The term “budget” comes from the old French word “bougette”, which means a leather bag or wallet. And until 2019, the Budget was presented in a briefcase before current Finance Minister Nirmala Sitharaman opted to buck the trend and go with a traditional bahi-khata, a red packet with the national emblem wrapped with a ribbon.

 

Who are the Stakeholders?

An extensive and complicated endeavour, the Budget-making process involves a variety of moving parts - the Finance Ministry, the Prime Minister's Office, NITI Aayog, different spending ministries, economists and an array of stakeholders such as businessmen, farmers, civil society groups etc.

The nodal body for the Union Budget is the Budget Division of the Department of Economic Affairs.

 

How is the Union Budget Prepared?

The process usually begins in September, which is when the Budget Division issues the Budget Circular, thereby officially kicking off the Budget Cycle.

The Circular is sent to all ministries, States, Union Territories, Departments, defence forces etc. And calls on them to prepare estimates for the next financial year. Once these estimates are received, bureaucrats and politicians in the Finance Ministry consider the proposals and hold extensive consultations with the relevant parties.

Once the details are hammered out and a draft Budget materialises, the Prime Minister’s Office is looped in. Following this, the Budget is frozen and all players await its presentation on February 1st.

FYI: Since 2018, the Railway Budget has been merged with the Union Budget.

 

What is the Halwa Ceremony?

The printing of the Budget documents commences about 10 days before the Parliamentary presentation with a customary halwa ceremony, where the Indian dessert is prepared in a large frying pot and distributed amongst Finance Ministry staff. A years-long tradition, the ceremony is held in New Delhi at the Central Secretariat’s North Block, where the Finance Ministry resides.

Significantly, the end of the halwa ceremony signals the beginning of the (rather intriguing) “lock-in” period.

 

What is the Lock-In Period?

So we’re ten days to February and the Budget is ready to go. But measures need to be taken to prevent leakage of information before the actual Parliamentary presentation - no mean task when you consider the countless people and interests involved in the process.

To ensure maximum secrecy, a 10-day lock-in period precedes the Budget presentation. About 100 key personnel involved in making the Budget are quarantined in North Block. In fact, North Block is converted into a fortress during this period, with 24x7 security and surveillance by the Intelligence Bureau. The people who are quarantined are not allowed any contact with the outside world, not even with their families. Only the top officials are allowed to return home, and even they are required to maintain secrecy.

In fact, the so-called Blue Sheet, a blue piece of paper containing key Budgetary numbers, is guarded "like the secret archives in the Vatican". Only the Joint Secretary (Budget) is entrusted with custody of this paper.

Budget-making, meet Dan Brown!

 

How is the Budget Finally Presented?

A day before the Budget is tabled, the Chief Economic Advisor presents the Economic Survey, a non-binding document that reviews the developments in the Indian economy over the past financial year, discusses the economy's prospects and challenges, and highlights steps taken by the Government.

On D-day, the Cabinet receives a summary of the Budget before its actual presentation. The Secretary General of the Lok Sabha seeks the President's assent following which the Finance Minister finally presents the much-awaited document.

Following the Budget presentation, the Finance Bill is introduced in the Lok Sabha as directed by Article 110 of the Constitution. Once passed, the Finance Act of the year gives effect to the Budget’s taxation proposals. (Since we don’t live in an ideal world, Finance Bills have often been used by political parties to pass non-Budget-related agendas alongwith the taxation proposals, bundling all of them in the same incongruous package.)

And thus, the Budgetary process comes to an end.

 

What is the Interim Budget?

In election years, the Budgets may be presented twice: first before the election to secure a Vote on Account (which does not require a Lok Sabha discussion and mainly deals with the expenditure side of things) for a few months, and later after the election in full. The former is the Interim Budget.

Theoretically, the Government can propose major changes in the Interim Budget, even though it may be functional for only a few months. But historically, outgoing Governments have refrained from making big-ticket changes. Well, usually anyway.

FYI: The constitutionality of the Interim Budget is a matter of debate, even though there have been over a dozen such budgets passed since Independence. In 2019, a petition was filed in the Supreme Court to quash the Interim Budget on account of it not having the backing of any Constitutional provision.

 

The Main Themes that Guide Budget-Making

Throughout the lengthy and complex process, two main things are on everyone’s minds - nominal GDP and the fiscal deficit target.

Nominal GDP is basically the value of all goods and services produced in the country at current market prices. It is - as a Professor at the National Institute of Public Finance and Policy termed it - the “Lord Ganesh of the Budget”. Because without knowing the nominal GDP for the current FY, there is no way to plan the Budget for the next FY.

The second important metric is the fiscal deficit target as provided by the Fiscal Responsibility and Budget Management Act (FRBM) Act. A Budget is basically an analysis of the Government’s revenues and expenditure plans - and a determination of how far expenditure can exceed revenues in the coming FY without crossing the fiscal deficit target. (Sure, revenues can also exceed expenditure to generate a fiscal surplus, but not every country has the privilege of being Germany!)

Both these factors determine the level of spending a Government can afford in any given year. Fiscal deficit is expressed as a percentage of nominal GDP, so higher the nominal GDP, greater the fiscal deficit targets, which means the Government can borrow more to fund increased expenditure.

By the way, expect demands to spend more to continue rising in decibels as February 1st approaches. That’s because of the unique times we’re in...

 

Budget-Making in the Time of COVID-19

The 2021 Budget will be unique since it will take place amidst the coronavirus pandemic. It will be the first paperless Budget in Indian history. Both the Budget and the Economic Survey will not be printed; soft copies will be provided to MPs instead.

Furthermore, the lock-in period would have involved about 100 officials locked into a North Block basement for 10 days. For obvious reasons, this won’t take place this year.

As for the Budget Session itself, it would be the first time MPs will meet since last year’s Monsoon Session (the Winter Session was cancelled amidst a surge in the number of COVID-19 cases). Face masks, hand sanitisers, mandatory RT-PCR tests, seating arrangements as per social distancing and different sessions for the Lok Sabha and Rajya Sabha - these are some of the measures that the Parliament will implement to prevent an outbreak of cases.

2021 is expected to be a unique Budget not just because of the precautionary measures in place but also due to the stark economic realities staring us in the face.

GDP growth is at historic lows, demand is struggling to pick up, small businesses have been battered by the pandemic, the virus continues to infect and kill, and the global economic forecast remains gloomy. To top it all, the country’s fiscal deficit was 35% higher than the FY21 Budget estimate as of November alone. So it’s not like the purse strings can be pulled liberally - and it’s not like there’s a lot of hidden capital in the purse to begin with.

Ms Sitharaman has promised a Budget like “never before” this year. For the economy’s sake, we better hope she delivers on that.

FIN.

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