UNION BUDGET: ECONOMY

UNION BUDGET: ECONOMY

NEWS: understanding its formulation and implications

 

WHAT’S IN THE NEWS?

The Union Budget is the Government of India's annual financial statement that outlines revenue and expenditure plans. It impacts economic growth, income distribution, and fiscal policies. The Finance Minister presents the budget, and it must be passed by Parliament before taking effect on April 1, the start of the financial year.

Key Components of the Union Budget

The budget consists of three major components:

  1. Expenditure (Government Spending)
    • Capital Expenditure: Spending on long-term asset creation, such as infrastructure, hospitals, and schools.
    • Revenue Expenditure: Day-to-day operational costs, including salaries, subsidies, and interest payments.
  1. Receipts (Government Income)
    • Revenue Receipts: Includes tax and non-tax income that does not increase liabilities.
    • Non-Debt Capital Receipts: Income from loan recoveries and disinvestment, which does not create additional debt.
    • Debt-Creating Capital Receipts: Borrowings that increase government liabilities.
  1. Deficit Indicators
    • Fiscal Deficit = Total Expenditure - (Revenue Receipts + Non-Debt Capital Receipts).
    • Primary Deficit = Fiscal Deficit - Interest Payments.
    • Revenue Deficit = Revenue Expenditure - Revenue Receipts.

Impact of the Budget on the Economy

  1. Aggregate Demand
    • Increased government spending boosts demand.
    • Higher taxes reduce disposable income, lowering demand.
  1. Income Distribution
    • Welfare schemes and social sector spending help the poor.
    • Corporate tax cuts benefit businesses and investors.
  1. Economic Growth
    • Government decisions on taxation, borrowing, and spending affect GDP growth.
    • Infrastructure spending enhances long-term economic productivity.
  1. Inflation Control
    • Subsidy reductions and tax changes influence inflation.
    • Fiscal deficit levels affect borrowing costs and interest rates.
  1. Foreign Investment
    • Favorable tax policies and business reforms attract Foreign Direct Investment (FDI).
  1. Social Welfare
    • Increased budgetary allocations for healthcare, education, and social security improve living standards.
  1. Stock Market Impact
    • Policy changes related to taxation, industry incentives, and reforms influence investor sentiment.
  1. Sustainability
    • Investments in green energy and climate resilience promote sustainable growth.

Fiscal Rules and the N.K. Singh Committee

The N.K. Singh Committee, established in 2016, reviewed the Fiscal Responsibility and Budget Management Act (FRBMA) of 2003 and proposed several recommendations:

  1. Debt-to-GDP Ratio Targets
    • Central Government: Reduce the debt-to-GDP ratio to 40%.
    • State Governments: Collectively aim for a 20% debt-to-GDP ratio.
    • Combined Target: Achieve a 60% debt-to-GDP ratio for both central and state governments.
  1. Fiscal Deficit Reduction
    • Target fiscal deficit at 2.5% of GDP.
    • Implement a phased reduction approach.
  1. Flexibility in Deficit Targets
    • Allow deviations of up to 0.5 percentage points in extraordinary situations such as economic downturns or natural disasters.
  1. Establishment of a Fiscal Council
    • A three-member independent council to oversee fiscal performance and adherence to targets.
  1. New Fiscal Legislation
    • Replace the FRBM Act with a Debt and Fiscal Responsibility Act for better fiscal discipline.

Source: https://epaper.thehindu.com/ccidist-ws/th/th_delhi/issues/117663/OPS/GAHDTMUAL.1+G0NDTOVIO.1.html