• According to Article 112 of the Indian Constitution, the Union Budget of a year also referred to as the Annual Financial Statement (AFS) , is a statement of the estimated receipts and expenditure of the Government in a financial year.
• Components of the Budget —expenditure, receipts and deficit indicators.
• Total expenditure can be further be divided into capital and revenue expenditure. Receipts of the Government also have three components —revenue receipts, non-debt capital receipts and debt-creating capital receipts
• Since different components of expenditure and revenue can have different effects on income of different classes and social groups, the Budget has implications for income distribution as well.
• In India the fiscal rule is guided by the recommendations of the N.K. Singh Committee Report.
• Allowing for some deviations under exceptional times, it has three policy targets —maintaining a specific level of debt-GDP ratio (stock target), fiscal deficit-GDP ratio (flow target) and revenue deficit-GDP ratio (composition target).
• Based on their impact on assets and liabilities, total expenditure can be divided into capital and revenue expenditure. Capital expenditure is incurred with the purpose of increasing assets of a durable nature or of reducing recurring liabilities.
• Consider the expenditure incurred for constructing new schools or new hospitals. All these are classified as capital expenditure as they lead to creation of new assets.
• Revenue expenditure involves any expenditure that does not add to assets or reduce liabilities.
• Expenditure on the payment of wages and salaries, subsidies or interest payments would be typically classified as revenue expenditure.
• Depending on the manner in which it affects different sectors, expenditure is also classified into (i) general services (ii) economic services, (iii) social services and (iv) grants-in-aid and contribution.
• The sum of expenditure on economic and social services together form the development expenditure.
• Economic services include expenditure on transport, communication, rural development, agricultural and allied sectors.
• Expenditure on the social sector including education or health is categorised as social services. Again, depending on its effect on asset creation or liability reduction, development expenditure can be further classified as revenue and capital expenditure.
• The receipts of the Government have three components — revenue receipts, non-debt capital receipts and debt-creating capital receipts. Revenue receipts involve receipts that are not associated with increase in liabilities and comprise revenue from taxes and non-tax sources. Non-debt receipts are part of capital receipts that do not generate additional liabilities.
• Recovery of loans and proceeds from disinvestments would be regarded as non-debt receipts since generating revenue from these sources does not directly increase liabilities, or future payment commitments.
• Debt-creating capital receipts are ones that involve higher liabilities and future payment commitments of the Government.
• Fiscal deficit by definition is the difference between total expenditure and the sum of revenue receipts and non-debt receipts. It indicates how much the Government is spending in net terms.
• Since positive fiscal deficits indicate the amount of expenditure over and above revenue and non-debt receipts, it needs to be financed by a debt-creating capital receipt. Primary deficit is the difference between fiscal deficit and interest payments. Revenue deficit is derived by deducting capital expenditure from fiscal deficits.

What are the implications of the Budget on the economy

• All Government expenditure generates aggregate demand in the economy since it involves purchase of private goods and services by the Government sector
• All tax and non-tax revenue reduces net income of the private sector and thereby leads to reduction in private and aggregate demand. But except for exceptional circumstances, the GDP, revenue receipt and expenditure typically show a tendency to rise over time.
• The trend in absolute value of expenditure and receipts in themselves has little use for meaningful analysis of the Budget. The trend in expenditures and revenue is analysed either by the GDP or as growth rates after accounting for the inflation rate.
• Reduction in expenditure GDP ratio or increase in revenue receipt-GDP ratio indicates the Government’s policy to reduce aggregate demand and vice-versa. For similar reasons, reduction in fiscal deficit-GDP ratio and primary deficit-GDP ratios indicate Government policy of reducing demand and vice versa.
• Since different components of expenditure and revenue can have different effects on income of different classes and social groups, the Budget also has implications for income distribution. For example, revenue expenditure such as employment guarantee schemes or food subsidies can directly boost the income of the poor.
• Concession in corporate tax may directly and positively affect corporate incomes. Though both a rise in expenditure for employment guarantee schemes or reduction in the corporate tax would widen the fiscal deficit, its implications for income distribution would be different.

What are fiscal rules and how do they affect policy

• What – Provide specific policy targets on the basis of which fiscal policy is formed. Policy targets can be met by using different policy instruments.
• There exists no unique fiscal rule that is applied to all countries. Rather, policy targets are sensitive to the nature of economic theory and depend on the specificity of an economy.
• India’s case
  • Present fiscal rule is guided by the recommendations of the N.K. Singh Committee Report
  • Three policy targets — maintaining a specific level of debt-GDP ratio (stock target), fiscal deficit-GDP ratio (flow target) and revenue deficit-GDP ratio (composition target).