Budget 2020 Explained: Finance Minister Nirmala Sitharaman arrives at the Finance Ministry on Saturday morning. (Express Photo: Praveen Khanna)
Budget 2020 Explained: Live News explanation and analysis
Finance Minister Nirmala Sitharaman presents her second budget in Parliament today. At a time when the economy is in the doldrums, Sitharaman is expected to announce measures to increase government growth to boost overall demand and put India back on track to achieve the ambitious $5 trillion economy by 2025.
The process of drafting the budget is not easy. This is especially at a time when almost all sectors, from agriculture to manufacturing to some service sectors, are witnessing a slowdown in economic activity. While some people expect the government to increase expenditure to spur economic growth, others have warned of rising fiscal deficit.
N R Bhanumurthy, Professor at the National Institute of Public Finance and Policy (NIPFP), told The Indian Express that the nominal gross domestic product (GDP) is the most fundamental building block of a Budget. “I always call nominal GDP the Lord Ganesh of the Budget," Bhanumurthy said.
“The Budget is the financial plan of the Union government for the next financial year. Essentially, it is an exercise in determining how far can the government exceed its expenditure over its revenues, given that the government is required to meet a fiscal deficit target that is provided by the Fiscal Responsibility and Budget Management Act (FRBM) Act,” he added.
So, what are the key steps of Budget-making? Udit Misra, Deputy Associate Editor, lists them:
Step 1: The Finance Ministry has to first ascertain the nominal GDP of the current financial year.
Step 2: Then it has to take this number and “project” the likely nominal GDP for the coming year.
In the “Budget at a Glance” document that is supplied at the time of the Budget presentation, the government mentions this calculation.
For instance, in the Budget for 2019-20, that was presented in July, the government stated, “GDP for BE 2019-2020 has been projected at Rs 2,11,00,607 crore assuming 12.0 % growth over the estimated GDP of Rs 1,88,40,731 crore for 2018-2019 (RE)”.
In other words, the nominal GDP (the market value of all goods and services produced within the domestic boundaries of India) to be Rs 1,88,40,731 crore in 2018-19.
The Finance Ministry then assumed that this nominal GDP would grow by 12% in 2019-20 and as such arrived at the nominal GDP figure of Rs 2,11,00,607 crore for 2019-20, which is the current financial year.
Step 3: Given the nominal GDP, the government can look at the FRBM Act target and figure out the absolute level of fiscal deficit (or borrowings or the difference between the expenditure and revenues) that it can have.
Step 4: After having a sense of how the overall economy will do in the coming year, the next logical step for a government making the Budget is to figure out how much money would it get in terms of revenues.
The absolute amount of revenues that the government will get is calculated by looking at revenue buoyancy. A tax buoyancy of 1 means that if the nominal GDP increases by 12% in the next year, the tax revenues would also increase by 12%.
Step 5: By now, the government knows what its revenues are likely to be and maximum allowable fiscal deficit. Now it is the turn of determining the level of expenditure. The idea is to contain the level of total expenditure in such a matter that fiscal deficit is not breached.
Step 6: Once the government has the fix on the total expenditure, it can go about allocating the absolute amount of money it intends to spend on different schemes.
Read more on our reportage on the Union Budget 2020:
Live Updates on the Union Budget 2020
Live Updates on the markets' reaction to the Union Budget 2020
Here are the Income Tax slabs and rates
Five things to watch out for in Budget 2020
What ails the credibility of India’s Budget numbers?
Is the push towards organised manufacturing the answer to India’s jobs crisis?
The ugly truth about India’s adherence to the FRBM Act