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Breaking down Budget 2017

In explaining the Budget, the wood can often be missed for the trees. The Indian Express answers the most fundamental questions about the biggest event in India’s economic calendar.

Written by Shaji Vikraman |
Updated: February 2, 2017 9:58:47 am
budget, budget 2017, union budget, Railway Budget, rail budget, budgte updates, taxation, tax rate, income tax, Fiscal Deficit, Revenue Expenditure, plan Expenditure,MGNREGS, GDp, financial year, arun jaitley, indian express news, india news, indian express explained New Delhi: An official showing the copy of Union Budget 2017-18 at Parliament after its presentation in the Lok Sabha in New Delhi on Wednesday. PTI Photo

The government merged the Railway Budget with the main Budget this year. Why does it need a Budget at all?

Any large, complex entity with financial dealings, like a company or a government, must keep accounts of what it earns and spends — and how. The Budget is a statement of those accounts. Under Article 112 of the Constitution, the Government of India must present to the representatives of the people an “annual financial statement” of “the estimated receipts and expenditure” of the government for that year financial year. India’s financial year runs from April 1 to March 31.

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Unlike the general Budget, there is no constitutional or legal requirement for a Railway Budget. It is rooted in the recommendations made by a British committee in 1924. Many Railway Ministers have been accused of using the Railway Budget for populist reasons rather than to run the Railways efficiently. It had been argued for several years that the Rail Budget should be scrapped.

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But why can’t individual ministries have their own budgets?

Individual ministries or departments work out their demands for grants — the expenditure they expect to incur on projects or programmes and payment of salaries — which are incorporated in the Union Budget. Once Parliament approves the proposals, they can start spending. It would be cumbersome and impractical to have the hundreds of departments of the government individually seeking Parliament’s approval for their spending.

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The Budget has traditionally been presented on the last day of February. Why was it advanced to February 1?

The government says it will speed up the process of getting the Budget approved by Parliament. Once that is done by March-end, spending can begin from April 1. Until now, Parliament has signed off on the Budget only by May, and spending has been postponed in some cases until after the end of the monsoon in September.

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This was the third full Budget of this government. What is the state of the economy today?

Politicians on the two sides of the political divide disagree. While government spokespersons stress that India is the “fastest growing major economy in the world”, critics have pointed to indicators that raise questions on the health of the economy. However, the slowdown is clear — growth, which was projected at 7.6% at the beginning of 2016, has now been scaled back to 7.1%, and even under 7%, by many forecasters and agencies. The overall demand for goods and services has been hit.

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And what were the expectations from this Budget?

Given the background, the Budget had fuelled hopes of higher spending by the government on infrastructure or other projects, and a stimulus to boost growth — including lower tax rates for both companies and individuals, and income support to poor households. These popular expectations have not been met by the Budget.

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Okay, before we go any further, let’s get a few Budget terms out of the way.

Fiscal Deficit

In any household, if what members of the family earn every month is not adequate to meet their expenses, they have to cut spending to the extent possible and, thereafter, borrow. Similarly, when a government is unable to raise enough revenues to meet its expenditure needs, it has to borrow. This it does either by issuing securities or bonds, or by borrowing from financial institutions such as the World Bank. Nearly all governments borrow, and their debt is referred to as national debt or sovereign debt.

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Fiscal deficit is the excess of expenditure over revenue, minus borrowings. The Budget has proposed to bring down the fiscal deficit for 2017-18 to 3.2% of the GDP, and to 3% in the following year. (Gross Domestic Product is the value of all goods and services produced in a country in a particular year — essentially, the size of the economy. India’s GDP is about $ 2 trillion.)

Revenue Expenditure

This is the money the government spends on salaries of its employees and constitutional functionaries, interest payments on borrowings, and subsidies such as selling cooking gas at below cost price.

Capital Expenditure

This is the expenditure on building roads, power plants, health facilities — in short, on anything that leads to the creation of an asset.

Plan Expenditure

This is expenditure on development schemes during a certain period like the Five-Year Plan. The Five-Year Plans have been executed by the NITI Aayog since the Planning Commission was abolished in 2014. The 12th Five-Year Plan period is from 2012-17.

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Non-Plan Expenditure

This is spending on pension payments and wages, defence, interest on borrowings, and subsidies. Both revenue and capital expenditure can be categorised as either Plan or Non-Plan Expenditure.

Goods and Services Tax

The Goods and Services Tax or GST will subsume other taxes such as excise, customs duty and service tax into one tax. It is expected to be introduced mid-year, and has the potential to boost revenues with greater coverage of tax assesses.

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How does the government raise resources?

The government’s revenues come largely from taxes, which can be either ‘direct’ or ‘indirect’. Direct taxes include income tax or corporate tax, where the money is collected directly from a person or entity. Salaried individuals get their salaries after tax has been deducted at source (TDS).

Indirect taxes are levied, as the name suggests, indirectly. An indirect tax on a good or service results in a higher price for that good or service. Thus, a part of what a buyer pays for, say, a TV, is routed to the government as excise duty levied on the manufacturing company. The government also charges for the services it provides, and makes money from dividends it earns from the companies it owns. Excise duty, service tax, value-added tax, stamp duty and entertainment tax are major indirect taxes.

What has the Budget done to raise resources?

The government hopes to raise money by taxing the well-off a little more — those with a taxable income of Rs 50 lakh or more will have to pay a surcharge of 10%. It proposes to publicly list more companies, which could mean divesting a part of the government’s shares to investors, and to bring a larger number of transactions in the tax net.

Does the Budget boost spending?

To a limited extent. The spending will be in select sectors such as roads (where it plans to spend Rs 64,000 crore) and housing, and on schemes like the Pradhan Mantri Awas Yojana. It has proposed to utilise a part of the land controlled by the Airports Authority of India to build airport infrastructure, and earmarked Rs 55,000 crore for railway projects. Government spending is important because it stimulates the economy and creates jobs.

What other steps has the Budget taken to create jobs?

There are close to 7 lakh Micro, Small and Medium Enterprises (MSMEs) in India, defined as companies with investments of up to Rs 25 lakh, more than Rs 25 lakh and up to Rs 5 crore, and more than Rs 5 crore and up to Rs 10 crore respectively, which have the potential to provide jobs. The corporate tax rate for these firms with a turnover of up to Rs 50 crore has been cut to 25%. The government says 96% of MSMEs will benefit, and hopes that they will be incentivised to add jobs.

What does the Budget have for the elderly and the retired?

There is now the comfort of assured returns of 8% for 10 years backed by a government-supported institution like Life Insurance Corporation of India (LIC) on their investments.

And what’s there for the poor — in urban and rural areas?

For the urban poor, there is the promise of affordable housing, while for the rural poor, an increased allocation has been made under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Are there any innovative ideas in the Budget?

An interesting idea is to issue bonds to fund political parties. Political funding has been repeatedly flagged as a major source of corruption, and this step is intended to bring about more transparency and accountability to the process.

Has the Finance Minister been bold, or has he played it safe?

Even aside from the political risks that bold proposals carry, the Minister had limited economic elbow room to be bolder. In many ways, he has sought to play it safe given the global uncertainties, which have a significant bearing on growth in India.

The government keeps talking of ‘minimum government, maximum governance’. Has the Budget signalled a reduced role for the government?

To an extent. The government has said it will do away with the Foreign Investment Promotion Board (FIPB), an agency that approves foreign investment proposals, thus reducing a layer of bureaucracy.

Infrastructure has been another one among this government’s buzzwords. How will the measures proposed in the Budget affect you on this count?

The plan to spend Rs 1 lakh crore over five years for rail safety should improve safety standards in the Indian Railways, and the proposal to spend Rs 1,31,000 crore by the Railways, including on development work, could mean cleaner trains. Greater spending on roads could mean improved, faster access between cities and towns, and facilities such as motels and hotels en route. This could attract more traffic and economic activity.

Finally, what is the big political message from the Budget?

Certainly, that the government is serious about eliminating black money, the theme on which it sought to sell the withdrawal of Rs 500 and Rs 1,000 notes in November last year. It has proposed a scheme, through amendments to the RBI Act, to issue bonds to fund political parties. The other big signal is that the government is more pro-poor — demonstrated by the move to tax the rich more.

And the outlook for the future?

The theme of the Budget, as articulated by the Finance Minister, is to transform and energise the country and the economy — as well as a much cleaner economy. How the year ahead will play out will depend on growth in the major economies, fresh investment by Indian companies, and spending by consumers and the government.

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