Explained: Dummies’ guide to the Budget

What is the Budget?

Come Budget-time, one comes face-to-face with a sudden deluge of jargon — capital expenditure, tax buoyancy, non-debt capital receipts, fiscal deficit, revenue deficit, effective revenue deficit — the list seems endless and quite capable of causing palpitations.

But beneath this jungle of jargon, a Budget is essentially an exercise where the government tells the Parliament (and through it, the whole country) about the health of its finances. This means coming clean on three main things: income, expenditure and borrowing.

Further, since a Budget typically comes at the end of one financial year and the start of another, it tells the citizens not only how much money the government raised last year, where did it spend it, and how much did it have to borrow to meet the gap but also gives an estimate about what it expects to earn in the next financial year (in the present case, the current financial year), how much and where it plans to spend it, and how much would it likely have to borrow to bridge the gap.

Why does it matter?

An average Indian citizen might wonder why he or she needs to be concerned with the government’s finances. After all, they may argue, it is not their money. It is because of this inadequate understanding of the Budget that most of the public interest in this annual exercise is limited to either seeking some tax relief or some kind of cash handout from the government.

The fact is that there is no such thing as government money — it is all taxpayer’s money. Consider what the Conservative British Prime Minister Margaret Thatcher once explained in the House of Commons of the UK:

“Let us never forget this fundamental truth. The state (government) has no source of money other than the money people earn themselves. If the state (government) wishes to spend more, it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay. That someone else is you.”

It is important to remember these words especially because the ruling BJP is the right-of-centre counterpart of the Conservative Party in the UK and much like Thatcher, PM Modi has repeatedly expressed his dislike for handouts and government dole.

In other words, the budget essentially discusses the citizen’s money. The government’s borrowing (the fiscal deficit) is, in no uncertain terms, an addition to a debt that citizens and their future generations will have to pay back. By the same logic, it matters for citizens to closely monitor things like: Who does the government tax and how much? What are the government’s spending priorities? Does it spend enough on education and health? Does it subsidise the deserving people? How can it bridge the gap between its income and expenditure?

With apologies to writer Katherine Mansfield, “some countries go over their budgets very carefully every year; others just go over them”. Over decades, the difference could be as stark as in the trajectory of India and Pakistan’s fiscal health.

How does a Union Budget influence the economy?

Union budgets aren’t exactly like household budgets because unlike the latter, they can influence the trajectory of the whole country. Apart from not overburdening people with increasing levels of borrowings and debt, a government can use the budget to influence the behaviour of Indian citizens and businesses in two broad ways.

One is by tweaking who it taxes and how much. For instance, if a government wants to incentivise businesses in one segment of the economy — presumably because it believes such a move will leverage India’s demographic profile, create jobs and bring prosperity — it can lower the tax rate. To be sure, lowering the tax rate may not necessarily lead to lower revenues; it is quite possible that the increased economic activity (thanks to the lower tax rate) leads to higher overall revenues despite a lower tax rate.

Second is by tweaking where a government spends and how much. While the budget is only for a year, budgets at the start of a new government’s term (as is the case this time) can often signal a broader shift in how the government wants to spend its money.

For instance, arguably the biggest macroeconomic policy shift of the last government (2019-2024) was the focus on incentivising investments by the private sector. To this end, the government gave a historic tax break in corporate tax on the one hand, while boosting its own spending in infrastructure on the other.

However, this strategy has met with a muted response. The businesses of India have largely held back from making the kind of fresh investments that the government had hoped for. That’s because overall demand for goods (say two-wheelers) and services (say tourism) from people has been less than encouraging. Widespread economic distress coupled with employment-related stress were key concerns in the minds of the voters as they reduced BJP’s seats by 20% in the recently concluded elections.

In such a scenario, the government could, if it wants, pivot and tweak its spending in a manner that boosts consumption by common people instead of further incentivising businesses to invest. As consumption recovers over time, firms may find it worthwhile to make fresh investments.

What to look out for in the 2024 Union Budget? And why?

1. 01

   Tax revenues

   Government’s tax revenues have been becoming progressively more responsive to increases in total GDP. Better ‘tax buoyancy’ can provide higher than anticipated income to the government.

2. 02

   Expenditure towards rural India and small businesses

   These are the segments that are still struggling with economic distress.

3. 03

   Subsidy outgo

   There is only so much that a government can spend in the form of a direct benefit from the government to one segment of the economy or the other.

4. 04

   Fiscal Deficit

   Each year’s fiscal deficit adds to the existing mountain of government debt. In the previous 10 years, Modi-led government has never achieved the prudential norm of a fiscal deficit being 3% of GDP.

5. 05

   Overall philosophy

   The first budget of a new government enunciates the broader approach it hopes to follow towards managing the economy.