The Budget In Class Room


The Consolidated Fund comprises of two parts a) the revenue account; and b) the capital account. The revenue account comprises expenditures covering the routine administration of the State, such as wages, salaries, maintenance and repairs, telephone expenses, day to day office running expenses and other overheads. Expenditures relating to the creation of assets – and this includes most (but not all) of Plan expenditure – are in the Capital account.

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Revenue receipts are all those incomes which do not incur repayment liability. These include, in addition to the State’s own revenues, grants from the Central Government for the financing of State Plans, as well as non-plan grants.

Capital receipts include internal debt, loans from the Center and the State’s recovery of its own loans advanced to State Corporations, Co-operative Societies, etc., and are entered in the capital account. On the outlay side of the capital account, there are expenditures corresponding to the State’s own investment outlay and disbursements, which are comprised of repayment of State public debt and the loans and advances made by the State to the various entities. Thus, both the capital and debt portions of the Consolidated Fund are under the Capital budget.

The Public Account includes those funds which do not rightly belong to the State but which the State holds in trust for other entities. This would include such items as deposits from Municipal Corporations, pension fund accumulations of the emoployees’ provident fund, and reserve and depreciation funds. It could rightly be characterized as the fund for which the State acts as “banker”.

The Contingency Fund, as its name implies, is a fund for emergency use. It does not, in fact, contain any “real” money, but is an accounting figure that is included in the budget to cover generally the decretal amounts and other unforeseen emergent expenditures. Expenditure from the Contingency Fund can be made with Cabinet consensus alone and hence have the advantage that the budgetary procedure – involving legislative approval – is circumvented; albeit the seal of Legislature subsequently to the expenditure thus incurred is a must. The monetary ceiling of Contingency Fund in most states is raised every few years through the budgetary process.

All those receipts for which the State has no re-payment liability and which are used to finance items of revenue expenditure. They consist of State tax revenues, non- tax revenues and grants from the Central Government.

Revenue sharing is a built-in feature of the Indian fiscal scene. The Indian Constitution assigns to the State and Central Governments specific expenditure responsibilities – Irrigation, Power, and Agriculture, among others, are the sectors of State responsibility, while Defence, Posts and Telegraphs, Railways etc. fall in the Center’s domain.

Similarly, a breakdown has been made in the case of tax revenues, where many taxes, in the interests of efficiency and uniformity, are assigned to the Central Government and they are States enjoined from taping these sources.

Share in Central Taxes represents the automatic revenue sharing, known as devolution, which all States receive. The States receive percent of the net tax revenues of the Centre. The proportion, in which these taxes are to be shared between the Centre and the States and amongst the States, is determined by the Finance Commission, a statutory body.

Expenditures are classified under two headings: a) revenue expenditures ; and b) capital expenditures.

The terms ‘revenue expenditures’ and ‘current expenditures’ are used interchangeably just as the terms ‘capital expenditures’ and ‘investment’. The correlation, however, is not exact. There is some investment expenditures on revenue account (basically capital expenditures), which are required for carrying out general administration of the State, such as housing for civil servants. Likewise, current expenditures shown up on the capital account. Formally, the difference between revenue and capital expenditure is determined on the basis of whether the expenditures are financed from revenue or capital receipts.

Plan expenditures may be either revenue or capital expenditures, since the expenditures of a non-capital nature are financed through Plan during the Plan period (they become Non-Plan committed expenditures at the termination of the Plan); but they are always “developmental”.

Revenue Budget: It is the revenue expenditure that takes place from this budget. Salaries of government employees and military staff, perks for ministers, office furniture, grants to local bodies, subsidies, interest to be paid on loans taken, and pensions are all accounted for here and referred to as revenue spending. Any expenditure for the normal running of the Government, which does not lead to the creation of assets, is called revenue spending. This spending must be financed from revenue receipts, i.e. revenue that the Government earns. The Government earns revenue in the form of taxes (corporate, income), duties (excise, custom etc.), receipts, fee and interest and dividends (if the Government makes investments).

Capital Budget: It is the capital expenditure and it refers to the money spent on creating assets (roads, highways, and dams), buying land or building, purchasing machinery and equipment. Loans from the Centre to various institutions or Government-run companies are clubbed here, too. Also included are any investments made by the Government in shares or other such instruments. This spending is financed from capital receipts, the money that the Government gets from loans. The loans can be from the public (market loans), from the Reserve Bank of India (the country’s Central Bank) or from financial institutions.

Finance Bill: Finance Bill consists the Government’s proposals for the imposition of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by the parliament.

Capital Receipts : Include loans raised by the State from the market, borrowings from RBI and other institutions, loans from the Centre, receipts from special securities issued to NSSF and the State’s recovery of its own loans and proceeds from disinvestment of Government’s stake in Public Sector Undertakings, all form part of Capital Receipts.

Budget Deficit:  The conventional deficit, is the difference between total expenditure and total receipts and has to be zero in the absence of monetization, State Governments have no access to the monetization route and as such Budget Deficit in their case ought to be zero.

Fiscal Deficit: The difference between aggregate disbursements net of debt repayments AND recovery of loans and revenue receipts and non-debt capital receipts.

Primary Deficit: Fiscal Deficit net of ‘Interest Payments and Debt Servicing’ under Non-Plan.

Revenue Deficit is the difference between Revenue expenditure (Plan / Non-Plan) and Revenue Receipts (Tax / Non-Tax).

Budget Surplus / Fiscal Surplus / Revenue Surplus / Primary Surplus are the terms just opposite of such ‘Deficit’ terms.

Balance from Current Revenues (BCR) is the difference between Revenue Receipts and the sum total of all Plan grants and Non-Plan Revenue Expenditure.

Aggregate Disbursements include (i) Revenue Expenditure (ii) Capital Disbursements and (iii) Disbursements under Public Account.

Aggregate Receipts include (i) Revenue Receipts (ii) Capital Receipts and (iii) Receipts under Public Account.

Miscellaneous Capital Receipts (MCR) are treated as Non Debt Capital Receipts.

Non-Plan Expenditure consists of salary, interest payments, subsidies and grants. It can be divided into revenue spending and capital spending.

Plan Expenditure : Consists of revenue spending and capital spending in the plan. Under the former is included salary and maintenance expenditure. Latter includes expenditure on creation of capital assets.

Central Plan refers to the Central Government’s budgetary support to the Plan and, the internal and extra budgetary resources raised by the Public Sector Undertakings.

Subsidies are financial aid provided by the Government to individuals or a group of individuals to become competitive. The grant of subsidies is also aimed at improving skills of those who benefit from the subsidies.

Amortization : Refers to liquidating (a debt) by repayment in installments.


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