Budget Glossary : Key Terms To Know About The Budget

To help you understand the budget better, we have compiled a list of frequently used financial terms that you can expect to hear during the budget to help you understand the announcements better. Read on!

Key Terms About Budget

Here are the key budget terminology that you should know about Budget-

• Union Budget

Here is the definition of the Union Budget according to Article 112 of the Indian Constitution:

Union Budget is the statement of estimated receipts and expenditures of the government called the Annual Financial Statement for a specific year.

A budget is a financial plan for a specific period. As individuals, we create a budget for our family to minimize costs and optimally utilize our income while saving for the proverbial rainy day.

Even a company creates a budget for all its costs, like marketing, PR, etc., based on its estimated revenues over the coming year. Similarly, a country needs to create a financial plan to manage its income and expenses.

The Union Budget outlines the government’s plan for allocating finances to different projects and agencies. Since tax is the most significant source of income for the Indian Government, the Union Budget specifies any changes in the tax rates/rules. Also, the areas where the government plans to spend money in the coming year can offer insight into the industries/sectors that can receive a boost.

• Gross Domestic Product (GDP)

GDP is one of the critical budget terms. The Gross Domestic Product or GDP is the total market value of all the finished goods and services produced within a country in a specific period. 

In most countries, GDP is the standard for measuring economic conditions. GDP can be calculated on an annual or quarterly basis. In India, the Central Statistical Office (CSO) under the Ministry of Statistics and Programme Implementation calculates the country’s GDP by accumulating data from central government and state government-run agencies.

The CSO uses one of these two methods for calculating GDP:

1. Factor cost method
2. Expenditure based method

Of these, the Factor Cost Method is the most commonly used since it discusses how the industries are performing in the country. On the other hand, the Expenditure-Based Model sheds light on the different areas of India’s economy and illustrates the trade and investment scenarios.

The Government of India releases GDP numbers quarterly and the final number on May 31st. 

• Direct and Indirect Taxes 

Tax is the primary source of income for the government. There are two broad-level taxes in India – Direct and Indirect tax. 

Direct tax is the tax paid by an individual directly to the government. This includes income tax and corporate tax. On the other hand, Indirect tax is produced by the people to a person/entity with the burden of paying the tax to the government.

A simple example of an indirect tax is GST. When you buy a product/service, the vendor is liable to pay tax to the government on the sale. However, he is allowed to recover the tax amount from you through GST. This amount is eventually deposited with the government. Hence, the vendor pays tax by collecting it from you, making you an indirect taxpayer. 

• Goods and Services Tax (GST)

GST, or the Goods and Services Tax , is levied in India on most goods/services sold. It is a form of indirect tax where the consumer pays the tax, but the amount is remitted to the government by the business establishment. GST adds to the income of the government.

According to the GST Act 2017,

“Goods” are defined as all kinds of movable property other than money and securities but include the actionable claim, growing crops, grass, and things attached to or forming part of the land which is agreed to be severed before supply or under a contract of supply.

“Services” are defined as anything other than goods, money, and securities but include activities relating to the use of money or its conversion by cash or by any different mode, from one form, currency or denomination, to another state, currency, or denomination for which a separate consideration is charged.

• Customs Duty 

When you import goods to or export goods from India, the government levies a tax on the transaction amount. While the economic burden of paying this amount lies with the importer/exporter, it is also usually passed on to the consumer. Therefore, this is also a form of indirect tax in India.

• Fiscal Deficit 

Fiscal means the government’s revenues. Fiscal Deficit, in simple terms, means the Deficit or shortfall the government faces in the non-borrowed receipts (income) concerning its expenditure. If the expenditure is more than the receipts (non-borrowed), then the difference between the total expenditure and total non-borrowed receipts of the government is its Fiscal Deficit. It is usually denoted as a percentage of the country’s GDP.

Also Read: Understanding the Concept of Fiscal Deficit.

• Fiscal Policy 

When a country announces a budget, it has ramifications on the economy.

For example, if the government changes the income tax rate, then it impacts the disposable income in people’s hands and influences their buying power. This, subsequently, affects businesses and the tax income of the government. Hence, the government uses its spending and tax policies in a manner that allows it to influence the economic landscape of the country suitably.

This is the government’s Fiscal Policy. A budget is usually an indicator of the same.

• Monetary Policy 

The flow of money in an economy directly impacts its growth. Hence, the government monitors the liquidity in the economy to ensure optimum growth. This is done via the central bank of the country – the Reserve Bank of India (RBI).

Monetary Policy is the RBI's actions to control liquidity (supply of money) in the economy to achieve sustainable growth.

• Inflation

There are many ways to define inflation. It is a sustained increase in the general price level in an economy. It is also the decline in the purchasing power of a currency over time.

In simpler terms, if you have Rs.1000 today, you can buy certain goods/services. However, the exact amount will fetch fewer goods/services after ten years.

The rate at which this purchasing power decline is the country's inflation rate. A 10% inflation rate means Rs.100 today will be worth Rs.90 after one year.

• Capital Budget

The Capital Budget consists of capital receipts and capital expenditures. 

Capital Receipts include disinvestment, loans from the public, loans from foreign Governments and bodies, borrowings from the RBI, recoveries of loans from State/UT Governments and other parties, etc.

Capital Expenditure includes the costs incurred by the government in developing health facilities, machinery, roads, acquisition of land, buildings, etc., and loans granted by the Central Government to State and Union Territory Governments, Government companies, Corporations, and other parties.

• Revenue Budget 

The Revenue Budget consists of revenue receipts and revenue expenditures.

Revenue Receipts include tax-related revenues, dividends/interest on the investments made by the government, receipts for services provided by the government, etc.

Revenue Expenditure includes the costs associated with the regular running of the government departments, interest paid by the government on debt, subsidies, etc. In addition, any expenditure that does not create an asset for the government is a revenue expenditure.

• Finance Bill 

In India, a Bill is produced to pass legislation as a law by the houses of the Parliament. As the name suggests, a Finance Bill is a Bill regarding the country’s finances and could include taxes, revenues, government borrowings, etc.

When the Union Budget is announced, several changes are proposed to the government’s revenue and expenditure, tax rules/rates, etc. Hence, immediately after the presentation of the Union Budget, all financial changes recommended are produced to both houses of the Parliament in the form of a Finance Bill.

• Vote on Account 

Once the Union Budget is announced, the government must start the Parliamentary approval process.

This is a time-consuming process, and while the Budget is presented two months before the financial year's end, the approvals are sometimes not in place by March 31st. However, the government needs funds to run its daily operations.

Hence, a special provision is called ‘Vote on Account’, where the government obtains permission from the Parliament for a sufficient sum to carry on daily functions until the required legislation is passed.

• Excess Grants 

Every year, a certain amount of money is allocated to the government for expenditure. If the allotted cash is insufficient, the government can seek additional funds. Article 115 of the Constitution of India provides an Excess Grant option to the government for managing such times. The request for additional funds needs to go through the whole process as in the case of the Annual Budget, i.e. through the presentation of Demands for Grants and passing of Appropriation Bills.

• Budget Estimates 

When the Union Budget is announced, the Finance Minister allocates funds for different tasks and ministries. These allocations are Budget Estimates. They are called Estimates because they are not the final commitment made by the government. They denote the upper limit of the government's expenditure for the said task/ministry/sector, etc.

• Revised Estimates 

When the government announces Budget Estimates, it indicates the maximum amount it is willing to spend on a particular aspect of the economy. However, as the year begins, some ministries/tasks might need more funds than estimated. These reviews of the estimates made during the year are called Revised Estimates. They need to be approved by the Parliament or through a Re-appropriation Order. 

• Re-appropriations 

Sometimes, the government must re-appropriate provisions from one unit to another within a specific Grant or Appropriation. This is allowed under the Re-appropriation provisions and needs to be sanctioned by a competent authority before the close of the financial year. Reviewing and commenting on corrective actions lies with the Comptroller & Auditor General and the Public Accounts Committee.

• Outcome Budget 

While a budget provisions for various purposes, there must be a way to monitor if the allocated funds were used for their intended purposes. Therefore, since the financial year 2006-07, it has been made mandatory for every ministry to present a preliminary Outcome Budget to the Ministry of Finance for compiling them together. 

The Outcome Budget is a kind of report card that describes the progress made by various ministries and departments with the allocations from the previous budget. In addition, the Outcome Budget measures the development outcome of multiple programs and determines if the funds were used for their intended purpose.

• Guillotine

The Parliament has limited time for discussing the expenditure demands of each ministry. However, if there are other pressing political matters, this time can be compromised. Hence, sometimes, the churches do not get enough time to get all their demands scrutinized. This is when the Speaker of the House can apply Guillotine and put all the needs for grants to vote regardless of whether they are discussed.

• Cut Motions

While the Demand for Grants during the Budget is made for each ministry, the Parliament can check the government's expenditure and decide to deny or change the demands. If the Parliament decides to reduce the market, it launches a Cut Motion. 

• Consolidated Fund of India 

This is one of the most critical government accounts. The Consolidated Fund of India includes the revenues received and expenses made by the government. Most government expenditure is met from this fund except for some items from the Contingency Fund. Withdrawal from this fund can only happen with the Parliament’s approval.

• Contingency Fund of India

The cAs the name suggests, Contingency Fund is the fund for tackling national emergencies. It is at the disposal of the President of India and is used when there is a crisis in the country. The Union Government has a Contingency Fund of Rs.500 crore.

• Public Account

There are various transactions where the government acts as a banker, like provident funds, small savings, etc. These funds don’t belong to the government and must be returned to the depositors. In such cases, a Public Account manages the fund flows. This is under Article 266(1) of the Constitution of India.

• Disinvestment 

Disinvestment means selling the shares to the government of a public sector company. The government is the shareholder in public sector companies. Therefore, they can sell these shares to get cash to manage expenditures.

We hope that these terms are clear now. Keep this article handy while listening to the Budget announcement if needed.