Budget Blues!

As a student of science I could never make out why my dad won’t allow me TV on the 28th of Feb. However it hardly bothered me for day was the birthday of my college crush. But later I realized the importance of the day to the economics of Valentine’s Day! 

With hopes to make it big in the world of business, an understanding of the nuances of Budget management more so after the government has documented it well in form of “Fiscal Responsibility & Budget Management” are essential for the students of business management. Thus on this 28th when India’s PC presents his budget and announces a better fiscal management, we can hazard a safe guess on whether the FIIs, whom we hate to love will continue pumping our economy and not just confine ourselves to calculate how much tax will I be paying next year! 

A Budget essentially provides the governments’ account, as of any household, in terms of income and expenses. It consists of two parts: the previous year’s actuals and next years (proposed) estimates (BE). Since, it’s the prerogative of the governments to delay, the previous years’ actuals are never available so what we get is the revised estimates (RE). The incomes & expenses are classified as revenue and capital. The revenue income consists largely of the taxes paid by you and me and a small but significant portion from interest on loans given and dividends from public sector undertakings – milking the cow! The revenue expenses include the expenses of day to day functioning of government – salaries, wages and other expenses of running government buildings and offices – talk of stalling the work of parliament! The capital expenses are borne on laying new roads (NHAI) and newer railway tracks or setting up power plants (under PPP) etc. that create physical assets for the nation and will generate revenue in years to come. It could be of interest to us to know that in
India’s budget the maximum expenses are on revenue side and that too on interest payment of loans taken, subsidies and defense expenditure (much against the wishes of the Father of the Nation).
 

The difference between the revenue receipts and revenue expenses is the revenue deficit and the difference between the total receipts and total expenses is the fiscal deficit which is met by raising funds from the market – the government bonds. It also throws light on how well the overall incomes and expenses of the government are managed but the revenue deficit/surplus has a major role. To understand better, let’s take the case of our household: my revenue income is my salary and revenue expenses, my daily expenses to run the house. The capital expenses will include my investment in shares/real estate etc and capital receipt will be dividends on share/rent on a house let out. Now if my activities are such that my daily expenses are well within the ambit of my salary then what I have is a revenue surplus which I can use to increment my capital and build upon the investments. However, if the reality is reverse giving a deficit in day to day living, I will have to sell my capital base – shares or house. Unfortunately for
India for many years revenue deficit has been eating into the capital budget thereby stalling any plans for investments.
 

Under the FRBM Act of 2004,
India committed itself in wiping out the revenue deficit by 2009. It is necessary because higher the deficit, the higher will be the borrowing which will raise the interest rates in the market. Second, with deficit around, government gets constrained to invest in social program and it’s not an easy thing to get a private investment into social asset creation which then the government does by raising more debt thereby pulling itself into a circle of deficit.
 

Tejbir

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3 Replies to “Budget Blues!”

  1. This revenue deficit and physical deficit is all well and good. But you still didn’t tell us whether the prices of Laptops are going up or not..;)
    Anyways, will be watching TV on 28th and if there are more questions, I will getting back to you. 🙂

    Nice, work, Tej

    Cheers,
    Biju

  2. Tej,

    Thanks for demystifying Budget and Fiscal deficit. You are raising expectations and Uma has righly phrased them.

    Cheers,
    Raju

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