Budget 2018: Here's an explainer on terms like fiscal policy, finance bill, and more

Finance Minister Arun Jaitley will present the Union Budget 2018-19 on 1 February. With the General Elections to Lok Sabha around the corner, this is likely to the last budget of the 16th Lok Sabha led by Prime Minister Narendra Modi. This combined with reports of rising fiscal deficit and low GDP growth rate has put a lot of pressure on the government to present a budget that will ensure it has enough money for its populist schemes while also bringing the economy back on track.

File image of Finance Minister Arun Jaitley. PTI

File image of Finance Minister Arun Jaitley. PTI

But how well versed are you in the budget terminology? Are you aware of the different funds that are available to the government to plan its fiscal policy? What is a fiscal policy, for instance? Here's a list of some key budget-related terms so that you know what it means when Jaitley mentions them in his speech:

I. Fiscal policy

Fiscal policy involves altering the levels of government spending and tax rates aimed at influencing the level of activity in an economy. These changes can significantly impact economic activity and as such need to be coordinated with a sound monetary policy to create healthy economic growth. Fiscal policy can be expansionary or contractionary.

An expansionary fiscal policy is aimed at stimulating economic growth by way of either increasing government spending or cutting taxes and is generally implemented when the economy is under stress or demand cycle is subdued. Contractionary fiscal policy, on the other hand, involves increasing taxes or reducing spending when the economy is seeing high inflation or prices shoot up due to supply constraints. Importantly, an expansionary fiscal policy is used more often with the idea to put more money in the economy that creates more jobs, increases consumer demand and provides businesses with easy capital.

II. Finance bill

Finance Bills can be divided into three categories: finance bill category I, finance bill category II and money bill.

Money bills contain provisions only on matters listed in Article 110 which include amendments to any tax at the Union or state level (but not at a local level), regulation of borrowing, allows withdrawal of money from consolidated or contingency fund, and accounts on receipts made in the consolidated fund and public account.

The decision on whether a bill is finance or money is made by the Speaker when passed by the Lok Sabha and then sent to Rajya Sabha. Even if a money bill is rejected by the Rajya Sabha, it is considered passed in both the houses.

Finance bills (category I and II), on the other hand, generally contain provisions related to taxation and expenditure (as explained in a money bill) or provisions related to any other matter. It is important to note that a finance bill will necessarily be a money bill but a money bill may not be a finance bill. A finance bill is presented with the budget as mandated in Article 110 (a) of the Constitution of India. This means that apart from the provisions of a money bill, it also provides detailed provisions on how it will be used and what will be the duties of government among other things.

III. Disinvestment

In order to understand the concept of disinvestment, clarity is needed on what investments entail. At the most basic level, investment involves the transfer or conversion of cash in hand into buying of stocks, bonds or anything else that provides a return in the future with a claim on the money invested. In this context, disinvestment involves converting any such investments or any assets back into cash. Generally speaking, the process is undertaken by organisations and largely by the government either due to bulging financial burden or when an asset is not performing as per expectations.

It is important to also understand that in the absence of the sale of an asset, disinvestment can also mean a transfer of funds to more productive segments by reducing capital expenditures in loss-making subsidiaries within an organisation or government projects. In this sense, the primary objective of a disinvestment is to maximise the return on investment (ROI) on expenditures related to capital goods, labour and infrastructure. For example, a car manufacturer might sell off its diesel car line in order to raise money that can be used to expand its electric car manufacturing segment. Importantly, in India's case, the term disinvestment is generally associated with the action of the government which has significant investments in several public sector undertakings (PSUs) and can sell part of this by offering shares to the public to raise finance.

IV. Budget estimates

To clearly understand the scope of a budget estimate, the first step involves defining a budget which is a financial document that highlights revenues and spending on various government schemes. In this context, budget estimates are merely a projection of such anticipated revenues and expenditures for the next year. It's important to note that the actual numbers may differ from these estimates as the ground reality may deviate from expectations. Every year, an annual statement (Union Budget) is presented that clearly defines the expected amount of money the central government expects to raise in the next financial year and how it plans to spend that money.

The expenditure is planned as per specific objectives (these are proposed depending on the general health of the economy). Based on these recommendations, resources are raised broadly from taxes, fees, fines, interest on loans given to states and dividend by public sector enterprises, etc. Budget estimates also help in estimating, among other things, the fiscal, revenue and primary deficit.

V. Public funds

Public funds are essentially a part of the public account of the Government of India which is constituted under Article 266 (2) of the Constitution. All the revenues and finances generated by the government or which are received on behalf of the government — other than which are part of the Consolidated Fund of India — are credited to the public account of India. Importantly, money under the account is not owned by the government but is merely guarded by it. In simpler terms, all the money transferred to provident funds, small savings account and others, which are owed back to the public at the end of specific tenures form part of the public fund of India.

The public funds include finance from five key sources including (i) small savings, provident fund and other accounts (ii) reserve funds (iii) deposits and advances (iv) suspense and miscellaneous and (v) remittances. Some of these accounts are interest-bearing accounts where the government is liable to pay interest at specific rates and in return can use this money for any government scheme, or in government securities.

Information courtesy Deloitte India

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Updated Date: Jan 22, 2018 14:26 PM

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