6/5/201402/07/071 Union Budget Process Union Budget Process An introduction Presentation at Press Information Bureau New Delhi February 15, 2008 P.R. Devi Prasad OSD (FRBM) Dept. of Economic Affairs Ministry of Finance

Presentation Scheme 1.Budget: fiscal policy and Indian legislative objective 2.Budget: citizen, parliament, constitution 3.Budget: legal framework 4.Budget: format / documentation / documents/ printing 5.Budget: preparations / consultations 6.Budget: FRBM Act, 2003 & medium-term framework 7.Budget: macroeconomic context 8.Budget: expenditure composition, policies & reforms 9.Budget: debt management

Fiscal Policy Represents formulation and implementation of government sector activities through budget Achieves budget balance though size of government, type of budget financing and revenue & expenditure composition Covers all levels of government including quasi government Seeks internal & external balance, lowers debt, ensures long-term sustainability Provides public goods; promotes private investment; engineers pro-poor growth Reduces poverty and provides good governance Issues: impact on interest rates, aggregate demand, output growth, competitiveness, credit rating, crowding out private sector;

Legislative Objective of fiscal responsibility and budget management To Provide for the responsibility of the Central Government to ensure inter-generational equity in fiscal management and long-term macro-economic stability by achieving sufficient revenue surplus and removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability through limits on the Central Government Borrowings, debt and deficits, greater transparency in fiscal operations of the Central Government and conducting fiscal policy in a medium term framework and for matters connected there with or incidental thereto. 6/5/20144

6/5/201402/07/075 Non Tax Revenue Grants /Donor support Market Borrowings OtherReceipts Tax Revenue CFI PSUS PSUS PLANPLANNONPLAN REVENUE CAPITALCAPITAL Four Four *Services 1 Application of Funds States Depts., citizen & the Citizen Budget & the Citizen a b c d e f g * * Economic Services Fiscal Services Social Services & Other General Services Railway budget is separate, but Constitutionally, Railway receipts are part of CFIRailway budget Not on Constitutional strength but by practice Taxes, Fee & Savings, Interest receipts Loan repayment Consolidated Fund Of India

6 Budget & the Parliament Presentation on last business day in February Examination by parliamentary standing committeesstanding committees Vote on Account before 31 st March Approval by parliament within 75 days Seeking supplementary demand for grants- 1 st, 2 nd & 3 rd Submission of C&AG Reports Examination by PACPAC Regularization of excess expenditure No taxation without representation; Lok Sabha & Money bill: why supplementary? Why regularization? how to work with Budget Division? Why to avoid excess expenditure? Lessons from C&AG reports! Aligning between DDG and Outcome Budget of the Ministry.

7 Budget & the Constitution While the following provide for Procedure in Parliament with respect to Estimates … 113 Appropriation Bills … … … 114 Supplementary, additional or excess grants … 115 Votes on account, votes of credit and exceptional grants … 116 Special provisions as to financial Bills … 117 Consolidated Fund …… … 266 Contingency Fund … … … 267 Finance Commission …… … 280 Expenditure defrayable by the Union out of its revenues … 282 Laws/Rules for Custody, etc., of Consolidated Funds, Contingency Funds and moneys credited to the public accounts … … … 283 Borrowing by the Government of India … 292 AFS- Anchor to all documents: Art 112 Trigger to All Documents * Annual Financial Statement

8 Budget Documents in the context of CFI All taxes, revenues, grants, loans, repayments, proceeds from treasury bills, way & means advances go into CFI (A) Other public money goes into Public Account of India (B) No money to be appropriated from CFI except through law passed by Parliament (C) Constitutional mandate in Article. 266 Explore relevance of A,B & C to Fiscal BalanceRelate of A, B, & C to various Documents/ statements

9 …a stylized peep into the Budget Objectives –in Spending, Taxing, Balancing, Investing, Macro-economic stability, growth & global positioning Risks & Risk proofing, leak plugging –in pass-thru of public money; –contingent liabilities eg: guarantees, PPP terms, legal liabilities Transfer payments –transfer objectives, transferring routes, vs. Operational issues Impact on equity*, efficiency** & entitlements*** ( excluding charged estimates) * Intergenerational. Regional. Public Vs. Private sectors, Farm & non-Farm sector. Rural Vs Urban. Spenders Vs. Savers. ** Capital Vs. Revenue. Productivity (ICOR) *** States Vs. Union Government. Through Finance Commission s recommendations. BPL Vs. APL. Children & Aged. Women Vs. Others

6/5/201402/07/0710 B udget & Accounts Protocol –Accounts Management –Expenditure tracking (Monthly)Monthly –Finance A/Cs presentation to Parliament through MoF –Quarterly FRBM Statements Controller General of Accounts Issues: Periodicity of Accounts; Time lag and aligning Provisional, Provisional Actual A/cs, Flash figures, Actual/Audited A/cs CAG s Audit Reports on Finance Accounts for the year T-1

11 Budget Format Receipts –Revenue receipts Tax Non-tax –Non-Debt Capital Loan repayments Disinvestment (till 2006) Debt Expenditure –Charged (discussion only)/ Voted (discussion & voting) –Capital/Revenue –Plan*/Non-Plan * Developmental expenditure within the framework of 5-Year Plans Issues: Source and logic of the inputs influencing these entries

6/5/201402/07/0712 Budget Making Expenditure Dept. of Expenditure Dept. of Expenditure Revenue –Non-Tax Dept. of Economic AffairsDept. of Economic Affairs –Tax Dept. of RevenueDept. of Revenue Deficit Dept. of Economic Affairs for its Control * & financing ** –Fiscal, –Revenue & –Primary Deficits *FRBM Legislation ** Reserve Bank Coordination (Costs, price, instruments, scheduling)Reserve Bank Coordination What Who

6/5/201402/07/0713 Budget: Annual preparations Extensive consultations involving –line ministries DoE –other stake holders: DEA & DoR farmers, labour unions, business, FIs, economists & other civil society groups Intense internal assessment about –spending priorities DEA –revenue mobilization DoR –aligning with policy goals DEA Start in Sept. with issue of Budget Circular Issues: Coordination between line Departments, Planning Commission & CGA Aligning expenditure, physical progress and capacity to absorb as also compliance to legal ceilings DEA: Dept. of Economic Affairs. DoE: Dept. of Expenditure. DoR: Dept. of Revenue

Budget Circular Budget Circular - 29 th February - FRBM Act - Annual Plans Triggers -Target time - Goals Budget Circular - 29 th February - FRBM Act - Annual Plans Budget Circular InputsSourceOutput presented in 1SBE/ spending performanceLine MinistriesDemands for Grants 2Pre-budget meetingsLine ministries/ PC & CGAPC Non-Plan in Demands for Grants 3NTR/ guarantees/ assets profile/NTR arrears Line ministriesReceipts Budget statements 4Plan allocationsPC, DoE & Line ministries GBS: Plan in Demands for Grants 5State entitlementsFCFC & DOETransfers to States 6Revenue receiptsDoR (CBDT/CBEC)CBDTCBECBE & RE 7Debt/liability profile & Interest liability (instrument specific) RBI, CAAACAAARE & BE, Receipts Budget statement 8Resource GapMoFDeficit targets 9Fiscal Policy/ Strategy/GDP for ensuing year MoFFRBM Statements

15 Core Budget Documents = Key to Budget Documents 2.Annual Financial Statement 3.Budget at a Glance 4.Budget Speech 5.Budget Highlights 6.Action Taken on Budget Announcements 7.Receipts Budget 8.Finance Bill Customs & Excise Notifications Presented by MoF and line MinistriesMoF 9.Explanatory Memorandum 10.Appropriation Bill 11.Demands for Grants Exp. Budget Vol-1 Exp. Budget Vol-2 12.FRBM Statements Macro-Economic framework for Year T+1 Medium term fiscal policy for Years upto T+3 Fiscal policy strategy for the Year T+1 Deviations statement for Year T 13. Detailed Demand for Grants* Pink Bold italics: Constitutionally mandated: Blue Bold: legally mandated White : supporting documents: * of respective ministries

6/5/201402/07/0716 Few more Documents Economic Survey Supplementary Demand for GrantsSupplementary Demand for Grants Finance Accounts FRBM Statements – Q4 of Year T-1 – Q3 of Year T Outcome Budgets Annual Reports Finance Commission Report (Accepted Recommendations) Five Year Plan Documents (Annual Plans & Evaluation Reports) RBI Reports relating to –Credit /Policy –Macroeconomic & Monetary Developments –State Budgets and –Annual Report PSUs Annual Reports Related* Relevant* Discuss: *How & why to relate ? * How & when to look for relevance ?

6/5/201402/07/ Budget Documents Accounting framework –CAG, CGA Accounts –Public Account & CFI: Charged Vs. Voted –Revenue Vs. Capital; Tax and non-Tax Receipts Performance perspective –Accounting the Resources & Counting the Results –Outcome budget, Annual Report –CAG Finance Accounts, Audit Reports Time-frame –Past year, Current Year, Ensuing Year & Future Years (Medium Term) Viz., years T-1, T, T+1, T+2, T+3 …a framework to understand Issues: Classification: Reconciling the Provisional: Provisional Actual: & Actual

6/5/201402/07/0718 Together – the Budget Documents … … Answer the questions like: Whether the results matched with the resources used? How much money will go to health, education, pay, pensions, poverty alleviation, interests payments, defence etc., ? How much money will go for research & development ? How much money will go to pay down the debt? Will taxes go up or down? How much money will be borrowed? What is the fiscal impact of all this ? … reveal Government resources flow &... Would you like to try few more questions ?

6/5/201402/07/0719 Budget Making Budget Management Budget Review FRBM Framework F R B M Act (a) limits on Fiscal & Revenue Balance, debt & guarantees, (b) Disclosures, (c) H1 performance indicators, (d) Transparency A c c o u n t a b I l I t y * Disclosures

Legal Frame work Borrowing by the Government of India - Art. 292 The executive power of the Union extends to borrowing upon the security of the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed. Constitution, FRBM Act, Public Debt Act, etc., India s FRBM Act – Managing The Mandate

FRBM Goals Reduce by >0.5% of GDP Reduce by >0.3% of GDP Assume < 0.5% GDP Reduce to zero by & build surplus later Reduce to 3% of GDP by Revenue Deficit Fiscal Deficit Contingent liabilities Annual Medium Term

Fiscal Performance :22 Source: Budget at a glance

6/5/201402/07/0723 GDP & Fiscal Indicators GDP: Gross Domestic Product –indicates annual national wealth production (value added at every stage of production of goods & services: CSO brings out Advance, Quick and Quarterly estimates) Economic Growth - GDP Growth: indicates how fast a nation is getting richer (Real Vs. Nominal Growth & WPI) Issues: What causes higher GDP growth - Increase in Output: What causes increase in Output – Increase in productivity & employment:. What causes increase in productivity – increase in efficiency. What cause increase in efficiency - enhanced/effective technology & raised skills: What raises investment and skills - Creative people with money; How to do that - Help more people to be creative & help them to have access to more money. (Note: The above slide and issues are framed using publicly available sources) Y =C+I+ G +(X-M)

24 Framework of Fund Applications & GDP CFI RevenueCapital Plan Non-Plan Plan Non - Plan Public Accounts [Art. 266 (2)] National investment Fund EconomicSocial Fiscal Services on which Funds are applied General Adds to GDP Growth Savings Poverty Reduction & Partial Impact =

6/5/201402/07/0725 Focusing Expenditure analysis on … Macroeconomic framework* –Growth objective of Budget making Fiscal framework for budgeting –Revenue, Expenditure & Borrowing and basis for assumptions Fiscal Objective of Budget Making $ –Optimal budgeting, net worth Balancing –Revenue balance, Fiscal balance, Primary balance –Golden Rule (exception to balancing exercise) Legal framework Parliamentary Accountability The cause-and-effect : * A higher economic (GDP) growth yields higher tax revenue growth: $ Higher tax revenues yield greater fiscal flexibility for accomplishing government's fundamental A low level of debt liability increases net worth of government; takes less and leaves more with people eg: low taxes, early debt redemption

6/5/201402/07/07... A Framework to Analyse Expenditure Policy framework –Economic/Growth policy viz., plan, non-plan –Fiscal policy viz., revenue, expenditure, borrowing Institutional framework –Finance Commission, Planning Commission, Line Ministries, RBIRBI –Centre Vs. States resourcesCentre Vs. States resources Legal framework –Tax law, Debt law, FRBM law, Accounting Rules, Spending Rules (GFR)Accounting RulesSpending Rules GFR Accounting framework –Heads of Accounts, Surrender of savings, re-appropriation, provisional, final, actual, audited numbersHeads of Accounts Issues: How to leverage the framework to influence for right, more & better spending

6/5/201402/07/0727 Budget & Debt Management Objectives –Minimize costs and risks in long & medium term –Develop/ maintain efficient market for government securities –Enlarge savings options Process –Preference to domestic debt (that finances about 90% of deficit ) – No debt from external commercial sources –Increasing reliance on marketable debt instruments –Elongation of maturity of government securities –Average tenor in is 15 years, longest tenor 30 years –Institutional and administrative reforms to make debt market modern and deeper for deficit financing