A Budget is a statement that gives the details of ‘where money comes from’ and ‘where the money goes to’.

In technical terms, the money that ‘comes in’ is referred to by terms such as income, revenue, receipts, etc., and the money that ‘goes out’ is referred to as expenses, expenditure, spending, etc. 

A Budget has to have at least three details: 

• It has to be for an entity, and for a defined purpose: an individual, an event, an organisation, a household, a business, a government, etc.
• It is for a defined time period: generally, a budget is drawn up for a year, but this can vary. For example - in the case of events or projects, budget can be for the duration of those events/projects.
• It gives details of receipts and expenditure: it lists all the sources from where money comes, and all the destinations where the money will go. 

The following figures are a few examples of budgets:

Figure 1: Budget for a Birthday Celebration

Figure 1 represents the simplest of budgets, for a birthday celebration. It also might be something many of us have prepared/experienced as well. The columns under receipt detail where the money came from and how much; the columns under expenditure detail where the money went, and how much was spent on each item. 

Figure 2: Annual Budget for a Household

Figure 2 provides a sample of annual budget for a household. In this particular year, this household expects to earn money from four sources, namely salary, business, interest on the money in a bank account, and rent from a house they own. The column under expenditure details the expenses the family expects to incur. The figures noted in second last row show the total of income and expenditure of the household. The last row shows that at the end of the year, the family expects to have a surplus of Rs 4,10,000. For families that have expenditure higher than income, this amount will be negative (a deficit), which means they have either used up their savings from the previous years, or they borrowed money that needs to be repaid. 

Figure 3: Annual Budget of a Business 

Figure 3 presents a simplified sample of the annual budget of a company. In this year, the company expects to earn revenue from four sources, namely sale of manufactured goods, goods traded, supply of services and other income. The company’s anticipated costs are given under the column ‘expenditure’. The surplus of revenue over cost is the profit the company expects to make, which in this year is Rs 3,50,000. 

Figure 4: Annual Budget of a Government (In Rs crore) 

Figure 4 shows a sample government budget. As can be seen, it is much more complex than the previous examples. The government receives money from sources including taxes, which only it can receive, and other entities such as households or businesses cannot. On the expenditure side, two broad categories are revenue expenditure and capital expenditure. Both of these have multiple components within them.

In this year, the expenditure is Rs 13,00,000 crore, while the receipt is Rs 10,50,000 crore. This results in a deficit of Rs 2,50,000 crore. The government finances this deficit by borrowing, partly from the domestic market, and partly through foreign borrowings. The government will need to repay this borrowed amount. One entry under expenditure, named ‘interest payment’, refers to the payment of interest on government borrowings in the past. Most government budgets are in deficit, but they can also have a surplus, i.e., the receipts can exceed the expenditure.

It should be noted that these are merely samples, and actual budgets are much more complex. This is especially the case for businesses and governments. Further details about government budgets are given in the following sections.

Many of us either have the responsibility to draw up a household budget, or are at least familiar with it. Figure 5 highlights some of the broad differences of a government budget from a household budget.

Figure 5: Differences between a Household Budget and a Government Budget

Apart from these, a government budget is also different based on the level of detail and complexity. Because of these lengthy details and complexity, different components of government budgets are presented separately. For example, details of receipts or where the money comes from is known as a ‘Receipt Budget’, while details of expenditure or where the money goes is known as an ‘Expenditure Budget’. Both these components are discussed in detail in the following sections.

A government can receive money from multiple sources. Figure 6 provides a snippet of the sources of government receipts.

Figure 6: Classification of Government Receipts

The government’s entire receipts can be divided into two categories, Capital receipts and Revenue receipts. 

Capital Receipts

Receipts that lead to a reduction in the assets or an increase in the liabilities of the government are termed as capital receipts. For example, when a government sells its ownership in a public sector enterprise, through a process known as disinvestment, it leads to receipts but reduces the assets the government owns. Similarly, if the government borrows money, these borrowings are known as capital receipts, as the government has to repay the amount with interest, which means its liabilities have increased.

Capital receipts can be further divided into the following two categories – 

1. Debt Receipts: These receipts increase the debt of the government and hence require future repayment, such as borrowing. Every year to finance the fiscal deficit, government borrows money, which is debt receipt.
2. Non-debt Receipts: These receipts do not entail future payments, such as the government selling assets through disinvestment, or getting repayment for a loan it extended to another entity. Government owns many assets like public sector enterprise (PSE), land, etc. Government can sell assets like land, or its ownership stake in a particular PSE. These capital receipt won’t lead to any increase in debt.

Revenue Receipts

These receipts do not lead to any change in the assets or liabilities of the government. For example, when the government collects taxes, they do not lead to any change in the asset ownership or the liabilities of the government, hence they are revenue receipts. 

The two major components of revenue receipts are: Tax revenue and Non-Tax Revenue, both of which are discussed in detail below.

2.1. Tax Revenue

Those receipts that a government raises through the means of taxation are known as tax revenue. Taxation refers to the payments imposed by legislation. The government has the unique capacity to raise receipts through taxation. The main types of taxes are as follows: 

• Personal Income Tax: Also, simply known as income tax, it is generally imposed on the income earned by individuals and/or families on an annual basis. 
• Corporate Income Tax: Also known as corporation tax, it is generally imposed on the profits earned by businesses.
• Custom Duty: Also known as import tax, customs duty is imposed when goods or services are imported from a foreign location.
• Excise Duty: This is a tax imposed on manufactured goods.
• Service Tax: This levy is generally imposed on the sale of services, such as banking, hotel, telecom services, etc. When a customer buys these services, a tax is imposed on the transaction. 
• Goods and Services Tax: This tax is generally imposed on the transactions involving sale of goods and services. 

2.2. Non- tax Revenue

These are the payments that a government receives when it provides certain services to individuals / households or entities. Some of the main sources of non-tax revenue for the government are: 

• Interest: This is received on loans given to States and Union Territories. In addition, the government earns interest on loans advanced to Public sector Enterprises (PSEs), Port Trusts and other statutory bodies.
• Dividends and Profits: These are earned from PSEs and from the transfer of surpluses by the Reserve Bank of India.
• Petroleum License: These are fees to get the exclusive right for oil and gas exploration in a particular region. Such fees may be in the form of a royalty, a share of the profit earned from contract areas during a specific period, a Petroleum Exploration License (PEL) fee or Production Level Payment (PLP).
• Power Supply Fees: This includes fees received by the Central Electricity Authority for the supply of power.
• Fees for Communication Services: This mainly includes license fees from telecom operators on account of spectrum usage charges that licensed Telecom Service Providers pay the government
• Broadcasting Fees: These include the license fee paid by DTH operators, commercial TV services, commercial FM radio services etc.
• Road, Bridge usage fees: This includes receipts through toll plazas on account of the usage of national highways, permanent bridges etc.
• Sale of stationery, gazettes etc: This comes under ‘Stationery and Printing’ and relates to the sale of stationery, gazettes, government publications, etc.

Fee for Administrative Services: This includes fees received for providing audit services, issuance of passport, visa and other services.

A government spends money on a number of different items. Its entire expenditure can be classified into different categories depending on the classification of expenditure, like - 

• Capital Expenditure and Revenue Expenditure
• Voted Expenditure vs Charged Expenditure
• Sectoral Classification
• Functional Classification
• Economic Classification

All these classifications are discussed below in detail.

Capital Expenditure and Revenue Expenditure

 As with receipts, expenditure can also be classified as capital expenditure and revenue expenditure, which are defined as follows: 

Capital Expenditure - Expenditure that leads to an increase in the assets or reduction in the liabilities of the government is known as capital expenditure. This kind of expenditures is also known as one time expenditure or non-recurring expenditure. Examples of capital expenditure include building bridges, school/hospital buildings, buying machinery, construction of roads, repayment of loans, etc.

Revenue Expenditure - Expenditure that does not change the asset and liability position of the government is known as revenue expenditure. This kind of expenditures happens repeatedly and is also known as recurring expenditures. Examples include salary payment to government employees, pension to retired government employees, subsidies, expenditure on repairs and maintenance etc.

Figure 7: Classification of Government Expenditure – Revenue vs Capital

Voted Expenditure vs Charged Expenditure

Voted Expenditure – In every budget, the executive presents its proposals for expenditure from the consolidated fund of India. Those proposals which needs to be voted by the legislature, and only after their approval, such expenditures can be carried out. These expenditures are known as ‘Voted Expenditures’. Examples of this include – most of the schematic expenditures.

Charged Expenditure – These are the expenditures from the consolidated fund of India which don’t require approval from the legislature, and are automatically deducted. Some of the examples are – salaries of the President and Lok Sabha speaker, interest payment, etc.

Sectoral Classification of Expenditure

A classification of expenditure can be made according to the sectors. In the budget there are three sectors defined as follows - 

• Social and Community Services – while it is difficult to have a precise definition, these services are those which are directly aimed at the welfare of the citizens. Major ministries/departments under this category are – Education, Health, Family Welfare, Housing, Urban Development, Sanitation, Social Security, etc. 
• Economic Services – this are those services which are primarily aimed at encouraging the economic activities. Major ministries / departments under this category include – Agriculture and Husbandry, Fisheries, Rural Development, Irrigation, Power, Energy, Railways, Ships, Aviation, Tourism, Foreign Trade, etc.
• General Services – these can be defined as services which aid in the well-functioning of the government and country in general. Major ministries / departments under this category are – Public Service Commission, Police, Public Work, Army, Navy, Air Force, etc.

Figure 8: Sectoral Classification of Government Expenditure

As mentioned earlier, a budget is essentially a statement of receipts and expenditure. When receipt and expenditure are not equal, it creates two possibilities – either receipt is more than expenditure, or expenditure is more than receipt. When the expenditure is greater than the receipts, it creates the situation of deficit, while the opposite case creates budget surplus. Based on the accounting practices, there are three types of deficits / surplus government budgeting. These are discussed below.

Fiscal Deficit / Surplus

When expenditure is greater than receipt excluding borrowing, the gap between the two is known as a ‘fiscal deficit’. This is the amount the government needs to borrow (fresh) in a particular financial year to meet its expenditure commitments.

A fiscal deficit is an important indicator in any budget, and receives wide public and media attention. The reason for its importance lies in the fact that the scale of government borrowing has implications for financial markets. Also, borrowing requires payment of interest and the principal amount in future. Because of this, there are schools of thought that argue that a large fiscal deficit may not be sustainable. 

It is important to note here that the debate is about the scale of the fiscal deficit, and not about the existence of a fiscal deficit. A minimum level of fiscal deficit is considered essential and even beneficial; the disagreement is over what is the scale of fiscal deficit that is sustainable.

A situation opposite to a fiscal deficit, i.e., when receipts excluding borrowing are more than expenditure, can also exist. In such cases, the gap between the receipts and expenditure is called a fiscal surplus. This surplus can either be kept for use in coming financial years, or it can be used to repay existing debt. There are instances of governments having a fiscal surplus, but they are rare.

Figure 9 provides a snapshot of India’s 2021-22 ‘Budget at a Glance’ document. This figure is helpful in understanding what a fiscal deficit is and how it is calculated.

As seen in the figure, the deficit numbers are given in Rs crore, and below that is another number in parentheses. These parenthesised numbers are the deficit numbers in terms of percentage of Gross Domestic Product (GDP). 

Revenue Deficit / Surplus

This is the gap between revenue receipts and revenue expenditure. In other words, this is the gap or surplus recorded in the revenue account of the government. As noted, revenue receipts are those receipts that are recurrent in nature and do not change the asset ownership and liability position of the government, as opposed to capital receipts, which result in lowering the asset base or increasing the liabilities of the government. When revenue receipts are higher than revenue expenditure, there is a surplus in the revenue account; and there will be a deficit in revenue account if revenue expenditure is more than revenue receipts. 

When revenue receipts equal to revenue expenditure there will be a balance in revenue account of the government. Having balance in revenue account is considered as prudent fiscal management and the much of the borrowed money can be invested towards infrastructure creation. 

Primary Deficit / Surplus

This is the fiscal deficit minus interest payment. It indicates how much of the total borrowing of the government in a particular financial year is going to expenditure items other than interest payment on past borrowings.

A smaller primary deficit is considered prudent fiscal situation, as it reflects that larger portion of borrowing to being used for other productive works.

Article 112 of the Constitution mandates the Union Government to lay before both the Houses of Parliament a statement of the receipts and expenditure of the Government of India. This statement is known as the ‘Annual Financial Statement’. Apart from the Annual Financial Statement, the Union Budget has a number of other accompanying documents / reports / statements. Given below is the list of all the documents that are presented with the Union Budget: 

Figure 10: List of Union Budget Documents

All the documents are discussed in detail below – 

1. Annual Financial Statement: This is the ‘Budget’ of the Union Government and is mandated by Article 112 of the Constitution of India. This document provides the estimated receipts and expenditure of the Union Government of India for the financial year for which government presents the budget along with the budget and revised estimate of the on-going financial year and actual for the previous financial year. The receipts and expenditures are shown under three parts in which Government accounts are kept viz., (i) The Consolidated Fund of (ii) The Contingency Fund and (iii) The Public Account. The information presented in this document distinguishes the expenditure on revenue account from the expenditure on other accounts, as is mandated in the Constitution of India. The Revenue and the Capital sections together, make the Union Budget. 
2. Key to Budget Documents: Provides a brief introduction to all the other budget documents, and explains what information they contain. 
3. Budget Highlights: A brief summary of the main features of the budget. 
4. Budget Speech: A word transcript of the speech that the finance minister makes in Parliament.
5. Budget at a Glance: A summary document that gives more details on the sources of receipts and heads of expenditure.
6. Finance Bill: This is a Money Bill, as defined in Article 110 of the Constitution, presented in Parliament proposing required changes in the taxation by the government every year. This bill is put to a vote in Parliament and its passage is necessary for the tax changes to be implemented. This is presented in fulfilment of the requirement of Article 110 (1)(a) of the Constitution of India.
7. Memorandum: This supplementary document to the Finance bill explains the various legal provisions of the Finance Bill.
8. Receipt Budget: Provides detailed information on how the government intends / expects to raise money from different sources.
9. Customs & Central Excise Notifications: Provides details on proposed changes in customs rules and tax rates.
10. Expenditure Budget: Provides detailed information about all the expenditure the government plans to incur.
11. Expenditure Profile: A summary of the total expenditure of all ministries. It also presents expenditure according to different categories of interest, that is, the summary of funds allocated to schemes for women, children, scheduled castes, scheduled tribes and religious minorities.
12. Summary of Demands for Grants: During the preparation of the budget, every ministry is required to submit to the finance ministry its proposal regarding the amount it plans to spend and the corresponding items on which it intends to spend the funds. The expenditure also needs to be divided into ‘voted’ and ‘charged’ expenditures. These documents are called ‘demands for grants’. The document presented in the budget as ‘Summary of Demand for Grants’ gives the total amount for each ministry along with breakup into voted and charged.
13. Detailed Demands for Grants – These demands for grants provide item wise details for each ministry. Along with voted and charged, they also give the breakup of revenue and capital expenditure. 
14. Appropriation Bill: This is the Bill that provides the government legal authority to incur expenditure, or in more technical terms, the authority to withdraw money from government accounts for expenditure. The Bill provides specific details about the amount being withdrawn and the purposes for which it is being withdrawn. 
15. Macro-Economic Framework Statement: Provides the assessment of the government on the growth prospects of the economy for the next few years. 
16. Medium-Term Fiscal Policy cum Fiscal Policy Strategy Statement: This document details the government’s budget deficit target for the next three years, with the targets broken down for tax and non-tax receipts. The document also explains the government’s policies and its adherence to the FRBM act. Any departure from the Act has to be explained and the remedy for the same has to be suggested. Earlier there were two separate documents: medium-term fiscal policy statement and the fiscal strategy statement. 
17. Economic Survey - It is a document prepared by the ministry of finance which provides details of the state of economy of the ongoing year. The entire document is generally divided into two parts, where the first part presents the analytical/qualitative description of economy and country in general, second part provides the statistical data of all major sectors, as well as any other important economic data.
18. Output Outcome Framework for Schemes: This document is the result of the outcome budgeting practice adopted by India, and provides a tool to evaluate performance of various schemes. The document provides the output and outcome indicators for major central sector schemes and centrally sponsored schemes. 
19. Implementation of Budget Announcements: This document is also an evaluation tool. It presents the major announcements / targets mentioned in the budget speech of the previous year, and details the extent to which those targets have been achieved. 

While the above documents are stand-alone papers presented with the Union Budget, there are others that are part of some of the above documents. Because of their importance, these documents deserve a separate mention. They are: 

• Gender Budget Statement: Captures budgetary resources earmarked for women and girls by various Union Ministries and Departments. It comprises two parts: Part A lists schemes and programmes that allocate their entire budget for the benefit of women and girls, while Part B reports schemes meeting the minimum floor requirement of 30 per cent allocation for the benefit of women and girls. The number of Demands for Grants reported in the GBS in Part A is 25 and Part B is 33.
• Statement on the Allocations for the Welfare of Children: This is one of the primary tools for child-responsive budgeting, both at the Union and State levels. Statement 12, titled ‘Allocations for the Welfare of Children’, has been brought out by the Union Government consistently since 2008. 
• Statement on Allocation for Welfare of Scheduled Castes: Given the lagging development status of schedule castes, government makes plans/schemes which are aimed at the welfare specifically of schedule castes. This document provides the allocation for schemes which are either fully or partially aimed at welfare of scheduled caste. 
• Statement on Allocation for Welfare of Scheduled Tribes: Similar to ‘schedule caste’, the schedule tribes also lag in the development indicators relative to general population. To correct this, government makes specific plans/schemes for scheduled tribe. This document provides the allocation for schemes which are either fully or partially aimed at welfare of scheduled tribes.   
• Allocation for the North Eastern Region: The north-eastern states are economically disadvantaged region because of their geography. To compensate for this disadvantage, Union Government makes additional provisions for the north-east states. This document provides the details of such allocations. 
• Statement of Revenue Foregone: When government provides tax incentives, it results in loss of tax revenue that it would have otherwise collected. This statement provides estimates of such tax losses for each major tax. 

It is important to note that above list of documents is for Union Budgets. Since States have freedom with regard to their own budgets, all States do not necessarily publish all the documents mentioned here.