13 Feb 2008

Unraveling the Indian Budget making process

Come February and all eyes focus on the Finance Minister. And why should they not be? After all he is about to present before the Parliament the sign piece of the economic paradigm for the country for the upcoming financial year. This year the same holds true but then again with Mr. Chidambaram set to present the budget on 29th February, he would equal a number of interesting statistical records. [click here for more on these records] However its not the such records which make the Budget becoming the anxious lime light of everyone. It is the impact which the budget has that is of relevance; for it seeks to affect not only the business gentry but transcends the economic structure to come to affect one and all, either through the regime of changes brought in taxation or the through the promotion of one or more programmes of the welfare state. Therefore I thought why not have a run down on budget on this blog, which I plan to do in a couple of posts; the first dealing with the various aspects of the budget making process while the second one on the predictions of the upcoming budget for 2008-09.

Spoken in purest of terms, a budget is the financial statement of the year. This translated in national terms comes to mean the financial statement of the year of a national economy, entailing the estimated earnings and proposed expenditure during the financial year. The Indian financial year starts from 1st of April each year and ends on 31st of March the following year. It is for each of this period of 12 months that a budget is presented, outlining the planning done on the financial scale for the nation. It boils down to the extent of how each Rupee is earned by the government (i.e. proportionally from various sources) and how each Rupee is spent by the Government (i.e. on various itemized and non-itemized ingredients upon which the government spends).

Traditionally it is understood that the Budget would be presented on the last working day in February of a calendar year for the upcoming Financial Year starting from 1st of April. This would entail allowing the business and commercial practices a leverage of one month to set their practices straight and adopt themselves to the changes proposed in the budget document. However, for a variety of reasons, more often than not the Budget has not been presented on the last working day of February, which however is of little consequence for the date of presentation does not make any difference.

I. Finance Ministry up to the task

The Budget is prepared at the behest of the Union Government by the Ministry of Finance which is responsible for arranging the fiscal affairs of the Union Government in the country. This Ministry of Finance is divided into five departments (i) Department of Economic Affairs, (ii) Department of Expenditure, (iii) Department of Revenue, (iv) Department of Disinvestment, and (v) Department Financial Services. Each of these departments are further classified into divisions and it is the 'Budget Division' under the Department of Economic Affairs, which is responsible for the preparation of the Union Budget. But then it must be noted that making budget is not the only function of this division and it has other responsibilities as well. [click here for full list of functions of the division]

The basic layout upon which the Budget division operates during the financial year in the run-down to the Budget can be summarized as under;
- The Division internally reviews the progress of the economy and the various issues to be dealt; 
- The Division calls forth the opinions of the prominent economic groupings of the country, such as the Confederation of Indian Industry (CII), NASSCOM, National Council of Applied Economic Research (NCAER), etc. besides the top entrepreneurial brass of the country which is invited by the Finance Minister himself to hold consultations before the budget in order to appraise himself with the ongoing concerns at the top circles of Indian economy; 
- Meanwhile data is collected by the various departments of the Finance Ministry upon various aspects of the economics, a sort of progress-report-card of the country giving vital insight into the various sectors of the economy and their movement across the previous years. As a new trend, this data is also began to be published a few days prior to the Budget, as a run-down to the main show and is called as the Economic Survey. [click here for 2006-07 Economic Survey] 
Having undergone this process, the Division forms a policy opinion on the changes which it thinks are required in the economic mainstream and incorporates all these changes in the form of a legal text (known as the Finance Bill) which is presented by the Finance Minister is an commonly understandable speech (known as the Budget Speech). Both these documents form an essential part of the budget and are equally important for while the administration and courts enforce the Finance Act (when it is passed by the Parliament, for more, read further) whereas in case of any ambiguity as to the purpose of ambit of any particular part or provision of this Finance Act, the Budget speech is often resorted to as a interpretative means for understanding the ambiguous provision.

Additionally, the Budget division is also required to prepare a statement in terms of the Fiscal Responsibility and Budget Management Act, 2003 (surprisingly wikipedia has no entry on this important legislation); issue biannual statements on the public external debt of the country; publish annual reports on the state of affairs of the Ministry, and work on promotion of small savings in the country. All these documents are presented soon or later near around the budget document itself for they provide vital insight into the understanding of the budget on a whole in the national context.

II. Parliamentary Scrutiny

Once the budget has been prepared and presented in the Parliament, similar to the ordinary law making process, it is presented for voting and approval before the Parliament. The importance of approval by the Parliament is two-fold. Firstly it reflects the satisfaction of the Parliament on a whole upon the budget presented before them for approval and thus allows the democratic process of the law being made by the people for the people through elected representatives, to set into motion. Secondly, non-approval of a Budget would imply that the government has lost the confidence of the majority in the Parliament and this may even lead to the grounds for removal of the existing government and formation of a new one, though such instances are absolutely rare.

On the appointed day in the Parliament (an entire Parliamentary session is devoted to the Budget presentation and approval process and is understandably known as the 'Budget Session') the Finance Minister presents a speech and the 'Finance Bill' with a host of other documents (read the first part above for more details). Once the document is read out by the Finance Minister, it is submitted for voting before the Parliament, where it might be approved and passed as it is presented or with modifications suggested by members of parliament, which the government might or might not agree to. Once approved, the Finance Bill is sent to the President for his/her approval and thereon when the President signs it, it become the Finance Act, meant to be in force only but for a full financial year. 
Further Readings;
  1. Links to Budget 2007-08
  2. Video of Budget 2007-08 presentation in Parliament
  3. Hindu's critique on Budget Making
  4. EPW article on lack of democratic values in Budget Making
  5. A slide-show on the budget making process.
  6. Rediff's article on Budget preparation
  7. Some more facts on budget preparation 

Post-Script Rejoinder

After writing this post, the Finance Ministry of Government of India unveiled the Budget Manual. This document, running over 200 pages, gives in the current context the entire process which is undertaken for the formulation of the Union Budget as also giving reference to various procedures and protocols followed by the Government of India in this regard. It is stated that  the Manual "unravels the detailed processes involved in the entire gamut of Budget preparation" while it also provides "deeper understanding to the officials of Ministries/Departments of their roles and responsibilities with respect to preparation of documents and statements included in the Budget".

Just to give our readers a glimpse, we are extracting the a preliminary insight into the various chapters of the Manual, which provides as under;
Chapter I is introductory in nature and brings out the meaning and importance of Budget, the important Constitutional provisions related to Budget, the various Budget documents and their composition and the recommendations of the Estimates Committee on the Form and Contents of Demands for Grants. 
Chapter II of the Manual deals with the Organizational aspects bringing out the roles and responsibilities of the Parliament and the Parliamentary Committees and the responsibilities of various wings of the Executive in the Budget making process. 
Chapter III of the Manual deals in a comprehensive manner with the Structure of Government Accounts and the classification system. This is very crucial for any budgetary process since the budgetary and accounting classifications follow a common pattern and their clear understanding is crucial for any analysis on Budget and the related provisions. A detailed analysis of the three Funds viz. the Consolidated Fund of India, the Contingency Fund of India and the Public Accounts of India has also been dealt with in this Chapter.
Chapter IV brings out the entire chain of Budget preparation process right from the issue of the Annual Budget Circular. It deals in great detail with the process of estimations relating to receipts and expenditure and the consequent compilation of the Statement of Budget Estimates. All the related formats of estimation have been dealt with briefly in this Chapter in a sequential manner. Chapter IV also deals with the process of Pre-Budget meetings and the various instructions relating to furnishing of information by the Ministries/Departments for the preparation of Budget Statements. 
Chapter V of the Manual brings out the calendar of Budget activities and timelines including those in the Parliament. This Chapter also brings out in minutest detail the duties and responsibilities relating to various Budget documents/statements explaining alongside the process of their compilation. The checklists used internally for the preparation of various Statements in the Budget documents have been made a part of this Chapter for easy reference and understanding by all users. This Chapter also brings out the process of Budget related security arrangements including the system of Lock-in and the processes and check-lists for the preparation of State Budgets while under President Rule. 
Chapter VI apart from others outlines the role of Departments in spending and control, cash management and the much in use processes of Re-appropriations, Supplementary Demands for Grants and the related provisions in the General Financial Rules and the Delegated Financial Powers Rules. This Chapter also deals with some common Budget related irregularities which can be avoided by taking precautionary measures. 
Chapter VII of the Manual brings out the main Budget related Reporting and Evaluation processes including the Act provisions, guidelines and instructions relating to FRBM Statements, Outcome Budget, Mid-term Evaluation of Plan Schemes, Audit Reports of C&AG and the reviews by the Public Accounts Committee. The Manual also includes a number of Annexes wherever required for providing a more holistic perspective on the subject matters dealt with in the related Chapters.
We hope this Manual would give vital insights to our readers. 

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