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Background about Union Budget

January 22, 2020


Article 112 of the Constitution of India states that every year a statement detailing the estimated expenditure and receipts of the Government of India for that financial year will be laid before the parliament. This statement is known as the Union Budget or the annual financial statement. Currently, the budget is presented on the first day of February so that it can be materialized before the new financial year begins


Since the pre-liberalization days, a few traditions have been associated with the union budget. Some of these have evolved over the years, let us take a look at these:

  1. Time of budget announcement: Till 1999, the Union Budget was announced at 5 pm on the last working day of February. This was supposed to allow the tax collecting agencies and producers to work out the price implications of the change in tax rates through the night. As the budget involves much more than just a change in income tax rates, it was considered prudent to move the announcement to earlier in the day with discussions happening over the day to finalize any amendments. Starting in 1999, the union budget today is announced at 11 am in the morning.
  2. Date of budget announcement: Since the colonial era, the budget was tabled in the parliament on the last working day of February. This was changed in 2017 to the first of February. One expects budget 2020 to be tabled on February 1, 2020, at 11 am.
  3. Halwa ceremony:The printing of budget documents typically starts a week before it has to be presented in the parliament. It is customary to prepare and serve halwa (an Indian sweet dish) to all the office bearers and support staff involved in the preparation of the documents. This practice seems to have evolved from the Indian tradition of having something sweet before starting any important task. Traditionally, the finance minister serves the halwa as part of the ceremony.
  4. Railway budget: Starting from the year 2017, the Rail Budget has been merged with the Union Budget. This broke away from a 92-year-old tradition to create a more consolidated document.

Components of the Union Budget

Article 112 of the Indian Constitution stipulates that the budget would distinguish the expenditure on revenue account from other expenses. This results in the budget being made of two primary components:

  1. Revenue budget:This deals with revenue receipts and expenditure, i.e. tax and non-tax revenues, and expenses needed for the daily functioning of the government.Any expenditure that neither builds assets nor reduces liability is revenue expenditure.
  2. Capital budget:This deals with capital receipts and expenditure. That is any capital raised from borrowing and sale of assets and any expenditure whose benefits will exceed one fiscal year. Capital expenses include expenditure on infrastructure, equipment, and other fixed assets.

Further, the budget also contains the actuals vs estimates for the previous period. For example, union budget 2020 will consist of:

  1. Actual for the year 2019-20
  2. Budget estimates for the year 2019-20
  3. Revised estimates for the year 2019-20
  4. Budget estimates for the year 2020-21.

The role of the finance commission

The federal structure of India is such that the center has most of the taxation power whereas the states have to undertake most of the expenses. This requires that the center transfer some of its resources to the states. For this purpose, Article 280 of the constitution requires that a finance commission be set up every five years. The commission is tasked with making recommendations on how the tax collected by the center should be shared with the states. Further, it also lays down rules governing grants-in-aid to states from the Consolidated Fund of India. It also suggests ways to supplement the resources available to local government bodies i.e. panchayats and municipalities. It is important to note that the suggestions made by the commission are not binding on the central government. The government can also request the commission to look into specific fiscal issues that it considers of import. For example, the 14th financial commission was requested to deliberate on the level of subsidies provided by the government of India. It was also asked to explore how public utilities like drinking water and public transport can be better priced.

ARN: ED/01/20/17586

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Background about Union Budget

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