SAS PART II
PAPER VII
SECTION – I: FINANCIAL MANAGEMENT
INDEX
II. BUDGET
Sl. No. TOPICS
1. Budget cycle and Process.
2. Budget Estimates
3. Budget Formulation and Implementation.
BUDGET CYCLE AND PROCESS
'Budget' is a term derived from an old English word, 'bougett',
the sack or pouch from which the British Chancellor of the Ex-chequer took out his papers for presenting the Government's financial programme for the ensuing fiscal year to Parliament. As defined by the Oxford English Dictionary the budget is “a statement of probable revenue and expenditure for the ensuing year with financial proposals founded thereon, annually submitted by the Exchequer for the approval of the House of Commons... Hence, any analogous statement, estimate or proposal.” in a general sense, therefore, the budget is a statement forecasting revenues and expenditures for a period of time. According to Willoughby, a budget comprises three components:
(a) a statement of the sums required for the due conduct of public affairs during the period to which such estimate relates;
(b) an estimate of the probable income from revenue and loans on the basis of existing provisions of law regarding public dues and credit operations;
(c) a statement showing conditions of treasury in terms of the assets and liabilities.
These components are then integrated in the form of a simple document showing clearly the relationship' between the actual, current as well as the estimated revenue and expenditure and the receipts and _ disbursements. Budgeting, therefore, involves preparation of the estimates ; collection and' custody of funds; disbursement and control of expenditure itnd recording of all the transactions whose legality and regularity are duly verified and reported to the legislature by an independent audit.
Functions of the Budget
Historically, budget was an accountability document in terms of which the legislature seeks to control the executive. This , is' true of the Cabinet as well as the Presidential systems. The legislature examines and votes (authorises) the proposed expenditure and the taxes. Generally, the executive maintains the accounts. The auditor scrutinises these accounts to find out whether irregularities were committed and the will of the legislature flouted. These audit reports are then examined by the legislature for suitable action. This is generally the procedure in democratic governments. Budgets may also be prepared in authoritarian governments as part of their financial plan for the coming year. Such a government is not answerable to any elected body. Nevertheless, in such systems, the budget can serve as a plan of action in terms of which higher levels of executive can control lower formations.
In fact, when budget was formally introduced in India in 1860 by the then Finance Member of the Governor-General-in-Council, there was no elected legislature. Nor was the Indian Budget presented to the British Parliament. At best, it was a document in terms of which the Viceroy/Governor-General-in-Council was made accountable to the Secretary of State-in-Council in London who was a member of the British Cabinet to look after Indian affairs. There was an Auditor-General of India. But he was not the guide, friend and philosopher of any legislature in India. He was charged with the responsibility of both maintaining and auditing government accounts. The combination of audit and account was a unique feature in the Indian Financial System which had continued until recently. Because of this,he was called Comptroller and AudItor General of India.
With the various reforms of Indian Administration beginning
from the Government of India Act of 1919, elected legislatures came into being by stages at various levels of government. Consequently, the CAG has become an important instrument for ensuring accountability of the executive to die legislature. In the early stages of democracy, the scope of the' government was limited. Its activities were largely confined to the maintenance of law and order. But with the passage of time State intervention was found necessary to regulate and manage various economic and social welfare programmes and activities. Sometimes, as in India, the public sector is regard,ed as the dynamic element in bringing about a planned transformation of the socio-economic system by strengthening the foundations of self-reliance, balanced growth, stability and social justice. Under such ,an enlarged sphere of the government, budget becomes a tool of planning, articulation of policies, implementation of programmes and review of accomplishments. It also reflects the sum-total of decisions arrived at as a result of conflicts and pressures exerted on the government. It follows that apart from being a means ofparliamentary financial control, modern budget is a political document reflecting the plans, policies, managerial actions and social outlook of the government.
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Budgeting in India
Preparation of a budget for the approval of the, legislature is a constitutional obligation on the rart of the government, both at the Centre and in the States. This is' based on certain basic principles of parliamentary form of government. Legislative prerogative over taxation, legislative control over expenditure, executive initiative in financial matters,' annuality, and so on are some of the fundamental principles of the system of parliamentary fina~cial controL There are specific provisions in tbe Constitution incorporating these tenets. According to Article 265, “no tax shall be levied or collected except by authority of law."
Executive ordinances can be used temporarily. But, no lasting tax measure can be imposed by an ordinance. Secondly, Article 266 requires that no expenditure can be incurred except with the authorisation of the legislature. The President can do so when the constitutional machinery fails or in between Parliamentary sessions. But, it. has to be subsequently ratified by the Parliament. Thirdly, no tax can be Imposed (Articles 117 and 207) or expenditure sanctioned (Articles 113 and 203) unless asked for by the executive government. Fourthly, all expenditures except that specifically charged by an enactment requires to be sanctioned on an annual basis (Articles 112 and 202).' The fiscal year in India begins from 1St April. '
All revenues are paid into and withdrawn from the Consolidated Fund of India. The legislature can also vote funds into Contingency Fund of India from which unforeseen expenditures can be met pending subsequent legislative authorisation. Provident Fund, Depreciation, Reserve Funds, etc., are held in the Public Account.
There are certain expenditures like the emoluments of the President, Comptroller and Auditor General of India, Judges, Speakers, and so on which are not voted by the legislature. These are called 'Charged' items. A demand becomes a grant when voted by the legislature. Apart from regular grants, supplementary grants may be voted when needed. Excess expenditure incurred by the executive is also voted as excess grants ex;.post. To allow enough time for legislative scrutiny and discussion of the budget, a vote on account is also taken. Token grant is also made to facilitate utilisation of savings within a grant for other approved purposes. . .
There are certain other features of the budget estimates. First, the estimates are on a cash basis. Secondly, there is a single budget for all financial transactions in the administrative departments of government. Railways and other public enterprises have separate budgets. Of these, only Railway Budget is presented to Parliament. Thirdly budgeting should be gross and not net. Any receipt accruing to the department should not be deducted. Nor could revenues be shown net of collection charges or other incidental expenditures. Fourthly, budgeting, should be close. It should not be a guesswork resulting in an over-estimate or a guestimate. Provisions should not be in, lumpsum. Details under each head of account should be carefully estimated. Fifthly, the budget should be on annual basis. The "rule of lapse" will apply at the end of the year, i.e., if the voted expenditure is not spent by the end of the financial year (i.e., March 31), then the unspent balance would lapse. Observance of the rule of lapse has led to a heavy "rush of expenditure" towards the close of the financial year. Sixthly, budget estimates are made on a departmental basis. The form of the estimates should correspond to the accounting heads-major head, minor head, sub- head and detailed heads of accounts. Seventhly, in India it has become customary to distinguish between the revenue budget and the capital budget. Those which are financed out ,of current revenues are normally included in the Revenue Budget and those financed out of saving or borrowing are included in the Capital Budget.
Budget Cycle in India
As mentioned earlier the financial year in India begins from 1st April. But the budget cycle begins around ,SeptemberOctober, i.e., 5.6 months before the commencement of the financial year. The cycle begins with a circular sent out by the Ministry of Finance to the various Ministries and Departments inviting their estimates for the ensuing year. The general ru]e is that he who spend~ the money must also prepare the estimates in advance. The items of income and expenditure contained in, these statements show:
(1) actual figures of the previous 3 years;
(2) the sanctioned budget estimates for the current year;
(3) revised estimates of the current year;
(4) proposed estimates for the next financial year, explanatory notes for any increase or decrease in mates ; and
(5) actuals of the current year available at the time of preparation of the estimates and actuals for the corresponding period of the previous year.
The estimates proposed by the Ministries/Departments then go to the respective departmental Controlling officers who (a) scrutinise them fully; (b) revise the estimates where necessary giving reasons therefor; and (c) give the approval. The consolidated estimates are then transmitted to the Ministry of Finance in the course of October-December. The Finance MInistry gives its concurrence and consolidates these proposals by the middle of February.
The budget is presented to Parliament towards the end of February. Presentation of the budget is accompanied by the Finance Minister's speech. A couple of days after the presentation of the budget, there is a General Discussion on the broad economic and fiscal policies reflected in the budget which lasts for about 20-25 hours. This is followed by discussions of Demands for Grants, which last for about 120-140 hours. Each demand. is voted at the end of the discussion. The time allotted may not be enough for discussing all the Demands. So the undiscussed demands are clubbed together and put to vote. This is called guillotine. This is followed by the introduction of the Appropriations Bill which comprises all the Demands for Grants voted. The Bill becomes an Act when it is voted. This is followed by the Finance Bill, containing proposals for taxation. When voted it becomes the Finance Act.
Since the discussion in Parliament is carried up to the end of April (and sometimes even beyond) a Vote on Account is taken to enable the Government to spend money pending the authorisation of the budget. Once the budget is voted, the respective grants are communicated to the Ministries.
Departments, in turn, inform their respective subordinate agencies and attached offices about the budgetary provisions. This marks the beginning of the execution phase of the budget. Expenditures are incurred according to the General Financial Rules framed by the Ministry of Finance for purposes of financial control. Various schemes of delegations of financial powers have been introduced since 1958 to decentralise financial control. Systems of financial advice have also been evolved with a view to develop financial consciousness within the spending Ministries/Departments.
Budgetary Processes in India
An outline of the budgetary process is already explained as .po.rt of the budget cycle. Proposals emanating from the lower formations are scrutinised by higher echelons especially by the Financial Adviser and head of . each department before according "administrative approval" and inclusions in the departmental budget. When prapcsals involve works they also require the "technica1 approval" by the Works Ministry or Public Works Department. In the Government of India, there is also a Works Priority Board to accord pri"ritifs between the various public works projects, schemes/services. The approval of the Planning Commission will be required in the case of plan schemes. Besides, investment proposals.above Rs. 5 crores are subjected to the scrutiny of Public Investment Board which is presided over by the Secretary, Department of Expenditure, Ministry of Finance. Investment below Rs. 5 crores but above Rs. I crore (non-recurring) and Rs. 20 lakhs (recurring) will be scrutinised by the Expenditure Finance Committee in which the representative of the Ministry of Finance win have an important say.
In the case of Defence Budget, the Finance Division and the Secretary scrutinise the estimates emanating from the various branches working under the Chiefs of Staff before consolidation and submission to the Defence Committee of the Cabinet for approval. Only after such approval, these estimates are sent to the Ministry of Finance for incorporation in the Budget.
Indian Railways are a departmental commtercial under taking of the Government of India and as such a different method is followed in the preparation of the Railway Budget. The framing of the railway budget is preceded by a forecast of the expected traffic, both passenger and goods, to' be handlEd by the Railways during the budget year. . On the expenditure side; there are five broad 4ivisions, viz., administration, repairs and maintenance, operating expenses, staff amenities and minor works. Each zone prepares its estimates in terms of the above categories which are finally consolidated by the Railway Board. Expansion of capital facilities are also planned and scrutinised by the Railway Board in consultation with the Planning Commission.
The scrutiny by the Ministry of Finance is least in respect of items charged on the Consolidated Fund of India and nominal with regard to 'standing charges', i.e., permanent charges like salaries and allowances. But tbe scrutiny is more detailed in respect of 'new items'. New items cannot be included in the estimates of the Ministries/Departments without prior sanction of the Ministry of Finance. 'New schemes' are formulated in the respective Ministries/Departments. But they have to be voted by the concerned Financial Adviser before submission for the consideration of the Planning Commission and the Ministry of Finance. The decision of the Ministry of Finance is final in the matter of determining the provision. Differences between Ministry of Finance and spending Ministries/Departments can be resolved by referring the matter to the Prime Minister or the Cabinet.