A beginner's guide to the Union Budget

As finance minister Pranab Mukherjee gets ready to present the much anticipated budget for financial year (FY) 2010-11 on February 26, here is what you ought to know about the Union budget. It will help you understand and analyse the budget.

What does the Union Budget contain?

The Union Budget is our country's annual financial statement of receipts and expenditures for the coming financial year -- similar to an individual's personal cash flow statement but prepared on an annual basis. It contains the expected revenues (to be received) and expected expenditures (to be met) in the coming FY by the Government of India. It is supposed to be an indicator of the economic growth and the financial well being of our country.

When is the Union Budget presented?

The presentation of the Union Budget is usually done on the last working day of February. This year, however, it will be presented on February 26 as the last working day falls on a Sunday. The current budget being presented is for the coming financial year: FY 2010-11.

Who prepares Government's annual budget?

There's a separate division in the Ministry of Finance called as the 'Budget Division' to look after the preparation of the Budget.

Budget process

Here are the various stages through which the Union Budget goes through before it is passed in the lower house of Parliament (Lok Sabha) after which the President of India signs it and it becomes an Act:

• Every year, the 'Budget Division' under the Ministry of Finance is responsible for the preparation of the budget. All government ministries & departments send in their funds' proposals and requirements
• Based on the inputs, a Draft Budget is prepared
• The draft budget is then approved by the Finance Minister in consultation with the Prime Minister
• A final budget is then presented in the Parliament
• A discussion on the budget is held in the Parliament (regarding each ministry's grant proposals) and Finance Minister responds to questions. Revision of tax (direct & indirect) proposals are also discussed & voted upon here
• Once the grants are approved, 2 bills are introduced in the Lok Sabha -- Appropriation Bill (final approval of funds to be given to each ministry) and Finance Bill (tax proposals). Union Budget is then approve

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Budget terms you should know

1. Budget estimate

The Budget estimate is an assessment of the Government's revenues and expenses for the coming FY. The government makes an assessment of the expenditure to be incurred and revenue (or income) to be received.

2. Central plan/Annual plan

The government's Five-Year plans are split into Central Plans or Annual Plans and necessary funds are allocated every year through the Union Budget to achieve the laid-out goals (social & welfare commitments).

3. Consolidated Fund of India

This is the government's savings account. All money received by government (in any form) is placed here. All expenses are met from this account. Withdrawal is subject to Parliament's authorisation.

4. Public account

It is an account where money received through transactions not relating to consolidated fund is kept.

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5. Contingency Fund of India

As the name suggests, money from this account is only for contingencies (such as floods, drought, other national calamities, disasters etc). Withdrawal is subject to Parliament's authorisation.

6. Revenue account

This is the income & expenditure statement of the government containing details of revenue spent in comparison with revenue received.

Revenue receipts: The government earns revenue in the form of taxes (direct and indirect taxes), duties (excise, custom), interest, and other fees collected.

Revenue expenditure: Any expenditure (other than for creation of capital asset) for the normal operation of the government is called revenue expenditure. Example, interest payments on government borrowing programme, salaries to government staff, subsidies etc.

The above expenditure must be financed from revenue receipts, ie revenue that the government earns.

7. Capital account

Alike Revenue Account, Capital Account is the statement containing details of capital expenditure incurred vis-a-vis capital receipts.

Capital receipts: Thye refer to the money that the government make via loans -- given to RBI, market advances, to foreign governments and other international organisations. Also, disinvestment proceeds fall into this category.

Capital expenditure: Refers to the money used up on creating capital assets (railways, express highways, airways, canals and dams, purchase of land, machinery and equipment), loans to state governments & government subsidiaries, and other investments made/incurred by the government.

8. Non-Plan expenditure

This consists of government's fixed expenditure like expenditure on defense, interest payments, subsidies and grants to states. This can be both revenue & capital in nature.

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9. Plan expenditure

This consists of expenditure incurred on five-year plans and social and welfare commitments of the government (example, expenditure incurred on National Rural Employment Guarantee Scheme). Funds are allocated for this periodically.

10. Fiscal deficit

When the revenue receipts of the government falls short of its total expenditure, a fiscal deficit is created. In such a case, the Government resorts to borrowing to make good this shortfall.

11. Finance Bill

This consists of the proposed amendments to taxes (example, change in income tax slabs etc) and their impact on the Government's revenue resources.

12. Direct and indirect taxes

Direct Taxes: Taxes cut directly from salary, business income or income from other sources are called direct taxes.

Indirect Taxes: Taxes added (indirectly) to the price of goods and services are called indirect taxes. Example: sales tax, excise duty and service tax.

13. Subsidies

Monetary concession given to producers or consumers of specific goods in order to control prices and manage resources for better utilisation.

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