L T M T 35 BUDGETING

Structure
35.0 Objectives 35.1 Introduction 35.2 Meaning of Budget 35.3 Principles of Budget-making 35.4 Preparation of the Budget 35.5 Enactment of the Budget 35.6 Kinds of Grants 35.7 Let Us Sum Up 35.8 Key Words 35.9 Some Useful Books 35.10 Answers to Check Your Progress Exercises
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35.0 OBJECTIVES
The objective of this unit is to enable you to get an understanding of the budgetary process. After going through this unit you should be able to: e explain the meaning and importance of the budget discuss the principles of budgeting e identify the various stages in the preparation and enactment of budget; and describe budget-making in democratic countries.

35.1 INTRODUCTION
Financial administration is very important today because of the volume, nature and variety of governmental activity. Everything government does requires money and government spends huge sums to meet its commitments of different kinds. Budgets grow larger and larger each year and it becomes increasingly necessary to ensure that the tax-payers' money is spent efficiently and economically. There is need to ensule adequate financial accountability. Successful fiscal management centres around budgeting. The budget of the state, is an elaborate and complex exercise. In the days of laissez-faire, the budget was a si~nplc 'statement of estimated income and expenditure. Given the accepted belief qf the time, that the best state was the one that did the least, the functions of government were liniited and iegulatory in natlue. Hence, the budget as the principal.financial statement of the government, sought to introduce orderliness and method in financial management. The modern state is a welfare state. It undertakes activities to promote the comtnon welfare of the community. In developing countries like India, the state is not just the preserver of the status quo, but the accelerator of socio-economic change. Government is engaged in nation building activities and seeks rapid modernisation. Administration is change oriented and result oriented. Goals have to be achieved within the democratic frame-work, with due regard for the rule of law and the rights of men. Hence, in the modern state, be it democratic o r communist, developing or developed, budgeting is the heart of financial administration. In this unit we shall examine the meaning and importance, principles and the process of budgeting.

35.2 MEANING OF BUDGET

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The word budget originally comes from the old English word "bougette" meaning a sack or a pouch. It was xclnllv :I lcnrher ha&in which the British Chancellor of the

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Exchequer (the equivalent of our Finance Minister) carried the papers relating lothc budget which were to be placed before Parliament for approval. From that association, it has come t o mean the papers themselves. The budget is not just a statement of estimates of expenditure and revenue of the Government. It is a plan of action of the government for orderly administration of its financial affairs. The budget reflects the philosophy of the government and its manner of governance. It indicates as to how resources are to be raised to meet the anticipated expenditure through its taxation policy. How economic growth is planned, is indicated through its production policy. The budget reflects the priorities and targets of the government. For instance, through heavy taxation of the rich, it can attempttoreduce economic and social inequalities. It is both a kind of economic horoscope and apolitical document.
The budget serves as a powerful tool of coordination. It seeks to eliminate duplication and waste. It is a means to inculcate cost consciousness. It provides a means to evaluate progranlmes and policies and helps to streamline administration. In fact, performance budgeting which emphasises what goverfiment does in terms ofoI>jectives and functions, and zero-based budgetjng which calls for an annual review of all programmes with il view to discontinuing those programmes that have failed or are not viableare steps in this direction. The budget is also the most important tool of legislative control over the public purse.

The term budget stands tor both-the financial plan as presented to the legislature for its sanction and the sanctioned plan as it emarges after being passed by the legislature. In India, the word budget is used t o indicate the estimates of expenditure only, In Englal~d, the word is used in connection with ths-revenue or taxation part of the financial plan. In America, the term is used in .a more comprehensive fashion to cover the entire financial process i.e., preparation of the budget, enactment by the legislatu~.e, its cxecution, accounting. and audit.

A budget may be longterm or short term. Usually, Government budgets are on an annual basis. In India, where we have Five Year Plans, a part of the plan is incorporated in the annual plan though Pal-liament does approve of the entire plan in principle and outline.

Let us examinc the principles of huclget-raaking.

1 The budget must be a balanced one : The estimated expenditure should not exceed

estimated income. When expenditure exceeds estimated income, it is called a deficit budget, Though deficit budgetingis risky in that it can lead to inflation, up to apoint it is acccptablc because it hclps fight trade depression. When government spends more on public works, it: ir~creascs the purchasing power of the people which in turn stin~ulates prices and production arrd fights depression.
2 Estimates should be on a cash basis : This is how it is in India, Britain and U.S.A.

This kind of cash budgeting has the advantage that the final preparation of accounts of a year call bc done soon after its close, though it may not reveal the true financial picture for that year. By deferring payvents that are due in that year, a surplus instead of a deficit will be shown in thc present year's budget which is incorrect. In contrast to tllc cash butlgct, thcrc is the revenue budgqt which corrects thisdeiicit,but it res~llts in long delays in preparation and presentation of accounts and this makes fillancia1 cotltrnl deficit.

3 Budgct must distinguish between recurring expenditure and income on the onchnnd and capital payments and receipts o n the other. In other words, there must be a distinction bclweerl current or revenue budget and capital budget. Eachpartmust be balanced scpnratcly and the overall surplus or deficit is found out by taking bothinto account,
4 Budget should be gross and not net : All the transactions of income and expenditure be clearly and fully shown and not merely as the resultant netposition. Neglect

of this rule can adversely affect the established financial procedure and result in laxity of control, incomplete accounts, etc.

Budgeting

5 Estimating should be as exact as possible :Gross over-estimating leads to heavy taxation. Gross under-estimating can throw the whole budget out of gear when it comes to implementation. Close estimation is usually done by taking the average figures of previous three years under different heads and making the necessary adjustments. Itemised estimates are an aid to close budgeting. Generally, one is liberal in estimating expenditure and conservative in estimating income.
6 Budget form should correspond to the form of accounts, i.e., budget heads should be the same as those of accounts. This facilitates budget preparation, budgetary control and account-keeping. 7 The rule of lapse : It is the last budgetary principle. No part of the grant that is unspent in the financial year can be carried forward for the future. If this rule did not apply, depnrtmel~ts would live on accumulated and unspent balances and would to - that extent be independent of legislative control.
&&rk Your Progress 1 Note: i) Use the spa'ce below for your answers. ii) Check your answers with those given at the elld of thc unit. 1 What is a budget'?

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2. Distinguish between deficit budgeting and cash budgeting.

The Budgetary Process It is an elaborate and complex process involving operations performed by several agencies as indicated below. 1 The Executive : The various depart~nenls which constitute the executive branch of the government have t a formulate their work programme for the year. .- 2 The finance ministry, though a pa t of the executive, has a special role to play. it administers the finances of the government and so it is responsible for the budget. It interacts with the administrative ministries that are the spending bodies and prepares the budget estimate. The estimates of income or revenue and the estirnaf.esof expenditure are brought together in the budget which is presented to Parliament. 3 The Legislature : It discusses the budget and sanctions the expenditure. In India, Parliament's control over government expcnditure is undertaken through its financial committees. 4 Audit Department : Audit is independent of Government. It is a device to ensure the legality and propriety of expenditure. The Comptroller & Auditor-General sees that

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Concepts in Organisations I11

the tnoney is spent according to the Appropriation Act and that the amount of expenditure does not exceed what has been sanctioned. Details of Audit are given in .-'Unit 38. Let us now examine the budgetary process in terms of the preparation of the budget and the enactment of the budget.

35.4 PREPARATION OF TWE BUDGET

Let us take the case of India and the preparation of the Union Budget. It may be noted that we have at the Union level, the General Budget and the Railway Budget and each state 'has its own budget The Financial Year in India is from 1st April to 31st March. The work in connection with the preparation of the budget estimate commences around July or August about 7-8 months before the start of the financial year. The initiative is taken by the Finance Ministry which supplies 'skeleton forms' to the administrative ministries for preparing their estimates. Each form contains columns far (1) actuals for the previous year, (2) sanctioned estimatesfor the current year, (3) revised estimates for the current year, (4) budget estimatesfor the coming year, (5) actuals of the current year available at the time of preparation of the estimates and (6)actualsfor the corresponding period of the previous year.

The budget estimates have three parts-standing charges, continuing schemes and new schemes. The last mentioned are the most important and have to be carefully examined by the Financial Advisers attached to the various administrative departments. After revision and review, these estimates are sent by the administrative ministries some time in November to the Finance Ministry. The Finance Ministry examines all these budget estimates from the point of view of overall needs of the , Government and total availability of funds. Proposals for new schemes are v e v thoroughly scrutinised for the rule is that no proposal for new or increased expenditure, , for any department, can be incorporated in the budget without the concurrence of the I Ministry of Finance. The estimates of expenditure are finalised by the Finance.Ministry 1 . after taking into account factors like the Five Year Plan, the policy decisions of the cabinet and the prevailing conditions in the country. The Finance Ministry is endowed with this control because it is not a spending ministry Iike the others. On the contrary, : it is the guardian on the tax-payers' interests. Above all, since it,has to raise the money required for the proposed expenditure, it must have a say in determining the level of that expenditure. After the estimates of expenditure are completed, estimates of revenue are prepared. This too is the work of the Finance Ministry. The Departments of Income Tax, Central Excise and Customs,~which are the principal revenue collecting agencies, make a forecast of expected revenue for the coming financial year. The Finance Ministry must be singled out for playing a special role in financial administration. It handles the financial business of the government and is the custodian of the nation's purse. T h e , Finance Ministry examines these estimates and accordingly prepares the tax proposals. However, decisions in policy matters in all respects, are taken by the cabinet. When estimates of Income and Expenditure are finalised by the Finance Ministry, they constitute the 'Annual Financial Statement'. This the President causes t o be laid before both the Housesof Parliament as per Article 112 of the-Constitution,. ..... -I

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Check Your Progress 2 ,Note: i) Use the space below for your answers. ii) Check your answers with fhose given at the end of the unit. What agencies are involved in the budgetary process?

2 Explain the role of the ~i'nance Ministry in preparing the estimates of expenditure.

35.5
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' ENACTMENT OF THE BUDGET

A very crucial stage in the budgetary process is its passage through Parliament which is marked by five stages. Before we examine these five stages, it is important to bear in mind thc powers of the Indian Parliament in budgetary matters, covered in Articles 112 to 117 oi' the Constitution. Briefly stated, they are the following. shall be made except on the recomkcndation of the President 1 No demand for a 2 Any proposal dealing with expenditure must bc 011 the recommendation of the President. 3 Parliament can reduce or abolisli a tax, but not increase it. 4 Certain itemsof expenditure are chargedon the Consolidated Fund of Ihdia, like the of the President, Judges of the Supreme Court, Speaker, salaries and allowa~ices Deputy Speaker, Comptroller & Auditor-General of India and others. The 'charged' expenditure is subject to discussion though not submitted to the vote of Parliament. 5 Parliament cannot amend the Appropriation Bill in such a way as tovary the amount, be it charged expenditure or otherwise, or alter the destination of any grant. 6 In financial matters, thc powers of the Rajya Sabha arc restricted. It must accept the Finance Bill with or without any recommendations within 14 days. The Lok Sabha may accept or reject any or all of these recomn~endations. In any case, the Finance Bill does dot go again to the Upper House but directly to the President for his'assent. Let us now take each of the five stages in turn.
1 Presentation to the Legislature : The Finance Minister presents the budget to the Lower House on the last wo;king day oEFebruary. Hc does so with the budgct speech which is eagerly awaited by business circles as it gives first indications of t?x proposdls and the economic and financial policy of the ~ o v e r n m e n tThe . budget is also placed before the Upper House which can only discuss it.
2 Generaldiscrrssion : It takesqlace a few days after the presentation of the budget, It is spread over two to three days. The discussion in each House is confined to general principles or policy'underlying the budget, No details are discussed; there is no voting, nor are cut motions allowed. The gencral cliscussion is a hangover of British times when the Indian legislature could do no more than discuss the budget. However, it serves the purpose of enabling a discussion on the programme of government and particularly on the 'charged' expenditure. At the end of the debate the Finance Minister repIies, reacting so the points of criticism and the main charges of the members.

3 Votingof demands for grants : ~ f t ethe r general discussion, the Lower House takes up voting of demands. Thjsvotingof the expenditure is part of the budget and is the exclusive privilege of the'lawer House. The demands are presented ministry-wise and each deniand is subject to a vote. At this stage there is a lot of discussion and government is subject to severe criticism. Members can move cut motions which are of three kinds namely-disapproval policy cut, economy cut and token cut. The purpose behind the cuts is to criticise the specific departments of government and expose inaladministr&n. When put to the vote they are generally defeated because government has a majority to srlpport it.

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In 26 days the Lok Sabha must complete the voting of demands. The time limit for each demand as well as for the entire expenditure part of the budget is fixed by the speaker in consultation with the leader of the House. The schedule is carefully observed. On the last day, all the remaining demands are subject to vote though the discussion may not be adequate. This is unfortunate and amounts to a highly unsatisfactory state of affairs, because the House is not able to perform its vital role o f controlof cxpenditure. It is noteworthy that the Lower House canonly reduceor reject the proposed items of cxpenditure. Even this is not possible because the ruling party of the government has majority backing. In that sense, even cut motions are only symbolic. They are only a means to expose the government. A demand becomes a grant after it has been duly vc~tecl.
4 The Appropriatio~i Bill : After the Lok Sabha has voted all the demands, these along with the charged expenditure arc embodied in a bill called the Appropriation Bill. This bill follows the same procedure in the House as in the case of any other bill although no amendments can be made to it. This bill legalises expenditure and meets the Constitutional requirement that ". .... no money shall be withdrawn from the Consolidated Fund of India except under appropriation made by law." After the Appropriation Bill is passed in the House, the Speaker certifies it as a money bill and sends it to the Upper House. Here the bill is discussed and wit11 o r without recommendations returns to the Lower House. The Lok Sabha then gives the Appropriation Bill its final shape and then sends it to the President for his assent which is given as a matter of course. Thus the Appropriation Bill becomes the Appropriation Act.
5 The Finance Bill : With the passage of the Appropriation Act, the expenditure part

of the budget is complete, in that all public expenditure is authorised by Parliament. But ways and means must be provided to meet this expenditure. This is done through taxation. According to Article 263 of the Indian Constitution no tax is t o be levied or collected except by authority of law, This means that parliament, the supreme law making body must approve of the tax proposals of the Government. All the taxesdo not have to be authorised annually. Some of them are permanent and their rates have to be fixed by the Government under the provisions of the law governing them. 'The rates of others have to be fixed annually by the legislature, like the Income Tax. Government's taxation proposals are incorporated in a bill known as t h e Finance Bill. It follows exactly the same procedure as a money bill. While no amendments in either house can be moved to the Appropriation Bill, amendments seeking to reject or reduce a tax can be moved to the Finance Bill. These have b e ~ n known to be accepted by . Parliament. However, no increase in taxes or introduction of new taxes can emanate Crom Parliament. Once the bill is passed it hecornes the law of the.land.+This completes the enactment of the budget in Parliament. #

Check Your Progress 3 Note : i) U& the space below for your answer for question No. 2.
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ii) Check your answers with those given at the end of the unit,
1 Indicate whether the following statements are True o r False. i) Parliament can increase, reduce or abolish a tax. ii) Items of expenditure charged o n the Consolidated Fund of India are non-votable. iii) In financial matters both t h Houses ~ of the Indian Parliament have equal powers. iv) Voting of demand for grants is done in the Rajya Sabha. ' v) Government's taxation proposals are embodied in the Appropriation Bill. vi) T h e demand for grants is introduced by the Speaker of the House. 2 Describe the enactment process of the budget.
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TruelFalse TruefFalse True/~a~s TruefFalse TrueIFalse TrueIFaIse

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KINDS OF GRANTS

The budget cmbodies thc ordinary estimates of income and expenditure for the year. Rut under special or extraordinary circumstances, these estimates may not be adequate. To take care of special needs there are four other kinds of grlrnts, that the Lower House considers. They are: i) -Vote on account : Even though the financial year starts on 1st April, the budget takes some time to be passed. The House is required to vote on account cf the expenditure that will be incurred in thc first few months of thc financial year. A vote on account is an advance grant.
ii) Vote on credit : This is to meet expenditure whose amount or detilils canoot be precisely stated in the budgct because of the nature or indefinite character of the service, eg., war.

iii) Exceptional grant : The Lok Siibha can makc iln exceptional grant which is not a part of the current service of any financial year. For unforeseen expenditure advanccs can bc niacle by t h e President.0~1 of thc Contingency Fund of India, but to be duly authoriscd by Pal-liarnent Inter. these advances l ~ a v e iv) Excess grant : This is a grant lo regularisc excess expenditurc. v) Token grant : If expcr~diture on a new service can be mct by re;~ppropriiltion of funds, this is regularised by a demand for ;I token amount (say Iis. 101-) which is , approved by Parliament by voting. vi) Supglelnentary grant : If original estimates arc insufficieni, aclditional tuntls arc sought in the course of the financial year through supplenienticry grants. This is morc in the nature at a supplenicntary budget which is frcqucntly rcsortcd to i n India and follows the proccdurc prescribed For thc originit! budget.
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Check Vor~r Progress 4 Note : i) Use the space below for your answers. ii) Chcck your answers with thosc given at the end of thc unlt. :1. Describe the following in two lines each. i) Vote on Credit

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ii) Vote on account

iii) Suppletnentary grant

35.7 LET US SUM UP

In a modern wclkre state, the budget is more than n device for counting and recording incotne and expenditure. It is an econornic horoicope and ;I political document. )Budget making is guided by principles and is an elaborate and complex exercise. The

Concepts in Organbations

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budgetary process involves the preparation of the budget and its enactment in thc legislature through five stages.

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Consolidated Fund of India : In India, the Centre and States have each, its consolidated fund to whi,ch all receipts are credited and all authorised payments are debited,. Finance Bill : The Finance Bill is the bill which consists of the Government's Financial (Taxation) proposals for the ensuing financial year which has to be passed by the Parliament every year. Inflation : A progressive increase in the general level of pnces brought about by an expansion in demand or the money supply or increase in costs. Laissez-faire : It literally means 'let it be'. It is a system where the government does not intervene and gives complete freedom to private enterprise. Zero-based budgeting : It is the latest method of evaluating the budget. It is a critical analytsis which questions the very basis and justification of every scheme & project-both ongoing and new. Each activity is closely reviewed from base zero and it is scrutinised to judge whether its continuation is justified.

35.9 SOME USEFUL BOORS

Bunkhead, Jesse, 1966. Government Budgeting(Second Edition); Wiley : New York. Premchand, A, 1963. Control ofExpenditure in India; Allied Publishers : New Delhi. Thavaraj, M.J.K., 1964. Essentials of Financial Administration; Indian Journal of Public Administration :April-June, 1964. Thavaraj, M.S.K.,1978. Financial Administration of India; Sultan Chand 6r Sons : New Delhi. Wattal, P. K., 1963. Parliamentary Financial Control in India; Minerva Book Shop : Bombay.

35.10 ANSWERS TO CHECK YOUR PROGRESS EXERCISES

Check Your Progress 1 See Sec. 35.2 2 See Sec. 35.3 Check Your Progress 2 1 See Sec. 35.4 2 See.Sec. 35.5 Check Your Progress 3 1 i) True ii) True iii) False iv) False v) True vi) False Check Your Progress 4 1 i) SeeSec35.6 ii) See Sec 35.6 iii) See Sec 35.6

2 See Sec 35.5