ASSIGNMENT 1

SUBJECT: PUBLIC POLICY AND ADMINISTRATION IN INDIA

TOPIC: BUDGETING AND FINANCIAL ADMINISTRATION- BRIEF
STUDY OF BUDGETARY PROCESS IN DIFFERENT COUNTRIES
DATE: 9TH JANUARY 2020
SUBMITTED TO: Dr. SIBARAM BADATYA
SUBMITTED BY: SUDHARSHINI K
REGISTER NO.: 18BLA1048
INTRODUCTION
This article aims to analyse the concept of budgeting and the processes
associated with it like preparation, enactment, execution and auditing of
budgeting. The article starts with a basic introduction of financial
administration, its importance and methods. Following this the budgeting
concept is covered concisely followed by the types of budgets, the
process of preparation, enactment, execution and auditing of budgeting
in India. Also the Parliament’s control over the budget in India is
discussed briefly. Finally an attempt is made to look into the budgetary
processes of different countries as concisely as possible.

FINANCIAL ADMINISTRATION
The term financial administration literally means the job of managing
financial tasks for a company or an organization; for example controlling
the budget, writing financial reports, providing money for projects, etc.
This article however focuses on public financial administration. Public
financial administration deals with the principles and practices
concerning the efficient and prudent management of the funds/finances
of the government. It may also be defined as the machinery and method
by which funds for the implementation of public programmes and
services are raised, spent and accounted for.

Importance of Financial administration

Public financial administration is important because:

(i) Finance is the life source of any government. People and

resources needed for effective functioning of the government
can be acquired only if funds are provided.
(ii) Helps to improve socio economic aspect of the people by
transferring private financial resources for public purpose and
thus improving the welfare of common people.
(iii) Helps in achieving the national objectives of the government.
(iv) It ensures that public funds are managed well so that wastage
and abuses are avoided.
(v) It helps in raising revenue from domestic as well as foreign
sources to implement the government's various development
projects and provide public services.
Methods/Process of Financial Administration:
1. Budget: In the word of Prof. Dimock, “Budget is a balanced estimate
of expenditure and receipts for a given period of time. In the hands of the
administration, the budget is a record of part performance a method of
current control and a projection of future planes.”

2. Accounting: Accounting is the record ingredient of financial

administration. It is an art by which the financial effects of executive
action are recorded, assembled and finally summarized in the form of
the financial reports.

3. Auditing: Auditing is a considered the final stage. In fact, it is

investigation of report and legally, efficiency and accuracy of the
financial transactions. Audition is of two types i.e. internal and external.

4. Purchase and Supply: As the name implies, it is the acquisition of

the property. In other words, purchasing is a report of large category of
supply which covers specialization traffic management, inspection,
storage and proper utilization of different resources.

Here on, the article would seek to look into the process of budgeting with
regards to financial administration in detail.

BUDGET
The budget in its elementary form had been part of almost all
monarchies of the history. There have been written documents regarding
the existence of the state treasury, accountants and auditors who were
employed by the monarchs to protect the royal treasury. The modern
democracies have the legislatures playing an important role in the
managing of public finances. The taxes that are collected and the
revenues that are generated by the government through several means
are to be used for the development and welfare of the society. The
emergence of the Welfare State made it important that the government
money is being judiciously used to better the living conditions of society
in general and the marginalized sections in particular.The process of
budgets fulfills important functions in the economy of the nation. They
act as a means to carry out several objectives of the public organization.
In some countries, the executive part of the government also plays an
important part regarding the revenues and expenditures of the
government and the legislative is reduced to just an approving and
reviewing authority, e.g. in UK where the budget process is primarily
dominated by the executive (the House of Commons). A more balanced
approach of distributing power is practiced in the USA where the
legislature can review and make changes to the budget presented by the
President and the President finally approves it after satisfactory checks
and balances are concluded.
The dominance of executive or legislature in the budgeting process is a
matter of debate as many consider the legislative to be an obstacle in
the fast paced globalized economy where foreign direct investment and
monetary funding from organizations like IMF and World Bank is of
crucial importance to several democracies. There are several measures
suggested to expedite the decision making process from fixing the term
of the legislatures, introducing citizen panels, attaching funding power at
local levels to bringing in two year budgetary cycle and special
legislation regarding expenditure management.
The government expenditure is funded by a common pool of tax payer’s
money and the policies that are formed with this money are further used
to fund projects. The catch here lies in the fact that the people who
actually are paying for these policies are the larger group while the
people who benefit from these policies might be a much smaller group,
which translates that one might not be enjoying the benefits for which
one is paying money. Such scenario leads to an excessive spending of
public money on policies which are not beneficial to the society as a
whole. Such situations are prevalent in democracies which are multi-
lingual, multi-ethnic and divided on the basis of regions, religions and
other factors.

TYPES OF BUDGET

Line item budgeting

Emphasizes on items of expenditure without highlighting its purpose and

conceives budget in financial terms. Amount granted by legislature on an
item should be spent on that item only. Objective is to prevent wastage,
overspending, misuse also called incremental budget as funds are
allocated on incremental basis after identifying existing base.
Performance budget

Output oriented budget with long range perspective so that resources can
be allocated effectively or efficiently. It presents budget in the form of
functions, programs, activities, projects. Established correlation between
physical performance and financial aspects of each program. It leads to a
functional classification of budget.

Zero based budgeting

Every scheme has to be reviewed critically and re-justified from zero

before including in budget. Hence no reference to previous appropriation.
Manager has to justify demand by explaining why money should be spent
at all and how a job can be done better. Group schemes as per cost
benefit ratio, evaluate each scheme and rank them in order of
performance. Decision oriented process and connects short, long range
goals by monitoring achievements of objectives. Advantage is that low
priority programs are removed. Reallocate scarce resources. However it
challenges past practices and attitudes and so needs time and effort.
Paper work is high as detailed costs, necessary information for decision
packages aren't available.

Revenue budget

It consists of the revenue receipts both tax-revenue and non-tax revenue

and the expenditure met out of the revenue receipts. Revenue
expenditure is further divided into plan and non plan revenue expenditure.
Plan revenue expenditure pertains to central plan and central assistance
for states and union territory plans. Non plan revenue expenditure covers
a wide variety of general, social and economic services of the
government. The major items of non-plan revenue expenditure are
interest payments, defence services and subsidies.

Capital budget

It comprises capital receipts and capital expenditures of the government.

Capital receipts include market loans, borrowing from RBI and others.
Capital receipts of the government are those which create liability or
reduce financial assets, while those expenditures of government which
lead to the creation of physical or financial assets or reduction in recurring
financial liabilities fall under the category of capital expenditure. Such
expenditures pertain to payments on acquisition of assets like land,
buildings, machinery, equipment, etc.
Balanced budget

A government budget is said to be balanced when it is estimated

revenues and anticipated expenditure are equal. That is government
receipts and government expenditure. Well, it implies that the government
raises funds in the means of taxes and other means a balanced budget
was considered an effective check on extravagant expenditure of the
government. The government must exercise financial discipline and
should keep its expenditure within the available income. The concept of a
balanced budget has been evocated by classical economists like Adam
smith. A balanced budget was considered by them as neutral in its effects
on the working of the economy and hence they are regarded it as the best.

However, modern economists believe that the policy of balance budget

may not always be suitable for the economy. For instance during the
period of depression, when economic activities are at low level, resulting
in unemployment. The government may come to the rescue of the people.
It can borrow money and spend it on public works. This will increase
employment and total demand for goods and services and encourage
investment.

Surplus budget

When estimated government receipts are more than the estimated

government expenditure it is termed as surplus budget. When the
government spends less than the receipts the budget becomes surplus
that is.

Estimated government receipts > anticipated government expenditure.

A surplus budget is used either to reduce government public debt or

increase its savings. A surplus budget may prove useful during the period
of inflation. In periods of inflation, although there is greater employment
there is also a tendency for prices to rise rapidly.

This has to be checked particularly in the interest of those who have more
or less fixed income. This inflationary gap can be corrected by lowering
the level of effective demand in the economy. It can be corrected by
increasing taxes. This would increase the revenue of the government but
reduce the purchasing power of the people. As a result, the aggregate
demand will fall. This inflation gap can be corrected by lowering the level
of public expenditure. The surplus budget should not be used in a situation
other than the inflationary gap as it may lead to unemployment and low
levels of output as an economy.
Deficit budget

When estimate government receipts are less than the government

expenditure. In modern economies, most of the budget are of this nature.
That the estimate government receipts < anticipated government
expenditure. A deficit budget increases the liability of the government or
decreases its reserves. A deficit budget may prove useful during the
period of depression, economics activities are at a low level. It results in
unemployment, business loss and even bankruptcy and inflation etc. the
government can borrow money and increase the expenditure on public
works through deficit financing. This will increase employment and total
effective demand for the goods and also the services which would then
encourage investment. Thus, a deficit budget is useful for removing
depression and unemployment. Any country in the world is aiming to
avoid deficit budget although the surplus budget is difficult for a country to
achieve and that is the reason countries strive for a balanced budget in
order to avoid inflation, unemployment, loss or another consequence

PREPERATION OF BUDGET
The budget is prepared by the Finance Minister with the assistance of
number of advisors and bureaucrats. The Finance Minister seeks the
view of the industry captains and economists prior to preparation.
Various accounting and finance related organisations send in their
opinions and suggestions .The budgeting exercise in India remains
mainly the domain of bureaucrats to participate and influence the
outcomes.
Normally, the budget-making process starts in the third quarter of the
financial year. The budget has four stages viz., (1) estimates of
expenditures and revenues, (2) first estimate of deficit, (3) narrowing of
deficit and (4) presentation and approval of budget.

STAGE 1: Estimates of expenditures and revenues

The process begins with various ministries providing initial estimates of
plan and non-plan expenditures. The ministries discuss the plan
expenditures with the Planning Commission. The Planning commission
allocates resources for continuing plan programmes and decides on the
new programmes that can be undertaken on the basis of a tentative
estimate or resources available, that is provided to it by the finance
ministry. The financial advisors of the ministries prepare the non-plan
expenditures. The expenditure secretary consolidates them and after
intensive discussion with financial advisors, budget estimates are set for
the ensuing fiscal year.
The majority of the non-plan expenditure is accounted for by interest
payments, subsidies (mainly on food and fertilisers) and wage payments
to employees.
Apart from estimating the expenditure, an assessment of expected
revenues likely to flow into the government treasury has to done as a
concurrent exercise. Revenue receipts are of two types - capital and
current receipts.
Capital receipts include repayment of loans given by the government,
receipts from divestment of public-sector equity and borrowings - both
domestic and external. Current receipts include mainly, tax revenues,
receipts by way of dividends from public-sector units and interest
payments on loans given out by the central government.
The amounts to be received by way of tax revenues is estimated on the
basis of existing rates of taxation and taking into consideration the likely
growth and inflation rate over the ensuing fiscal year.
On the capital receipts side, targeted amounts to be realised through
divestment of public sector equity and amounts to be realised by way of
repayments of loans is made. All the estimates are provided to the
revenue secretary.

STAGE 2: First estimates of deficit

After the estimates of revenue and expenditure are made, they are
matched together. This provides the first estimate of expected shortfall in
revenue to meet projected expenditure. The government then, in
consultation with the chief economic advisor, decides on the optimum
level of borrowings to meet this deficit. The figure of external borrowings
is known as much of the external borrowing by the government consists
of bilateral and multilateral assistance which is known by the time budget
exercises are undertaken. The level of domestic borrowing depends
partly on the desired level of fiscal deficit that the government targets for
itself. A part of the revenue gap is left unfilled to be met through the
issue of ad hoc treasury bills.

STAGE 3: Narrowing of the deficit

After the targets for the fiscal deficits and the overall budget deficit is
decided, any remaining shortfall is filled through a revision in tax rates if
feasible , keeping in mind the fiscal incentive structure the government
wishes to put in place to stimulate the growth in different sectors.
Following the initial plans, if any changes need to be made adjustments
are made to the expenditure; usually the plan expenditure has to be
modified. The non plan expenditure comprises of interest payments,
subsidies and administrative expenditure. Due to the political
sensitivities involved in reducing subsidies, non-plan expenditure of the
government is inflexible about changing it and it is the plan expenditures
which get the axe after per-emption have already been made for non-
plan expenditure.

STAGE 4: The Budget

The presentation of the Budget for the ensuing fiscal year (beginning
April 1) is usually done on the last working day of February. The Indian
constitution has made the Parliament supreme in financial matters. The
Union government, under Article 112 of the constitution, is required to
lay an annual financial statement of estimated receipts and expenditure
before both Houses of Parliament. It can levy taxes or disburse funds
only on approval in both houses of Parliament. However, the proposal
for taxation or expenditure has to be initiated within the Council of
Ministers--specifically by the Minister of Finance. The Finance Minister
presents before the Parliament, a financial statement detailing the
estimated receipts and expenditures of the central government for the
forthcoming fiscal year and a review of the current fiscal year.

ENACTMENT OF BUDGET
Once the budget is prepared, it goes to the parliament for enactment
and legislation. The budget has to pass through the several stages.
The finance minister presents the budget in the Lok Sabha. He makes
his budget in the Lok Sabha. Simultaneously, the copy of the budget is
laid on the table of the Rajya Sabha. Printed copies of the budget are
distributed among the members of the parliament to go through the
details of the budgetary provisions. The finance bill is presented to the
parliament immediately after the presentation of the budget. Finance Bill
relates to the proposals regarding the imposition of new taxes,
modification on the existing taxes or the abolition of the old taxes.The
proposals on revenue and expenditure are discussed in the Parliament.
Members of the Parliament actively take part in the discussion.

Demands for grants are presented to the Parliament along with the
budget.These demands for grants show that the estimates of the
expenditure for various departments and they need to be voted by the
Parliament. After the demands for grants are voted by the parliament,
the Appropriation Bill is introduced, considered and passed by the
appropriation of the Parliament. It provides the legal authority for
withdrawal of funds of what is known as the Consolidated Fund of India.

After the passing of the appropriation bill, finance bill is discussed and
passed. At this stage, the members of the parliament can suggest and
make some amendments which the finance minister can approve or
reject. Appropriation bill and Finance bill are sent to Rajya Sabha. The
Rajya Sabha is required to send back these bills to the Lok Sabha within
fourteen days with or without amendments. However, Lok Sabha may or
may not accept the bill.

Finance Bill is sent to the President for his assent. The bill becomes the
statue after presidents’ sign. The president does not have the power to
reject the bill.

EXECUTION OF BUDGET

Once the finance and appropriation bill is passed, execution of the

budget starts. The executive department gets a green signal to collect
the revenue and start spending money on approved schemes. Revenue
Department of the ministry of finance is entrusted with the responsibility
of collection of revenue. Various ministries are authorized to draw the
necessary amounts and spend them. For this purpose, the Secretary of
minister’s acts as the chief accounting authority. The accounts of the
various ministers are prepared as per the laid down procedures in this
regard. These accounts are audited by the Comptroller and Auditor
General of India.
PARLIAMENT CONTROL OVER PUBLIC FINANCE

There is a prescribed procedure by which the Finance Bill and the

Appropriation Bill are presented, debated and passed. The Parliament
being sovereign gives grants to the executive, which makes demands.
These demands can be of varieties like the demands for grants,
supplementary grants, additional grants, etc. The estimates of
expenditure, other than those specified for the Consolidated Fund of
India, are presented to the Lok Sabha in the form of demands for grants.

The Lok Sabha has the power to assent to or to reject, any demand, or
to assent to any demand, subject to a reduction of the amount specified.
After the conclusion of the general debate on the budget, the demands
for grants of various ministries are presented to the Lok Sabha.
Formerly, all demands were introduced by the finance minister; but, now,
they are formally introduced by the ministers of the concerned
departments. These demands are not presented to the Rajya Sabha,
though a general debate on the budget takes place there too.

The Constitution provides that the Parliament may make a grant for
meeting an unexpected demand upon the nation’s resources, when, on
account of the magnitude or the indefinite character of the service, the
demand cannot be stated with the details ordinarily given in the annual
financial statement. An Appropriation Act is again essential for passing
such a grant. It is intended to meet specific purposes, such as for
meeting war needs.

BUDGETARY PROCESS IN DIFFERENT COUNTRIES

The budgeting process has a lot to do with the available resources and
wealth of a country. If the country is poor but the environmental
conditions are stable and certain, the most commonly found budgeting
method is revenue budgeting. When the wealth is absent i.e. a country is
poor as well as the environment is uncertain, the budgeting process if
that of repetitive budgeting. Repetitive budgeting is a common
phenomenon for the poor countries where the budgeting happens
several times over the year due to changing scenarios, limited funds and
misplaced strategies.
The rich countries which have certain environments go for incremental
budgeting and in case there are uncertainties, the incremental budget is
alternated with repetitive budget. The difference in the budgeting
process amongst different nations also happens because of their
respective taxing system and the how and choice of programs they
spend money on. So while, Japan has an electoral party, the Liberal
Democratic Party which plays an important role in the budgeting
process, France has a mixed Presedential-Parliamnetary system, the
USA has an independent legislature and executive and the cabinet in
UK is responsible for important decisions regarding revenues, taxes and
expenditure.
In the USA, The Office of Management and Budget steer the President
in realizing the budget goals. The respective government agencies put
their request for funds which are reviewed. The House Appropriations
Committee decides how much money should be given for each purpose
however the final deciding power lies with the Congress. After the
budget reforms of 1974, many sub committees gave up their
guardianship and the role played by them was taken over by the higher
House bodies.
In India, the Union Budget is presented by the Finance Minister every
year in February. The process begins with a budget speech in the
parliament which has two parts, one outlining the general economic
scenario and the second part which contains details of the proposed
taxations for the next financial year. A general discussion on the budget
happens after few days of its presentation and a voting happens on the
request for grants.
An important aspect of this process is the Cut Motions which allows the
members of the upper house to question the policies and programs of
the government where the money is being spent. These cut motions are
of three types namely:

 Policy cut where the amount for demand is reduced by a meager

Rs1 which also implies that the mover disapproves of the policy
 Economic cut where the demand is reduced by a specific sum
 Token cut is when the demand amount is reduced by Rs.100

The Parliamentary Committee plays a significant role only when the

limited time of the parliament leads to the Guillotine situation where not
all demands are discussed. In this situation the department related
standing committees and financial committees undertake the task to
scrutinize in details, the government spending, expenditures and
performance.
The budgetary process in UK is lengthy too, where the departments
submit their funding requests or Main Supply Estimates to the HM or the
Her Majesty’s Treasury. The government then releases a consolidated
document called the Central Government Supply Estimates for the year.
Agencies have respective oversight committee in parliament which
oversees the changes if any made in the requests submitted. The UK
parliament does not take a decision upon the new budget until summer
and therefore the funding for the respective agencies continue up until
the new budget is enacted.
In the rapidly developing economy like China, the central agency that
control budget is Ministry of Finance (MoF). The National Auditing
Committee audits the MoF and the most common discrepancy cited by
them was the over allocation than the budgeted amount or not allocating
the sum mentioned in the budget requests. The Chinese legislature the
National People’s Congress lacks any substantial control over the
budgeting process which is often cited as the root of the budgetary
problems in China.
It would be interesting to learn more about the budget processes of other
nations as well however, it lies beyond the scope of this particular article.
However, it is recommended to the readers and students that they try to
explore the budgetary process of nations like France and Germany and
the contrasting countries like Somalia and Zimbabwe in Africa,
Afghanistan as well as Pakistan, Bangladesh and Thailand in Asia.