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UNIT-3 Budget Notes | DSC-10 BA HONS SEMESTER 4

A.  Concept of Budget and Budget Cycle in India



Introduction

  • Humans, governments, businesses, and NGOs adjust their income and expenses to achieve financial balance.

  • Public expenditure and revenue are interdependent; taxes affect taxpayers, and expenditure impacts welfare and costs.

  • Efficient resource utilization is crucial for a decent life, achieved through planning and budgeting.

  • Budgeting is a tool for forward-looking planning, analyzing past results, current trends, and future objectives.



Evolution and Importance

  • Budgets have evolved into complex tools, impacting prosperity, class relations, and national strength.

  • Budgeting is no longer just about finances but also considers economic, political, social, and administrative aspects.

  • Budgets serve multiple purposes, including financial management, economic policy, and social welfare.

  • Budgeting has become a motivator of economic and social activities, influencing production, class disparities, employment, and wealth distribution.

  • It significantly impacts the welfare state, as seen in the huge expenditure on social services.



Meaning and Definition

  • The term "budget" originates from the French word "Bougette."

  • In the modern sense, it was first used in 1733 by the Finance Minister of England.

  • Budgets were initially secret documents but evolved into tools for public accountability and financial planning.



Modern Perspectives

  • Willoughby: Budget is a report, an estimate, and a proposal, presenting past actions, current financial status, and future.

  • Harman: Budget influences the economy, politics, business, public service, and citizens' lives, highlighting various policy aspects.

  • Michigan Finance Administration Report: Budget formulation is the process of formulating financial policy, enacting, and implementing it.

  • New York Policy Holder Bureau: Budget system is a systematic process of collecting past and present information to prepare future financial plans.



Objectives of Budget

  • Mobilizing Financial Resources: The budget aims to mobilize financial resources for the effective functioning of the government. This includes revenue generation through taxes, duties, and other sources.

  • Coordination and Determination: It helps in coordinating and clearly determining the activities of various departments within the government. This ensures that all departments work towards common goals and objectives.

  • Achieving Goals Efficiently: By coordinating departmental activities, the budget helps in achieving predetermined goals with minimum cost, time, and effort. It ensures that resources are utilized efficiently.



  • Measuring Efficiency and Control: The budget serves as a tool for measuring the efficiency of government programs and activities. It also strengthens control mechanisms by setting standards and comparing them with actual performance.


Characteristics of Budget

  1. Fixed Period: The budget relates to a fixed period, which can be short-term, medium-term, or long-term. It provides a framework for planning and resource allocation.

  2. Planning and Control: It is an important tool for administration, as it helps in planning future activities and controlling current operations. It ensures that resources are used effectively and efficiently.

  3. Goal-Oriented: The budget is goal-oriented, aiming to achieve pre-determined objectives and targets. It provides a roadmap for the government's financial activities.




  1. Comparative Analysis: The budget involves a comparative analysis of predetermined objectives and actual performance. This helps in identifying areas of improvement and making necessary adjustments.

  2. Future Action Plan: It serves as a future action plan for the government. It outlines the government's financial strategy for the coming period.

  3. Coordination: The budget helps in coordinating the activities of all departments of the administration. It ensures that all departments work in harmony towards common goals.



Principles of Budgeting

  1. Publicity: Budget should be widely publicized to ensure transparency and public participation in the budgeting process. This helps in garnering public support for government policies.

  2. Clarity: Budget should be clear and easily understandable by every citizen. It should clearly outline the government's revenue and expenditure plans.

  3. Accuracy: Budget estimates should be accurate and based on detailed information. It should not be manipulated to hide facts or distort the actual financial position.

  4. Unity: All government receipts should be collected in a common fund to ensure unity in financial management. This helps in avoiding duplication and ensures proper utilization of resources.

  5. Comprehensiveness: The budget should be comprehensive and cover all aspects of government fiscal programs. It should provide a complete picture of the government's financial position.

  6. Integrity: The budget should be implemented with integrity and in accordance with legislative spirit. It should not be used for personal gain or political motives.

  7. Periodicity: The government should have the right to spend only for the budget period. This ensures that spending is authorized and controlled.



Socio-Economic Implications of Budget

  • Budget plays a crucial role in shaping the social and economic landscape of a nation.

  • In modern times, budgets serve broader objectives, especially in welfare states.

  • The modern budget is a comprehensive tool for planning and controlling public resources.

  • It influences development, production, income distribution, and overall economic activities.



  • The budget reflects the government's expanded role in public welfare, covering education, healthcare, infrastructure, and social security.

  • It redistributes wealth through taxation to reduce social inequality and class discrimination.

  • The budget aims to eradicate poverty, reduce unemployment, and address unequal distribution of wealth.

  • It serves as a tool for planning future activities and controlling current operations.

  • The budget influences economic development by allocating resources to key sectors and projects.



History of Budget System in India

  • Ancient India had an advanced budget system, as seen in the Mauryan administration described in the Arthashastra.

  • Detailed rules were followed for maintaining, submitting, and scrutinizing accounts.

  • The budget included revenue and expenditure plans, along with estimates for the coming year and actual results from the previous year.

  • Punishments and rewards were given to ensure accountability and efficiency in financial management.

  • The budgeting system in the Delhi Sultanate and the Mughal Empire followed similar principles of accountability and transparency.

  • The budget system in India has evolved over time, with significant developments in the pre-colonial, colonial, and post-independence periods.

  • The evolution reflects a gradual shift towards modern budgeting practices, emphasizing transparency, accountability, and public participation.



Budget System in Colonial Period

  • After the British rule, India's financial system came under the East India Company's control, which initially had separate financial management for the Presidencies of Bombay, Calcutta, and Madras.

  • The Charter Act of 1833 centralized revenue supervision under the Governor General, leading to a more unified financial system.

  • The East India Company's focus on territorial expansion led to increased expenditures, especially related to wars and military operations.

  • Significant amounts of money were remitted to Britain for various purposes, including interest on Indian debt.



Various Approaches of Budgeting

  1. Marginal Utility Approach

  • Definition: Balances resources and expenditures to achieve a balance among various types of expenditure.

  • Development: 1920s for fiscal control, emphasizing rational aspects of budgeting.

  • Key Points:

  1. Individuals spend to achieve balance among various types of expenditure.

  2. Government should provide marginal utility of resources to all classes.

  3. Budgeting involves comparing relative results obtained from various uses of funds.


  1. 2. Public Goods Approach



3. Public Choice Approach

  1. Definition: Emphasizes public preferences in the political process of budgeting.

  2. Key Points:

  3. Budgeting is a political process influenced by voters' choices.

  4. Focuses on satisfying voters to win elections.

  5. Criticism: Neglects equilibrium in resource allocation and decision-making.


4. Positive Approach

  • Definition: Deals with empirical aspects of expenditures and policy formulation.

  • Objective: Tests the growth of public expenditures and conducts empirical studies on formulated programs.

  • Focus: On financial hypotheses, testing validity of budgeting decisions.


 

B. Types of Budgets



1.Performance Budgeting

  • Definition: Focuses on activities, functions, programs, and projects, emphasizing outcomes and specific resource utilization.

  • Origin: Recommended by the American Hoover Commission.

  • Features: Classification of government expenditures, measurement of performances, and reporting outcomes.

  • Purpose: Determine desirable quantity of government expenditure and proportion of expenditure to government resources.



2. Programme Budgeting

  • Definition: Structured form of performance budgeting, focusing on classification of expenditure, government work, and cost analysis.

  • Origin: Recommended by the American Hoover Commission.

  • Differences: Focuses on planning and forward-oriented analysis, emphasizes classification of work and planning according to objectives.


3. Planning Programming Budget (PPB)

  • Introduction: Aimed at programming for a better life at a lower cost, emphasizing goal specification, plan formulation, and pragmatic approach.

  • Levels: Policy management, resource management, and program management.

  • Features: Specification of goals, plans, and alternatives; emphasis on finding alternatives according to specific works.



4. Line-Item Budgeting

  • Definition: Simplest form of budget, used for small and short-term budgets, allocating costs and focusing on cost reduction.

  • Application: Suitable for government branches but not for entire government expenditures.

  • Features: Allocates costs based on different income sources and expenses, focuses on reducing costs.


5. Zero-Base Budgeting

  • Focus: Starts planning from ground-up, finding new plans for contemporary issues without carrying over existing plans.

  • Characteristics: Emphasizes base formulation and allows for incremental base adjustments.

  • Critique: Considered more administrative than analytical.


 

C. Budget Cycle


Budget Preparation

  • Begins in September/October, six months before presentation, based on circulars from the Ministry of Finance.

  • Budget estimates analyzed by Financial Advisors based on plan and non-plan classifications.

  • Plan items of the Union Budget finalized in consultation with NITI Aayog, based on the Annual Plan.



Enactment of the Budget

  • Stages: Presentation, General Discussion, Voting on Demands for Grants, Passing of Appropriation Bill, Passing of Finance Bill.

  • Voting on Demands: Involves discussions and voting on Demands for Grants in the Lok Sabha, with various types of 'Cut Motions' allowed.

  • Passage of Appropriation Bill: Allows for withdrawal of funds from the Consolidated Fund of India, subject to the President's approval.


Execution of the Budget

  • Passing of Finance Bill: Specifies financial proposals for the next year, including details of taxes and fees levied by the Government of India.

  • Implementation: Responsibility of the executive government, organized to ensure funds are not spent before additional amounts are received.



Audit

  • Purpose: To ensure public funds are spent in accordance with laws and procedures, conducted by the Comptroller and Auditor General of India.

  • Focus: Legality, regularity, and propriety of expenditures.


Conclusion

  • Budget as a Stability and Growth Plan: Reflects future growth possibilities and expense management.

  • Variation in Budgets: Varies based on a nation's financial status, with developing countries having different expenditure lists and goals.

  • Budget Extensions: Gender, environmental, rail, and other budget patterns have emerged as separate entities, though they are part of the main budget.

  • Financial Activity and Management: Crucial for optimal resource utilization and national growth.

  • Budget Formulation in India: Involves a lengthy process with reforms introduced during colonial rule and post-independence.

  • Public Welfare Focus: Aims at public welfare, addressing development needs of the Indian people.

  • Importance of Efficiency and Transparency: Crucial for meeting expectations and requirements for India's development.




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