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What is a Union Budget?

The budget is a statement of accounts of the Union Government. Just as your household budget is all about what you earn and how you spend, the Union budget is a statement on the Government's income and expenditures.

business Updated: Jun 29, 2009 17:13 IST

What is a Union Budget?

The budget is a statement of accounts of the Union Government. Just as your household budget is all about what you earn and how you spend, the Union budget is a statement on the Government's income and expenditures.

What makes up the Government's income?

The government earns its money from taxes. It also makes money by charging fees for a variety of services it provides (user charges for water, for issuing passport), selling some of its rights for commercial usage (auction of communication bandwidth to telecom firms), and interests on loans to states. It earns dividends earned by public sector companies and can also earn money by selling the ownership shares in these companies.

What are the kinds of taxes the government imposes?

A Taxes can be split into two broad categories: direct taxes and indirect taxes. Direct taxes are levied on income of individuals and companies. Indirect taxes are of three types. The first is excise duties, which is levied when a product leaves a factory gate for the market. The company making the product pays the duty to the government, but passes down the mount to the consumer. Next there is service tax, which is levied on services rendered by an individual or a firm (you pay a service on your telephone bill). Finally, there are customs duties, which are levies on imported goods (such as wines or crude oil) as they enter the country.

What does the Government spend on?

The government spends on securing and providing various goods and services to its citizens. It spends on law and order to maintain internal security and defense services to protect the country from external aggression. It pays salaries to its staff, offers subsidy to needy people and groups and incurs all such expenses relating to governance of the country.

Does the Government earn as much as it spends?

Not necessarily. In India, the government has mostly spent more than what it earned. And therefore it often has had a deficit in its budget, which is also called the "fiscal deficit." In 2008-09 the government's fiscal deficit rose sharply to Rs. 331,000 crores as its expenditure surged on the back of pay revision of its employees, waiver of loans to farmers and stimulus measures to revive the economy.

How is this "fiscal deficit" bridged?

Just as when you fall short of money and borrow from friends, relatives and banks, so does the government; except that it's a lot easier for the government to borrow. In today's context, a large part of the fiscal deficit is met through the so-called market-borrowing programme, which involves selling interest earning government securities to banks and other financial institutions. Individuals can also buy government securities. In addition the government borrows from multilateral agencies like World Bank and foreign governments. It also taps the money you deposit in your provident fund and small savings schemes, such as Kisan Vikas Patra.

Is the Budget all about a statement of accounts?

No. The budget is a two-part document. In the first part, the finance minister often outlines the Union government’s economic policies, future course and its expectations about the broader economy. The second part is a statement of its accounts, which also includes changes in taxes and fees, and allocation of resources for various ministries.

Why should you care?

Any change in income tax policies affects the money that you carry home every month. Changes in indirect taxes affects the price you pay for goods and services. Government spending affects the quality of our lives. For example, the government spending on public transport and roads can make our daily commutes easier and less time consuming. Finally the policies it adopts has a bearing on economic growth which in turn affects our job prospects and the economic environment.