Budget 2022: Your Handbook of Key Financial Terms

The Union Budget 2022-23 is expected to be presented by Finance Minister Nirmala Sitharaman on February 1.

The next budget will be tabled in Parliament at a time when India’s economic recovery is facing obstacles due to rising inflation and new Covid restrictions.

During the budget speech, the Minister of Finance is expected to make several announcements and talk about financial indicators such as inflation, budget deficit, capital expenditure, revenue, bad debts, etc. Understanding these terms is crucial to understanding the government’s spending plans for the next fiscal year beginning April 1, 2022.

Annual financial statements

The Union budget is also known as the Annual Financial Statement (AFS) for a given financial year. It is presented by the government to highlight its expenditures and revenues during the financial year. Under Section 112 of the Constitution, an AFS must be tabled in Parliament for each fiscal year from April 1 to March 31.

The budget or AFS also describes the government’s accounts estimates for the next financial year, known as the budget estimates. It may be noted that the budget for the coming fiscal year must be approved by parliament. Without its approval, the government cannot tap into the Consolidated Fund of India.

Economic survey

The Economic Survey is a flagship document of the Ministère des Finances. It is presented each year before the Union budget. The economic survey provides detailed information on the Indian economy during the past financial year. In addition to the current state of the economy, the Economic Survey provides the economic outlook. A team led by the Chief Economic Advisor prepares the document.

The document is presented in both chambers of Parliament one day before the presentation of the Union budget. The first economic study was presented in 1950-51 and until 1964 it was presented together with the Union budget.

For ordinary people, the Economic Survey is a useful document to understand the state of economic affairs in India and the impact of decisions made by the Union government.

Inflation

Inflation, usually expressed as a percentage, is a quantitative measure of the rate at which an economy’s goods and services increase over a certain period of time. When the price of a certain basket of commodities rises due to internal or external economic factors, it can be termed as rising inflation.

A rise in inflation indicates a decline in the value of the currency and the purchasing power of the country. Although the term has more to do with central bank policies, it will come as no surprise if the finance minister mentions the term during the budget speech.

Tax policy

Fiscal policy basically outlines estimated taxation and government spending and serves as a key instrument to monitor the economic position of the country. Fiscal policy refers to adjustments in the level of spending and tax rates and also refers to the use of government spending and tax policies to influence economic conditions, in particular the aggregate demand for goods and services, the employment, inflation and economic growth.

This goes hand in hand with monetary policy, through which the Reserve Bank of India (RBI) influences the country’s money supply. In the event of an ongoing recession, the government may resort to expansionary fiscal policy by lowering taxes to increase aggregate demand.

Budget deficit

Budget deficit means that a government’s total expenditure exceeds total revenue, excluding any external borrowing. However, the budget deficit should not be read in the same way as the debt, which can be an accumulation of many annual deficits.

It is extremely important for developing countries like India to maintain a healthy budget deficit ratio as the total revenue generated is not sufficient for the government to cover all its revenue and capital expenditure.

Since the government needs a large sum of money to finance infrastructure development, developing countries often have a budget deficit for asset creation. This is why some economists claim that the budget deficit is not really a bad indicator but a position that indicates development.

An ideal budget deficit should not exceed 4% of gross domestic product (GDP).

Divestment

Divestment is a process involving the sale of existing assets. It is the opposite of investing.

The government has sought to divest itself of many of its assets which have turned sour over the years. In last year’s budget, the government set a target for divestments as it sought to close the budget deficit gap.

Capital expenditure

Capital expenditure (capex) refers to the funds used by the government in this case – to acquire, maintain or upgrade physical assets such as real estate, new infrastructure projects or the purchase of new equipment.

Capital expenditures are classified as long-term expenditures and generally include expenditures made by the government for the construction of assets, including development and infrastructure projects.

When a government spends money on expensive projects, the expenses incurred are usually categorized as capital expenditures. These expenses are not of a recurring nature.

Although capital expenditure (capex) is a general economic term used by many companies, it is important in a budgetary context.

Customs duty

Customs duty is a levy that is levied when certain goods are imported/exported out of the country. Eventually, these expenses are passed on to the end customer. Since customs duties are not part of the Goods and Services Tax (GST), the government has the flexibility to announce changes, if desired, in its budget presentation. It is a key element of the budget and many sectors will be eagerly awaiting an announcement regarding tariffs.

Goods and Services Tax (GST)

Unlike tariffs, changes to the Goods and Services Tax (GST) are not announced in the budget. The GST Board takes a call on any changes in the GST slabs and structure. Although Finance Minister Nirmala Sitharaman may talk about the GST in her budget speech, no changes in this regard will be announced in the budget.

Direct tax (income tax)

Direct taxes include income tax and corporation tax. The government is unlikely to make any major income tax announcements this year. However, some adjustments are to be expected.

Current account deficit

The current account deficit (CAD) is a measure of the country’s trade, where the value of imported goods and services exceeds the value of exports. It is a component of the country’s balance of payments.

Revenue deficit

A revenue shortfall occurs when the government’s net income or revenue generation is less than the projected net income.

This is a situation where the actual amount of revenue or expenditure does not match the budget revenue and expenditure. This is a key indicator for determining whether the government is spending too much relative to its regular revenue.

Surplus income

Revenue surplus is the opposite of revenue shortfall. This is a situation where the realized net income or government revenue generation is greater than the projected net income. Actual revenue and expenditure exceed budget forecasts.

Planned and unplanned expenses

Expenses generally have two components – planned and unplanned expenses.

The expenditures of the plan cover budget estimates which are determined after discussion with all stakeholders or ministries.

Unplanned spending, on the other hand, mostly involves revenue spending, although it also includes capital spending.

These are expenditures incurred by the government on interest payments, statutory transfers to states/union territories, pension payments and salaries of government employees.

Out-of-plan spending is a significant portion of government budget spending. Debt service, defense spending and interest payments are the largest expenditures in the category.

READ ALSO | Union budget 2022-23: here is what the working class expects from the government