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Budgetary Process in India
Essay Contents:
- Essay on the Introduction to Budgetary Process
- Essay on the Preparation of Budget in India
- Essay on the Enactment of Budget
- Essay on the Execution of Budget
Essay # 1. Introduction to the Budgetary Process:
The budgetary process in any country involves four different operations, viz.:
(i) The preparation of the budget, i.e., the formulation of estimates of revenue and expenditure for the ensuring financial year.
(ii) The enactment of the budget, i.e., its approval by the legislature in the form of finance bills and appropriation bills.
(iii) The execution of the budget, i.e., enforcement of the finance and appropriation bills; in other words, collecting the taxes and incurring the expenditure as authorised by the Parliament,
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(iv) The legislative control of the budget, i.e., supervision and control of financial operation by audit on behalf of the legislature.
Essay # 2. Preparation of Budget in India:
Preparation of the budget involves the following operations which follow in the order as given below:
1. Preparation by the Disbursing Officers
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2. Scrutiny and Review of Estimates by Controlling Officers
3. Scrutiny and Review by the Accountant-General and the Administrative Department
4. Scrutiny by the Ministry of Finance
5. Approval by the Cabinet.
1. Preparation by the Disbursing Officers:
The work in connection with the preparation of the Budget begins 6 to 8 months before the commencement of the next financial year. Since the Indian financial year begins from 1st of April every year, the work of budget preparation starts in the month of August-September.
The Accountant-General sends prescribed form for estimates of revenue, and expenditure separately to the Heads of various departments the month of July or August.
The Heads of Departments send those forms to the disbursing officers-heads of the local offices who prepare the preliminary estimates. The task of preparing the estimates is the most important one. In the words of Mr. P.K. Wattal it is not a simple arithmetical exercise in striking out averages of previous years and putting in a safe figure which would not look exactly like repetition of the last year’s performance.
Behind figures lay insistent realities of administration. The circumstances of no one year are exactly similar to those of the previous year and yet they are not quite dissimilar. One has, therefore, to use his judgment in estimating the similarities and dissimilarities and making due allowance for each.
Every care should therefore be taken in the preparation of the estimates. While preparing the estimates the local officers are to fill in four columns of the prescribed form:
(i) Actual of the previous year,
(ii) Sanctioned estimates for the current year,
(iii) Revised estimates for the current year, and
(iv) Budget estimates for the next year.
These estimates are prepared by the Heads of offices in three parts, namely, Part I, Part II A and Part II B. Part I relates to revenue and to standing charges like permanent establishment, travelling allowances, etc. Part II A relates to continuing schemes, e.g., purchase of raw material, etc. Part II B relates entirely to new schemes of expenditure.
Sometimes there remains much difference between the budget estimates and the actual amount spent or required to be spent. This is mainly due to two important factors. Firstly, the estimates are prepared some 18 months earlier, and secondly, Indian economy is a gamble in monsoon and the estimates are prepared much before the advent of monsoons.
Besides as Mr. Ashok Chanda puts it, “the preparation of estimates on new projects at the time of their inclusion in the budget proves in most cases to be difficult…The estimates given have often to be based on mere expectations and on nothing more concrete and positive. Nevertheless, unless any figure is communicated to the Finance Ministry for inclusion in the budget estimates the scheme cannot be taken in hand when it matures.”
2. Scrutiny and Review of Estimates by Controlling Officers:
The local officers send the estimates to their prospective controlling officers or Heads of Departments for scrutiny and review. The scrutiny is purely of an administrative type. The controlling officer has to judge the relative importance of the proposals from the various branches and sections of his department for new expenditure in the light of the possible grant for the department as a whole.
He has, therefore, to accept some of them and reject others. Then he consolidates the estimates for the whole department and by the beginning of October, these forms go into the hands of the Budget Officers.
3. Scrutiny and Review by the Accountant-General and the Administrative Department:
After the estimate forms have left the desks of the controlling officers. Part I of the estimates which relates to revenue and to standing charges like permanent establishment, travelling allowance, etc., is submitted to the Accountant-General and the General Administration Departments for scrutiny and review.
The General Administration Departments exist in State Governments. Besides the general review, the Accountant-General’s Office is also required to prepare estimates under debt, deposit and remittance heads. By the middle of November, these estimates go to the Budget Department of the Ministry of Finance.
4. Scrutiny by the Ministry of Finance:
The estimates received from the various departments are scrutinized by the Ministry of Finance and after revision and modification, are consolidated together into the Budget of the Government as a whole.
In the words of Mr. P.K. Wattal, “the scrutiny applied by the Finance Department is different in character from that applied by the administrative department. The administrative department is responsible for the policy of the expenditure or its necessity or general propriety. But the Finance Department is mainly concerned with economy and is therefore entrusted with the duty of keeping the demand of the departments, within the fund available. The unresolved differences of opinions between the administrative departments and the Finance Department are submitted to Government (Cabinet) for decision.”
The scrutiny of the estimates by the Ministry of Finance is thus from the financial point of view, i.e., of economy, or availability of funds.
The operation of the scrutiny by the Ministry of Finance in regard to new expenditure, e.g., over a new social service or the extension of an existing activity in new direction, is fully revealed from the nature of following questions it applies on them:
(i) Is the proposed expenditure really necessary?
(ii) If so, how have we so long done without it? Why now?
(iii) What is done elsewhere?
(iv) What will it cost and where from is the money to come?
(v) Who will go short as a consequence of it?
(vi) Are new developments likely to render it unnecessary? And so on.
The Ministry of Finance then prepares an estimate of income and expenditure of the Government of India. On the basis of the estimated expenditure, proposals regarding fresh taxes are made in the budget. In other words, the budget is divided into two parts-the Income side and the Expenditure side.
The Budget consolidated in this form is ready by the month of December. In Britain, the Treasury and in the U.S.A., the Bureau of the Budget exercise the control over the budget estimates the control which the Ministry of Finance does in India.
5. Approval by the Cabinet:
The Finance Minister examines the budget estimates somewhere in January and in consultation with the Prime Minister prepares his financial policy with regard to taxation, etc. After that has been done, the budget is submitted to the Cabinet for joint consideration.
It is so done, because it is the Cabinet which is responsible for laying down the general course of policy. When the Cabinet has approved the budget, it is ready for being introduced in the Parliament.
Essay # 3. Enactment of the Budget:
In the Parliament, the budget goes through five stages, namely- (i) introduction (ii) the general discussion (iii) the voting of demands for grants (iv) the consideration and passing of the appropriation bill, and (v) the consideration and passing of the taxation proposals, i.e., the Finance bill.
(i) The Introduction of the Budget:
The Budget session of the Indian Parliament commences in the mid-February. The Budget is presented to the Parliament in two parts, the Railway Budget and the General Budget. The Railway Budget exclusively deals with the receipts and expenditure of the railways and it is separately presented to the Parliament by the Railway Minister.
The General Budget deals with estimates of all the departments of the Government of India excluding Railways and is presented to the Parliament by the Finance Minister. The procedure followed in the case of Railway Budget and the General Budget is the same.
First is presented the Railway Budget. This is followed by the General Budget which is presented by the Minister of Finance in the Lok Sabha usually at 5 P.M. on the last day of February. The copies of the Budget together with the Financial Statement are printed and circulated to all the members for their reference.
(ii) General Discussion:
According to Rule 130 of the Rules of Conduct of Business of Parliament, ‘no discussion of the budget shall take place on the day on which it is presented to the Parliament.’ The Speaker, therefore, fixes a date on which general discussion on the Budget is to take place. Such a date is generally fixed one week after the presentation of the Budget and about four days are allotted for the purpose.
Discussion covers all items of expenditure including those that are charged on the Consolidated Fund of India and are excluded from the vote of the Parliament. It relates to the general principles or policy underlying a review and criticism of the administration of the various Ministries.
The discussion is more of political rather than of financial nature and major part of the time is allowed to the opposition to review the work of the Government for the year and ventilate the grievances of the people.
At this stage, no motion is moved nor is the Budget submitted to the vote of Parliament. It may be mentioned here that the general discussion on the budget takes place in both the Houses of Parliament simultaneously. The Finance Minister makes a general reply at the end of the discussion.
(iii) The Voting of Demands:
The Demands for Grant are referred to the Standing Committee of the concerned Ministry for thorough consideration. It was in 1993 that the Parliament took decision to set up Department related Standing Parliamentary Committees to scrutinize the Demands for Grants of various ministries departments before these are discussed and voted in the House.
The functions of these committees are:
(a) To consider the Demands for Grants of the concerned ministries and make a report on the same to the Houses.
(i) To examine bills pertaining to the concerned ministries.
(ii) To consider annual reports of ministries and make reports thereon, and
(iii) To consider national basic long term policy documents presented to the Houses.
There are twenty four committees; eight are chaired by the members of the Rajya Sabha and the remaining 16 by the members of Lok Sabha. Each committee consists of 31 members 21 members from Lok Sabha and 10 from Rajya Sabha. After the scrutiny by the committees, the Demands come before the Lok Sabha for its consideration.
The Lok Sabha proceeds to the voting of demands for grants not charged on the Consolidated Fund of India. The voting of demands is the exclusive privilege of the Lok Sabha and the Rajya Sabha does not take part in it. While voting the demands for grants, the Lok Sabha sits as House and not as the Committee of the Whole House as is the practice of the House of Commons in Great Britain.
The total number of days allotted for the voting of demands is 26 as in Britain. It is evident from the short time given that many of the demands are voted without any discussion at all.
What happens is that the Speaker in consultation with the Leader of the House fixes a time limit for particular demands or group of demands and for the entire expenditure, part of the budget and as soon as the time-limit for any demand is reached, it is immediately put to vote irrespective of the fact whether the discussion on it is complete or not.
Similarly on the last day allotted for the voting of the demands, at 5 P.M. the Speaker puts all the demands which remain outstanding to vote and disposes them whether they have been discussed or not. Due to Parliamentary system of government, the reduction of any item of the budget in opposition to the wishes of the Cabinet tantamount to a vote of no confidence.
What, therefore, happens in the House during the demands for grants is not a discussion of the heads of items of the budget from the financial point of view, but a general ventilation of grievances against the administration of particular departments of the government. As each head of expenditure comes up for discussion, some member rises and moves a token cut of one rupee or a hundred rupees in its estimates.
Then he proceeds to criticize the administration of the department to which it relates. The Minister concerned has to defend the administration against all criticism that is leveled against it by the opposition.
At the end of the discussion of each demand, the demand is put to the vote of the House in the following form “That a sum not exceeding Rs. be granted to the President (or the Governor) to defray the charges, which will come in the course of payment during the year ending March 19—in respect of—(subject of the demand)”.
A demand when duly voted becomes a grant. It may be remembered that the House can only reject or reduce a demand but cannot increase it. If more money is needed for expenditure, it is authorized by way of Supplementary grants or may be spent out of Contingency Fund.
(iv) Passage of the Appropriation Bill:
The next stage is the passage of the Annual Appropriation Bill into a statute. All the demands voted by the Lok Sabha and the expenditure charged on the Consolidated Fund of India are put together and incorporated in a Bill called the Annual Appropriation Bill.
Article 114(1) of the Constitution provides that after the grants have been made, there shall be introduced a Bill to provide for the appropriation out of the Consolidated Fund of India of all moneys required to meet:
(a) The grants so made by the House of the People, and
(b) The expenditure charged on the Consolidated Fund of India but not exceeding in any case the amounts shown in the statement previously laid before Parliament.
An Appropriation Bill is accordingly introduced in the Lok Sabha. The allotment of time for the different stages of the Bill is determined by the Speaker. The debate is restricted to those points only which have not been already discussed during the debates on estimates.
The Bill follows the same procedure in the House as any other Bill except in this that no amendment to the grants as voted by the House previously, or altering its destination, or to the Consolidated Fund Charges can be proposed in either House. After being passed by the Lok Sabha, it is certified by the Speaker as money bill and sent to the Rajya Sabha.
The Rajya Sabha has neither the power of amending nor rejecting the Appropriation Bill. It can only discuss and make recommendations within 14 days to the Lok Sabha, which may or may not accept them. Even if the Lower House rejects the suggestions made by the Upper House, the bill will be considered as passed by both the Houses in the form it was passed by the Lower House.
In case the Upper House does not make recommendations within the above specified period and remains silent, even then the bill will be deemed to have been passed by the Upper House on the expiry of that period.
The Appropriation Bill is then sent to the President for his assent. It is just formality because the President cannot return a money bill for reconsideration. An Appropriation Act embodies the authority given by the Parliament with the assent of the President to the Government to withdraw money from the Public Fund and spend it as authorized in the Act.
Without such an authority, the Government cannot incur any expenditure and the Comptroller and Auditor-General of India would hold a payment as unauthorized or illegal if it were made without authorization in the Appropriation Act Article 114(3) lays down that “no money shall be withdrawn from the Consolidated Fund except under appropriation” and hence the passage of the Appropriation Act constitutes an important process in Budget enactment.
(v) Passage of the Finance Bill:
The Appropriation Act authorizes the Government to appropriate money from the Consolidated Fund but it has not so far been provided wherefrom the money for expenditure would come. Provision is therefore made for collecting the required money by way of taxation. For this purpose a Finance Bill is placed before the House.
This bill incorporates the financial proposals of the Government for the ensuing year and is placed before the Parliament at the same time as the Budget. The procedure followed is that of money bill and it is only in Select Committee that the Bill is considered in details and amendments are moved. After the presentation of the Committee Report, clause by clause consideration of the bill follows.
The scope of amendments is restricted to proposals for the reduction or abolition of a tax. The financial proposal becomes operative as soon as the Budget is presented under the Provisional Collection of Taxes Act, 1931. The Finance Bill must be passed before the end of April and after having been passed, the Government is authorized to collect the taxes.
With the passage of the Appropriation Bill and the Finance Bill, the enactment of the Budget is complete. The budget contains the ordinary annual estimates which constitute the bulk of the annual receipts and charges.
To meet expenditure on circumstances unforeseen at the time of budget there are other four kinds of grants which the Lok Sabha may be asked to make, viz.:
(1) Supplementary Grants,
(2) Votes on Account,
(3) Exceptional Grants and Votes on Credit.
(1) Supplementary Grants:
If the amount authorized by the Appropriation Act of the year is found to be insufficient for any service or if expenditure on some new service becomes necessary or if expenditure incurred on any service exceeds the amount provided for in the budget the President is authorized under Article 115 of our Constitution to cause to be laid before the Parliament a supplementary financial statement embodying the supplementary grants which is passed according to the usual procedure followed for the passage of appropriation bill.
(2) Votes on Account:
Under Article 116 (1) (a) of the Constitution, the Lok Sabha has power to make any grant in advance in respect of the estimated expenditure for a part of any financial year pending the passing of the Appropriation Act.
As the voting of expenditure for a particular financial year is not completed till the month of April, it becomes necessary for the Lok Sabha to make provision for defraying the expenditure likely to be incurred till the voting is over. This provision in advance of pending the passage of the Appropriation Act is known as ‘votes on Account’.
It may, however, be mentioned that demands for grants on account are restricted to such services as have received the sanction of the Parliament. Usually, it is not used for the new services. The estimated requirements broadly represent one-twelfth of the whole year’s gross requirements except in exceptional cases where it can be more also if the expenditure is not uniformly spread over the year.
(3) Exceptional Grants and Votes on Credit:
Article 116(b) reads:
The House of the People shall have power “to make a grant for meeting an unexpected demand upon the resources of India when on account of the magnitude or the indefinite character of the service the demand cannot be stated with the details ordinarily given in an annual financial statement.” The same Article in clause (c) states.
The House of the People shall have the power “to make an exceptional grant which forms no part of the current service of any financial service”. The expenditure on such unforeseen events can be met from advances made by the President out of the Contingencies Fund of India. These advances will have to be authorized by the Parliament later.
Essay # 4. Execution of the Budget:
After the enactment of the Budget, the next step in the budgetary process is its execution. The execution of the budget is the responsibility of the executive because the grants of money are made by the legislature to it.
The two important principles involved in the execution of budget are:
(i) That it must conform to the terms of the Appropriation and Finance Acts; and
(ii) That there must be a high degree of honesty, integrity and efficiency.
The process of execution of the budget involves the following operations:
1. Assessment and Collection of Funds:
Before the taxes are collected they have got to be assessed. Assessment means the act of determining as to how much amount is to be collected from different individuals according to the authority given by the legislature. Assessment, therefore, involves the preparation of a list of persons liable to pay the tax and also determining how much each has to pay according to the prescribed rates.
The executive has to devise a suitable machinery and procedure for assessing the amount that is due to the Government from an individual or an association. While devising such a machinery care should be taken to prevent the evasion of taxes.
Having made the necessary assessment, the officers of the Government proceed to collect the sum of money due to the Government from the various persons. The mode of collection varies according to the nature of the tax. In certain cases, for example of customs, payment has to be made on the spot. In other cases, bills may be sent to the assesse and he may be asked to pay the amount in the nearest treasury.
In some cases, deduction of the tax may be made at the sources as is done in the case of income tax which is deducted from the pay of the salaried employees. Lastly, in some cases, the agents or officials of the Government may approach the tax payer directly and demand payment from him and the collection thus made, they may subsequently deposit in the treasury.
The Department of Revenue of the Finance Ministry exercises overall control and supervision over the direct and indirect taxes levied by the Government of India through the two statutory Boards, viz., the Central Board of Direct Taxes, and the Central Board of Excise and Customs.
Sometimes the question arises whether the tasks of assessment and collection of revenue should be entrusted to the same officials or to different sets of officials.
The supporters of the former view hold that:
(i) There would be more of honesty and fair play under the system.
(ii) It will ensure greater control over collection of money to the Government.
(iii) It will also facilitate the work of audit, because when the same service has the duty of assessing and collecting the taxes, it becomes easy to check one of these operations against the other.
But the system is defective in as much as:
(i) The two activities are different in nature and hence need different forms of organisations.
(ii) If the same officials are to do both the jobs, they shall be heavily burdened.
(iii) It will be more expensive and it shall involve unnecessary duplication of records, etc.
The best method will, therefore, be that both the functions should be concentrated in a single service, but there may be two sections in the organisation to deal with the two phases of the problem. In India this system is followed.
There is in the Centre as well as in the States a Revenue Department under the charge of the Finance Minister. There are also Boards under the Minister and they carry on the functions of assessment, supervision of collection and adjudication of revenue disputes.
2. Custody of Funds:
All revenue that is collected has to be placed in safe custody.
This involves two main considerations, namely:
(i) There should be no possibility of embezzlement and misappropriation.
(ii) There should be ensured convenience and promptness of payment.
In former days, huge stocks of Public money were maintained in the Treasury in specially constructed strong boxes. But with the development of the Banking system, now there is little need for the Government to keep treasury for the custody of its funds.
Moreover, it is not necessary to carry on all the financial transactions through cash money as most of the work may now be done through cheques as payment by cheque minimizes the chances of foul play and embezzlement.
In most of the countries, therefore, the Central Bank carries all the money transactions on behalf of the Government as does the Bank of England in London But in a country like India where the banking facilities are not sufficient, it is not possible to have such a centralized system for receiving money and for making payments on behalf of the Government.
The Reserve Bank of India and where there is no branch or agency of the Reserve Bank, the State Bank of India, however, conduct the Treasury business of the Government of India. But since the branches of the Reserve Bank and State Bank do not yet exist at all places, the Government has still to maintain over 1,200 sub-treasuries and over 300 District treasuries to supervise over them.
3. Disbursement of Funds:
Disbursement is the process of withdrawal of money from the Treasury for payments of various liabilities. This is based on British system. Every care should be taken in the work of disbursement against illegal and inaccurate withdrawals or payments. Particular control is, therefore, exercised by the Ministry of Finance over expenditure.
The legislature makes the grants to the Government as a whole, technically to the President and not to individual departments. The Ministry of Finance designates the Head of each administrative department as a controlling officer in respect of the expenditure occurring in his department. These officers in turn allocate grants to the disbursing officers-heads of offices working under them.
The work of communicating grants to the controlling and disbursing officers is taken up immediately after the enactment of the budget. Expenditure against appropriation is controlled by dividing grants into primary units of appropriation, for example, the pay of officers, establishments, contingencies, etc.
These appropriations are sometimes further divided for purposes of financial control. The basic unit of expenditure control is the sub-head. The disbursing officer is allotted certain sub-heads of appropriations. He alone can withdraw money from the treasury.
A great responsibility falls on the disbursing officer. He has to satisfy himself before withdrawing the money:
(i) That the expenditure has been sanctioned by a general or special order of the authority competent to sanction such expenditure;
(ii) That the expenditure to be incurred is within the limits of the appropriation granted by the legislature; and
(iii) That payment of the claims is just.
(iv) That the claims have been examined from the point of view of administration and in case of engineering work also of technical sanction.
He has also to keep the accounts of the various transactions and to make a report about them to the Head of the department and to the Accountant-General. The treasurer, i.e., the officer in charge of the Treasury is also to be equally vigilant while making the payments.
He has to see whether the warrants of payment, the challan or a cheque is signed by a competent authority or not and further he has to keep a record of all receipts and payments.
The power of control of expenditure of the Head of the department is not finished with allocation of money grants to the disbursing officers. He exercises continuous control over the expenditure in his department. The disbursing officers are required to submit monthly accounts to the controlling officers of their departments.
The controlling officer gets these accounts classified and consolidated under the various sub-heads and can thus get an accurate and up-to-date picture of the financial position of his department as a whole. He also sends a copy of these accounts to the Accountant General’s office and the Finance Ministry.
The departmental accounts are reconciled with those of Accountant General on the basis of fortnightly accounts received by him from the treasuries. All this enables the controlling officer to watch the flow of expenditure in his department against the budgetary grants and to apply the necessary control over extravagance or carelessness.
It may be noted that the controlling officers are sometimes authorized by the Finance Department to allow re-appropriations from one minor head to another minor head. But the Finance Department can allow re-appropriation from one major head to another major head or to a wholly new head only with the approval of the legislature which has to be taken by way of Supplementary grants.
4. Accounting:
Accounting means keeping a systematic record of financial transactions. A good accounting system is indispensable for adequate budgetary control. It is only through systematic accounts supported by vouchers and receipts that the legality and honesty of the transactions as also the fidelity of the officers handling the funds can be determined.
Secondly, it is through accounts only that it can be ascertained whether provisions of the budget as voted by the legislature have been properly implemented or not, i.e., how much has been spent and for what purpose and whether within the budgetary limits or not.
Thirdly, accounts furnish the valuable information needed regarding financial conditions and operations for policy determining and programme making.
Francis Oakey in his book titled Principles of Government—Accounting and Reporting, rightly defines the term Accounting “as the science of producing promptly and presenting clearly the facts relating to financial conditions and operations that are required as a basis of management.”
In the words of Dr. L.D. White, “The primary functions of a system of accounts are to make a financial record, to protect those handling funds to reveal the financial condition of the organisation in all its branches, to facilitate necessary adjustments in rates of expenditure, to give information to those in responsible position on the basis of which plans for future financial and operating programmes can rest and to aid in the making of an audit.”
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He further says, from the point of view of the department head or the chief executive early and accurate accounting reports are necessary in order to direct the course of work and future expenditures. They also provide the essential record to demonstrate the appropriate and legal use of funds making certain that each sub-division of an organisation is actually using money for the purpose for which it was appropriated.
The accounts and the supporting financial documents provide the evidence on the basis of which spending officer justifies his expenditure either to finance Director or to the auditor.
5. Audit:
The last stage in the execution of the budget is audit. The term, audit, has been defined as “the process of ascertaining whether the administration has spent or is spending its funds in accordance with the terms of the legislative instrument which appropriated the money” It is a means of enforcing accountability.
The Audit Department is headed by the Comptroller and Auditor-General. His functions are not merely to ensure that the appropriations made by Parliament have not been exceeded by the executive without a supplementary vote or that the expenditure conforms to rules but also to satisfy himself on behalf of Parliament as to its ‘wisdom, faithfulness and economy’.
The Comptroller and Auditor-General acts as an agent of the Parliament. The Parliament itself, too, exercises control over expenditure through its three important financial committees-The Public Accounts Committee, the Estimates Committee, the Committee on Public Undertakings.