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Decoding The Budget- Part 1

Business and Economy

Decoding The Budget- Part 1

Weve prepared a short note decoding the budget for you

By Admin 15th Jul, 2014 01:28 pm

It’s that time of the year when people around you start dropping terms like FDI, disinvestment and GST during conversations while you sit around gaining stars on Candy Crush! Worry not, for we’ve prepared a short note decoding the budget for you. The next time you’re catching the latest Alia Bhatt movie, you can wow them with your knowledge on how the changes in service tax affect your ticket price! 

 

 

The gist of the Finance Minister’s Budget speech covers what is essentially the balance sheet of the government. Just like how your family tallies all the incomes which it collectively gains and matches it against spends, the government also takes account of its financial resources as well as expenditures

 

 

RESOURCES

 

First, let’s look at where the government gets money from.

 

Taxes

 

One means at the government’s disposal are the various taxes levied such as

  • Customs duties are taxes levied on goods exported and imported. For example, if the Government increased customs duties on imported clothes by 5%, then buying a new pair of branded jeans could be more expensive.
  • Excise duties are taxes levied on goods manufactured in India. Certain items meant for common consumption are exempt from excise taxes such as bicycles, kitchen utensils, light bulbs etc. 
  • Service taxes are taxes levied on a list of specific services fixed by the Indian Government Services provided by hotels, restaurants, travel agencies, gyms, hospitals etc.  
  • Income Taxes are taxed levied on the incomes earned by your parents. While a lot of noise is made about income tax rates when the budget approaches each year, less than 5% of India’s population actually pays any income tax. 

 

PSUs

 

The government has differing levels of shareholdings in Public Sector Undertakings (PSUs). These are government companies such as Bharat Petroleum, Coal India, ONGC etc. Each of these companies issues dividends based on the profits it makes each year. The board of directors decides the amount of money to be divided among company shareholders in proportion to their shareholding. These are called dividends.

Other than this, the government may also choose to reduce its shareholding in certain companies in order to raise money. Called disinvestment, this is also the primary route for the government to reduce its exposure to various markets along the lines of ‘less government, more governance’.

 

Loans and Bonds

 

Typically, the government’s revenues don’t match up to planned expenditures. In such cases, the government chooses to take loans from Public Sector Banks (SBI, Punjab National Bank, Indian Bank etc.), the World Bank, the Asian Development Bank etc. or other such institutions.

 

Alternatively, it issues bonds. Bonds are another class of financial instruments. Say the government issues a 100 rupee bond at the rate of 5%. This means that the government promises to pay the purchaser 5 rupees (5% × 100 rupees) every year for the length the bond is valid and pay the 100 rupees back at the end. These bonds are typically purchased by PSUs, banks and other financial institutions. That said, the Indian bond market isn’t robust.

 

These typically constitute the majority of the sources of funding for the Central Government.

 

In the next part, we’ll look at the various categories under which the government allocates its expenditures.

 

- Srinivesh Tanukula

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