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Decoding the Budget- Part 2

Business and Economy

Decoding the Budget- Part 2

Take a look at the vital role which the Ministry of Finance plays in deciding where and how funds are best put to use.

By Admin 16th Jul, 2014 01:36 pm

The last time we took a look at the various means at the government’s disposal for raising funds to perform its various responsibilities. Here we look at the more vital roles which the Finance Minister and the Ministry of Finance play in deciding where and how these funds are best put to use.

 

A growing economy’s government typically faces higher expenditure demands than incoming revenues plus financing (loans, bonds etc.). Hence, the government treads a delicate line when planning its expenditures as it has to service this debt as well (similar to how we pay installments on loans). This is also relevant in a macroeconomic perspective. For example, a heavy debt could mean that the government’s credit rating is suffering. In this case, it would have to pay higher interest rates on its borrowings. This would mean that the government has to make more money to service this additional debt. As we’ve seen in the last article, the alternative to borrowing money is to generate more taxes. Thus, the burden ends up falling on tax-paying citizens.

 

 

EXPENDITURES

 

Ministry budgets

The various ministries under the Central Government assess their yearly spend requirements and communicate this to the Ministry of Finance. This consists of the operational expenditures required to keep the departments under these ministries running. For example, the Forest Department will require funding to maintain forest and wildlife reserves, employ guards, train them, deal with poachers, maintain beat depots for surveillance and guarding, stay prepared for natural disasters, survey infrastructure projects for environmental clearances, auction timber, regulate timber supply and a whole host of other tasks.

 

Plan/scheme allocations

Other than operational expenditures, the government heeds the advice of the Planning Commission and the ministries to allot funds for various schemes and plans. These funds are akin to project investments which provide returns to the government and society as a whole over a long time span. This represents the capital expenditure requirements which are important in relevance to progress, growth and development.

 

Some of the more recent prominent schemes include JNNURM (Jawaharlal Nehru National Urban Renewal Mission), MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) and IAY (Indira Awas Yojana).

 

This pretty much summarises what you could effectively call the balance sheet of the government. Let’s also take a look at the external economic and market factors which the Finance Minister has to consider when developing his policy.

 

Fiscal policy and macroeconomic policy

Fiscal policy is the use of government revenue collection and spending to influence the country’s economy. This perspective is what matters most to both business and people. For example, if the government decided that all government offices were to be computerised and paper-free by 2020, the big IT hardware firms would kick into overdrive in preparing themselves to grab these massive tenders. Their stocks as well as their suppliers and business partners’ stocks would rise overnight.

 

Let’s also consider what would happen if the government increased import duties on automobiles.

-          The government would make more money per car sold.

-          Imported car prices would rise and sales would decrease.

-          The Indian automobile industry would enjoy decreased competition and a sudden drop in sales.

-          Indian car manufacturers would also enjoy a spurt in stock prices.

-          Manufacturing and assembly inside the country would be a cheaper alternative, and foreign companies may consider setting up manufacturing facilities in India.

-          Thus, increased employment → increased incomes → increase in income tax revenues (for the government)

 

Phew! If you’ve got till here, you now have a fair idea on how the budget works and why hundreds of thousands listen to every word which the Finance Minister drops during the Budget session of Parliament. Enough for now! Go out and catch some fresh air. Or rain. Or some fish. Fish is nice.

 

Srinivesh Tanukula

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