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Understanding the Budget


Assets with banking system include current account balances with other banks, advances to banks and money at call and short notice of a fortnight or less.

Ad-valorem duties This is a Latin term and it used to refer to duties that are levied on commodities/products as a certain percentage of their price. These are different from specific excise duties that are levied on products.

Budgetary Deficit Such a situation arises when the expenses exceed the revenues. Here the entire budgetary exercise falls short of allocating enough funds to a certain area.

Budget Estimates These estimates contain an estimate of Fiscal Deficit and the Revenue Deficit for the year. The term is associated with the estimates of the Center's spending during the financial year and the income received as proceeds of tax revenues.

Balance of Payment An overall statement of a country's economic transactions with the rest of the world over some period, often a year. A table of the balance of payments shows amounts received from the rest of the world and amounts spend abroad. The current account includes exports and imports, that is visible trade, and receipts from and spending abroad on services such as tourism. It also includes receipts of property incomes from abroad and remittances of property incomes abroad, and receipts and payments of international transfers, that is gifts. The capital account of the balance of payments includes inward and outward foreign direct investment, and sales and purchases of foreign securities by residents and of domestic securities by non-residents. The third element in the balance of payments is changes in official foreign exchange reserves.

Bank credit It includes loans, cash credit and overdrafts, and inland bills and foreign bills purchased and discounted. Bills exclude those rediscounted with RBI and IDBI.

Bank credit to commercial sector It includes credit to commercial sector by RBI and commercial banks. RBI's credit includes advances to and investments in shares and debentures of financial institutions, and land mortgage banks.

Bank Rate The rate at which the Bank of England used at one tome to rediscount first-class bills for its customers. It has long been abolished. At one time many other interest rates were specified in terms of their margin above bank rate. It directly affected other interest rates only when the market needed to borrow from the Bank of England, but changes in bank rate were announced as a means of informing the City of the Bank of England's views on what commercial interest rates should be.

Borrowings by commercial banks from RBI constitute outstandings against refinance schemes, like general refinance, and export credit refinance.

Cash balances with RBI indicates cash balances maintained by scheduled banks with RBI and include these balances under cash reserve ratio (CRR) requirements.

Capital Budget The word, capital, is long-term in nature. Capital Budget keeps track of the government's capital receipts and payments. This accounts for market loans, borrowings from the Reserve Bank and other institutions through the sale of Treasury Bills, loans acquired from foreign governments and recoveries of loans granted by the Central government to state governments and Union Territories.

Capital Payments Expenses incurred on acquisition of assets are termed capital payments.

CENVAT This is a replacement for the earlier MODVAT scheme and is meant for reducing the cascade effect of indirect taxes on finished products. The scheme is a more extensive one with most goods brought under its preview.

Custom Duties These duties are levied on goods whenever they are either brought into the country or exported from the country. The importer or the exporter pays custom duties.

Countervailing Duties This is levied on imports that may lead to price rise in the domestic market. It is imposed with the intention of discouraging unfair trading practices by other countries.

Consolidated Fund This is one big reservoir where the government pools all its funds together. The fund includes all government revenues, loans raised and recoveries of loans granted.

Contingency Fund It is more or less similar to that extra little bit of savings that all mothers set aside in case of an emergency. Likewise, the government has created this fund to help it tide over difficult situations. The fund is at the disposal of the President to meet unforeseen and urgent expenditure, pending approval from Parliament. The amount that is withdrawn from the fund is recouped.

Capital Expenditure Long-term in nature they are used for acquiring fixed assets such as land, building, machinery and equipment. Other items that also fall under this category include, loans and advances sanctioned by the Center to the State governments, union territories and public sector undertakings.

Capital Receipt Loans raised by the Center from the market, government borrowings from the RBI & other parties, sale of Treasury Bills and loans received from foreign governments all form a part of Capital Receipt. Other items that also fall under this category include recovery of loans granted by the Center to State governments & Union Territories and proceeds from the dilution of the government's stake in Public Sector Undertakings.

Central Plan It refers to the government's budgetary support to the Plan and, the internal and extra budgetary resources raised by the Public Sector Undertakings.

Consumer price index A price index covering the prices of consumer goods. This is contrasted with a more general price index, such as the GDP deflator, which also includes investment gods and goods purchased by the government.

Corporate Tax A tax on the profits of firms, as distinct from taxation of the incomes of their owners. There are strong arguments for having separate income tax schemes for firms and individuals the system of allowances and progressive tax rates appropriate for a tax on individual incomes is quite different from a sensible scheme for taxing firms.

Crowding Out The possibility that an increase in one form of spending may cause another form to fall. This could happen in various ways. Suppose for example that government spending on public work rises. This might use scarce resources, such as skilled engineers, diverting them from alternative investment projects, which are thus delayed. Alternatively, if increased demand causes inflation, this might lead to tighter monetary policy, thus cutting forms of spending. Finally, if private investors are made nervous by increased government debt, a rise in public works might scare off private investment. Total crowding out occurs if other spending falls by 100 per cent of the rise in public works. Partial crowding out occurs if other spending falls, but by less than spending rises. It is possible that crowding in may occur, that is, other spending is actually increased, if conditions are such that the Keynesian multiplier works, or through favourable effects of an overall rise in spending on the confidence of private investors.

The currency liability of Central government constitutes one-two-five rupee coins, small coins, and other commemorative coins issued by the government mints.

Current Account Transactions where the payments are income for the recipient. A country's balance of payments on current account includes trade in goods, or visibles; trade in services, or invisibles; payments of factor incomes, including dividends, interests, migrants remittances from earnings abroad; and international transfers, that is gifts. Current account is contrasted with capital account, where transactions do not give rise to incomes, but represent changes in the form in which assets are held.

Current Account Deficit An excess of expenditure over receipts on current account in a country's balance of payments.

Current Account Surplus An excess of receipts over expenditure on current account in a country's balance of payments.

Direct Taxes Taxes imposed directly on the customers such as the Income Tax and the Corporate Tax fall under this category.

Disinvestment The dilution of the government's stake in Public Sector Undertakings is called as disinvestment.

Demand for grants It is a statement of estimate of expenditure from the Consolidated Fund. This requires the approval of the Lok Sabha.

Demand deposits It include current deposits, demand liabilities portion of savings bank deposits, overdue deposits and cash certificates, outstanding telegraphic and mail transfers and margins against letter of credit/guarantees.

Deposit money It consists of demand deposits with commercial and cooperative banks. It also includes current deposits portion of savings bank deposits. These deposits do not earn any interest.

Excise Duty A tax levied on the consumption of particular goods. These may be levied to raise government revenue, and are often levied at higher rates on goods whose consumption is believed to have adverse effects on public health, public order, or the environment. Excise duties on alcoholic drinks, tobacco, and petrol are widely used for both purposes.

Food credit by banks indicates bank credit to Food Corporation of India, State governments and State cooperative agencies for food procurement.

Foreign Direct Investment The acquisition by residents of a country of real assets abroad. This may be done by remitting money abroad to be spent on acquiring land, constructing buildings, mines, or machinery, or buying existing foreign business. Inward foreign direct investment similarly is acquisition by non-residents of real assets within a country. Once a country has real assets abroad, if these make profits which are ploughed back into expanding enterprises, this would ideally be shown in the balance of payments as receipts on current account balanced by an outflow on capital account. In fact balance-of-payments accounts often show only net remittances of profits as a current account item, ignoring profits earned abroad and ploughed back in both current and capital accounts.

Finance Bill Consists the government's proposals for the imposition of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by the Parliament.

Fiscal Deficit It is the difference between the Revenue Receipts and Total Expenditure.

Gross National Product Total market value of the finished goods and services manufactured within the country in a given financial year, plus income earned by the local residents from investments made abroad, minus the income earned by foreigners in the domestic market.

Gross Domestic Product (GDP) One of the main measures of economic activity. 'Gross' indicates that it is calculated without subtracting any allowance for capital consumption; 'domestic' that it measures activities located in the country regardless of their ownership. It thus includes activities carried on in the country by foreign-owned companies, and excludes activities of firms owned by residents but carried on abroad. 'Product' indicates that it measures real output produced rather than output absorbed by residents. GDP is reported at both current and constant prices.

Gross Investment Spending on creating new capital goods, before making any allowance for capital consumption. Gross investment consists of gross fixed investment, plus net investment in stocks and work in progress. Gross investment is distinguished from net investment, which measures the change in the capital stock after allowing for capital consumption. Gross investment is in principle based on observable market transactions; by contrast, capital consumption is based on calculation about the rate at which capital goods wear out or become obsolete. These calculations are not based on market transactions thus they, and estimates of net investment based on them, are less reliable than measures of gross investment.

Income Tax A tax on income. Income tax is normally zero on some bands of small incomes, both on equity grounds and because of the expense of collecting tiny amounts of tax. It is then normally proportional up to some upper limit; income beyond this is taxed at higher rates. Thus income tax is usually progressive. An individual's taxable income is calculated after deducting various allowances, in respect of assorted items which may include mortgage interest payable, charitable donations, responsibility for dependents, age allowances, medical insurance, and superannuation contributions. Income for tax purposes may include or exclude imputed items such as the value of the services of owner-occupied houses. Capital gains may be included as income, excluded, or taxed separately from income. Income tax may be collected from individuals in arrears, or by deduction at source through pay-as-you-earn (PAYE) in the UK, or a withholding tax on incomes from employment and payment of dividends net of tax by companies, in the US.

Inflation A persistent tendency for prices and money wages to increase. Inflation is measured by the proportional changes over time in some appropriate index, commonly a consumer price index, or a GDP deflator. Because of changes in the type and quality of goods available, measures of inflation are probably not reliable to closer than a margin of 1 or 2 per cent a year, but if prices rise faster than this there is no doubt that inflation exists. Economists have attempted to distinguish cost and demand inflation. Cost inflation is started by an increase in some elements of costs, for example the oil price explosion of 1973-4. Demand inflation is due to too much aggregate demand. Once started, inflation tends to persist through an inflationary spiral, in which various prices and wage rates rise because others have risen. The inflation tax is the real cost to the holders of money due to its loss of real purchasing power during inflation. Hyperinflation is extremely rapid inflation, in which prices increase so fast that money largely loses its convenience as a medium of exchange.

Indirect Taxes Taxes imposed on goods manufactured, imported or exported such as Excise Duties and Custom Duties.

MODVAT It stands for Modified Value Added Tax and is a way of giving some relief to the final manufacturers of goods on Excise Duties borne by their suppliers.

Monetized Deficit Measures the level of support the RBI provides to the Centre's borrowing program.

M1, also called narrow money, includes currency with public (notes and coins in circulation less cash in hand with banks), deposit money with public, and `other' deposits with RBI.

M3, also called broad money, includes M1 plus time deposits with banks. Time deposits exclude inter-bank deposits.

Medium term loan It is granted for 1-3 years. Long-term loans are for more than 3 years.

Merchandise Account The part of balance-of-payments accounts referring to visible trade, or merchandise imports and exports.

Non-Plan Expenditure Consists of Revenue and Capital Expenditure on interest payments, Defense Expenditure, subsidies, postal deficit, police, pensions, economic services, loans to public sector enterprises and loans as well as grants to State governments, Union territories and foreign governments.

Net bank credit to government includes total net credit to Central and State governments by RBI and commercial banks. Credit to government by commercial banks indicates investments by banks in government securities.

Net foreign exchange assets with banks include net foreign exchange with RBI and commercial banks. Foreign exchange assets of commercial banks include net foreign currency balances with authorised foreign exchange dealers.

Net non-monetary liabilities of the banking sector indicate net non-monetary liabilities, other than time deposit liabilities of commercial banks, and net non-monetary liabilities of RBI. These include capital and reserves, branch adjustments, and bills payables; the liabilities are net of investments in fixed assets, and branch adjustments.

"Other" deposits held with RBI are deposits other than balances held in IMF Account No.1, RBI employee provident and superannuation funds, and CDS deposits. The balances under these accounts are excluded, as they are non-monetary liabilities of RBI.

Peak Rate It is the highest rate of Custom Duty applicable on an item.

Performance Budget It is a compilation of programs and activities of different ministries and departments.

Public Account It is an account where money received through transactions not relating to consolidated fund is kept.

Plan Expenditure Consists of both Revenue Expenditure and Capital Expenditure of the Center on the Central Plan, Central Assistance to States and Union Territories.

Primary Deficit Fiscal Deficit minus Interest payments.

Per Capita Real GDP A country's real GDP per member of the population. This may be calculated using the total population, adults only, or 'adult' equivalents', giving children of various ages weighs equal to a fraction of an adult. Per capita real GDP is lower than per capita income in a country with net external assets which yield an income, and greater than per capita income in a country with a lot of inward investment, so that net property income payments have to be made abroad.

Purchasing power parity PPPs are the rates of currency conversion which equalise the purchasing power of different currencies. This means that a given sum of money, when converted into different currencies at the PPP rates, will buy the same basket of goods and services in all countries. In other words, PPPs are the rates of currency conversion which eliminate the differences in price levels between countries.

PPPs also appear in international trade theory in the context of equilibrium exchange rates - that is the underlying rates of exchange to which actual exchange rates are assumed to converge in the long term.

Reserve money refers to money supplied by RBI and Central government. This indicates monetary liability of RBI and the government of India to public including banks. The reserve money, or currency notes and coins, is held by public and banks in their currency chests and as deposits with RBI. It also includes "other" deposits with RBI.

Revenue Deficit It is the difference between Revenue Expenditure and Revenue Receipts.

Revenue Surplus Opposite of Revenue Deficit, it is the excess of Revenue Receipts over Revenue Expenditure.

Revised Estimates Usually given in the following budget, it is the difference between the Budget Estimates and the actual figures.

Revenue Budget Consists of Revenue Receipts and Revenue Expenditure of the government.

Revenue Receipt Consists of duties imposed by the Centre, interest and dividend on investments made by the government.

Revenue Expenditure Expenditure incurred for the normal functioning of the government departments and various other services such as interest charges on debt incurred by the government.

Scheduled banks are banks, which are included in the second schedule to the Reserve Bank of India Act 1934. These banks enjoy certain privileges such as free concessional remittance facilities and financial accommodation from the RBI. They also have certain obligations like minimum cash reserve ratio (CRR) to be kept with the RBI.

Subsidies Financial aid provided by the Center to individuals or a group of individuals to be competitive. The grant of subsidies is also aimed at improving their skills of those who benefit from the subsidies.

Term deposits are deposits with a fixed maturity of not less than 15 days. This would also include cash certificates, and cumulative or recurring deposits, but would exclude interest accrued and payable on these deposits.

Value Added Tax It is based on the difference between the value of the output over the value of the inputs used.

Wholesale Price Index The prices of goods, which are dealt with, wholesale, mainly bulk goods, which are mostly inputs to production rather than finished commodities. A wholesale price index, for example, includes wheat and sheet steel, where a retail price index includes bread and cars. Because they involve goods that are dealt in before the production of final goods, and are held as stocks of inputs, wholesale price indexes tend to be leading indicators, moving earlier in trade cycles than the retail price index.


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