What is 'interim budget', how is it different from 'full budget'?

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An interim budget is presented by an outgoing government but does not usually contain significant tax-related measures. It is primarily aimed to enable spending till a new government assumes office and Parliament passes a full budget.

We answer a few frequently asked questions about the interim budget.

What is Budget?

Government's financial plans, pretty much like household budgets, are primarily about prioritising spending. Total expenditure or the size of the annual budget is the amount of money that government spends during the year.

Over the years, the government's annual spend has risen sharply, reflecting the growing size of the economy as also the need to fund welfare schemes such as the rural job guarantee scheme NREGS.

On the other hand, the government's revenues are akin to the income of a large family where the each member's earning from various sources is pooled together to take care of the total expenses.

Like households, the government also borrows money to fund some of its expenses as income falls short of revenues.

The government's Annual Financial Statement or the Statement of the Estimated Receipts and Expenditure for each financial year is popularly known as the Budget.

How is the government expenditure categorised?

India's total expenditure is divided into two broad components: plan and non-plan.

Plan expenditure is spent on productive asset creation through centrally-sponsored programmes and flagship schemes.

Traditionally, higher plan expenditure is considered good budget management because it implies that more funds are going towards asset creation that can multiply income and create jobs.

On the other hand, 'non-plan' refers to all other expenditure such as defence expenditure, subsidies, interest payments, including expenditure on establishment and maintenance activities such as salaries.

The government's five-year plan is knocked down into five annual plans that are fleshed out in the budget. The central plan is funded almost equally from government's own accounts or the annual budget and the resources that flow in from public enterprises.

The government's support to the central plan is called the gross budgetary support, or the GBS. The planning commission and the finance ministry decide on the GBS for every year, which is finalised by the second-week of January.

When is the budget presented in Parliament?

The Budget is presented to Lok Sabha in two parts, namely, the Railway Budget pertaining to Railway Finance and the General Budget which gives an overall picture of the state of the economy and the government's financial position.

By convention, the Railway Budget is presented sometime in the third week of February at 12pm after the Question Hour.

The General Budget was presented by convention, till 1998, on the last working day of February at 5pm. This convention was however, changed in 1999 when the General Budget was presented at 11am.

In an election year, the Budgets may be presented twice — first to secure a 'Vote on Account' for a few months and later in full.

What is a 'Vote on Account'?

Article 266 of the Constitution of India mandates that parliamentary approval is required to draw money from the Consolidated Fund of India. Besides, Article 114 (3) of the Constitution stipulates that no amount can be withdrawn from the Consolidated Fund without the enactment of a law. This is sought through the Appropriation Bill.

As the whole process of Budget beginning with its presentation and ending with discussion and voting of demands for grants and passing of Appropriation Bill and Finance Bill generally goes beyond the current financial year, a provision has been made in the Constitution that empowers the Lok Sabha to make any grant in advance through a 'Vote on Account' to enable the government to carry on until the voting of demands for grants and the passing of the Appropriation Bill and Finance Bill.

This enables the government to fund its expenses for a short period of time or until a full-budget is passed.

Normally, the 'Vote on Account' is taken for two months for a sum equivalent to one sixth of the estimated expenditure for the entire year under various demands for grants.

During an election year, the 'Vote on Account' may be taken for a longer period, say three to four months, if it is anticipated that the main demands and the Appropriation Bill will take longer than two months to be passed by the House.

How is 'Vote on Account' different from a budget?

A 'Vote on Account' relates only to the expenditure side of the government's financial statement. A full budget, on the other hand, carries details of the governments' earnings and spending plans.

What is the difference between a 'Vote on Account' and an 'interim budget'?

An interim budget gives the complete financial statement, very similar to a full budget.

While law does not debar the government of the day to introduce tax changes, normally during an election year governments have avoided making any major changes in income tax laws during an interim budget.

The rationale for this is that it may not be proper for an outgoing government to announce major changes which may not be readily agreeable to a new legislature. This, however, is not legally binding.

Budget, interim budget: what you should know about FM's speech - Hindustan Times

 

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Vote on Account 2014: A non-event for markets, say analysts - Economic Times

NEW DELHI: Being an election year, the government would be presenting an interim budget for FY15 on February 17.

The government would be seeking Vote on Account, i.e. Parliament's approval for meeting the estimated expenditure for 3-4 months until the new government is elected.

Ahead of the event, Indian markets have plunged nearly 700 points so far in the year 2014 and over 200 points in February alone. However, analysts are of the view that interim budget or Vote on Account will not be very significant for markets, but upcoming general elections could very well be a game changer.


"The vote-on-account is constrained by itself because you cannot have any new direct taxes, you cannot have any changes in direct taxes," said Vibhav Kapoor, Group Chief Investment Officer, IL&FS, in an interview with ET Now.

However, what can be done is that you can only have changes in indirect taxes and whatever announcement the finance minister makes in terms of policy are also not going to be taken seriously by the market as they would be subject to change, he said.

Kapoor is of the view that the signpost is largely going to be global in nature till the elections happen. The markets are generally smart, so going closer to the elections they will try and make up their mind on what the election results are going to be or are likely to be, he said.

Since major policy announcements and changes on the taxation front are not expected, the markets are more likely to be watchful for government's progress on fiscal consolidation.

Post national elections, the government which comes to power at the Centre would present the regular annual budget in July 2014.

Although markets may have priced in a lot of uncertainty in terms of elections, a breakaway move will only come once there is more clarity, say analysts.

On the macro front, market participants will closely watch the FY15 fiscal deficit target, which will determine the size of market borrowing for the next fiscal year.

"The finance minister is committed to reducing the fiscal deficit by 0.6% of GDP annually; he is unlikely to deviate from this plan in his budget. However, the new government to be formed after elections will have the option of revisiting the deficit target and borrowing plans for FY15," Standard Chartered said in a note.

This means the borrowing laid out in the interim budget will be valid only for Q1FY15, if the new government revises the FY15 fiscal deficit projections, added the Standard Chartered report.

According to analysts, election results can surprise investors on either side so the strategy should be to remain cautions and on sidelines till the time some clarity emerges.

So far in 2014, the stock markets of emerging markets, including India, have come down like a pack of cards on concerns of further tapering by the Federal Reserve and on concerns of further slowdown in China.

Foreign institutional investors (FIIs) which have been the backbone for India markets in the year 2013 have pulled out nearly Rs 1,700 cr from Indian equities in the first week of February alone.
Expectations are that FII outflows might accelerate in coming future if global cues become weaker as talks of tapering picks up even thought it looks like the markets today has priced in a lot of uncertainty related to the tapering.

The market is likely to remain range-bound around the current levels rather than having a significant breakaway and the likely trigger for markets will come from the policies and initiative that the new government undertakes to revive growth and investment in the country.

Going forward, we believe that the general elections due in May 2014 are likely to take the centre stage for markets and their outcome would be crucial for determining market direction, Angel Broking said in a note.

In case a positive electoral mandate materialises, as the market is anticipating, it would likely result in positive momentum for cyclical stocks, added the note.

The brokerage firm is of the view that measures including structural reforms, clearing supply-side bottlenecks, expediting projects stuck in various stages of implementation and good policy mix geared towards capital expenditure rather than subsidies has the potential to boost infrastructure spending and crowd in private investment, consequently resulting in a turnaround in the investment cycle and a boost to the potential growth in the economy.