Behind the Budget: Some lesser known aspects

When I got posted as Joint Secretary in the State budget department, I was not very happy about it. For someone who had put in 6-7 years of service, the CEO of development authorities or Municipal corporations appeared better postings. But, in bureaucracy, you don’t choose your post, the chair chooses you.

After two years, I realized that most of the things I knew about the Government were by being in that place. Whenever there is hullabaloo around the release of the budget, I start feeling I know a thing or two more than many. Of course, I am in no way a subject expert, and it is too specialized a subject but let me share some general facts which many do not clearly understand. This is not about this year’s budget but you may find it interesting:

1. One of the first things I realized is that one who controls the purse strings can make the rules. There are huge discussions post budgets that this department got this much, there was an increased levy on this, but the Finance Ministry knows better. They can at any time of the year change it or go back from what was written in the budget. Figures mentioned in the budget are just numbers with an intent to honour it in the current fiscal, and intents evolve with time. They just need to put in along with the next year's budget as supplementary and bingo.

2. There are always three figures in the budget viz. Budget estimate (BE) for the next year, Revised Estimate (RE) for the current fiscal and Actuals for the year gone by. Only the last part is sanguine truth but most discussion revolves around BE. Smart play can often be done in the political economy by putting the desired number there, the budget department can always restrict the actual expenditure.

3. The budget for the next fiscal is placed for approval of the parliament because it is understood in a democracy that no expenditure can be incurred without obtaining the will of the people. But the day for this discussion is limited and often the budget is guillotined i.e. demands are deemed to be passed by the Parliament without any actual debate. And since the party in power has a majority, it is assumed that the people’s will has been obtained.

4. We always hear about budget lapses or departments not being able to spend the money. One often gets the impression that money kept in a department’s bank account gets lapsed on 31st March and it must be a bad thing but there is nothing like it. Whatever could not be spent in the fiscal moves on as cash in hand for the next year’s budget. The department will have to seek that money afresh and only the intent lapses with the financial year ending.

5. A tendency exists to keep money in bank accounts as departments feel that money in the budget is not yielding any interest. To avoid this, there is a strict watch of the finance department on advance drawls and money is released only when the actual expenditure has been incurred as per established guidelines. As told before, the budget allocated is just the number and actual liability arises only when payment is to be made. Finance departments maintain daily cash balances and borrow through RBI to ensure adequate liquidity. If departments keep the money in a bank account, basically the same money flows back to the Government as a loan but at a higher interest.

6. Thus, we come to the banker of the Government, RBI. The government of India and all State Governments have one main account and RBI is the banker for the governments. All credits from taxes and loans are credited in the central account and all debits like loan repayments and bills to be made are paid from this account. Hence the need to keep a keen eye on the need to borrow at different times to avoid payment crises.

7. Governments borrow through bonds and RBI runs these bond auctions for the Governments. Based on creditworthiness, different governments command different interest rates. In practice, Governments can never default on loans as RBI will first repay loan liabilities from the main account before allowing any fund debits. Also, sovereigns can borrow even more if the need arises or impose fresh taxes to avoid this.

At the end of the day, a budget is a policy document and an important one for the Government. It spells out where the money is being headed and what are priorities of the Government are.

#Budget