The Union Budget for the fiscal year 2023–24 will be presented in Parliament by Finance Minister Nirmala Sitharaman in less than 30 minutes.
This Budget is significant because it is the last comprehensive budget until the Lok Sabha elections in 2024. It also comes as the Indian economy continues to recover from the pandemic’s impact.
Finance Ministers balance a variety of conflicting options each year. On the macroeconomic side, some people think that the Budget should concentrate on raising public spending to support economic growth, while others are more concerned about a rise in the fiscal deficit. Others draw attention to the discrepancy between expected and actual government revenues, which limits the latter’s capacity for spending.Economists who are concerned about the Budget’s numbers itself contend that closing the gap between anticipated numbers and actual outcomes should be the top priority.
How does Finance Minister decide the Budget?
Going through the budget-making process is one approach to get the answer to this query. What are the factors an FM must deal with, and what limitations does she face?The Union government’s financial strategy for the upcoming fiscal year is essentially laid out in the budget. The Fiscal Responsibility and Budget Management Act (FRBM) Act requires the government to reach a fiscal deficit target, therefore this exercise is essentially about figuring out how much the government may spend in excess of its revenue.
The amount of borrowing that a government makes each year is known as the fiscal deficit. The fiscal deficit goals are expressed as “percentages of nominal GDP.” In other words, the government may borrow more money (in absolute terms) from the market to pay for its expenses if the nominal GDP is larger.
The government, however, is unable to forecast what the nominal GDP is likely to be in the upcoming fiscal year without knowing the nominal GDP for the present year. The government cannot predict the budget deficit it must not exceed or the quantity of revenues it will receive in the upcoming year without knowing the absolute level of nominal GDP.
Additionally, it is unable to make promises or choose how much money to spend on particular projects without knowing the exact income it is expected to receive.
The significance of nominal GDP is thus the first item to comprehend. An FM seeks the nominal GDP growth rather than the actual GDP growth.
It is true that the factor used to compare the rates of economic growth among nations is real GDP. There is a valid explanation behind it as well.
The nominal GDP growth rate is subtracted from the inflation rate, which is the pace at which prices are rising in a country, to get the real GDP growth. Real GDP growth does this by painting a more accurate picture of economic development across nations that could have varying degrees of inflation.
Consider a scenario where the amount of apples produced overall does not increase from Year 1 to Year 2, but the cost of apples increases by 10%. In this scenario, nominal GDP growth would be 10%, but all of it would be attributable to price increases rather than increased output. This lack of production growth would be revealed by real GDP growth (in this example, 0%), which would eliminate the impact of high prices on nominal GDP.
Contrary to popular belief, however, no one aims for the actual GDP growth rate. “The actual GDP is a derived quantity, The government sets goals for nominal GDP through its fiscal policy, while the RBI sets goals for inflation rate through its monetary policy.
These some factors interact to produce real GDP growth.
The nominal GDP figure serves as the actual observed data for budgetary considerations. The whole structure of the upcoming year’s budget is built using these statistics as the cornerstone.
The arithmetic consists of around five stages
01-The Finance Ministry starts by calculating the nominal GDP for the most recent fiscal year.
02- It “projects” the probable nominal GDP for the next year using this figure. The government makes reference to this computation in the “Budget at a Glance” paper that is provided at the time of the Budget presentation.
03-The government determines the maximum level of fiscal deficit (or borrowings, or the difference between expenditures and revenues) it is permitted to have based on the nominal GDP and the FRBM Act objective.
04- A government’s next obvious move is to determine how much income it would get once it has a general idea of how the economy will perform in the upcoming year. By taking into account revenue buoyancy, the total amount of revenue that the government will get is determined. If the buoyancy is 1, the tax receipts would likewise grow by 12% the next year if the nominal GDP rose by, let’s say, 12%.
05-The government determines the level of expenditure after estimating its expected income and the maximum permissible fiscal deficit. The goal is to keep overall spending within certain bounds so as to avoid exceeding the fiscal deficit.
The government may proceed with designating the exact amount of money that is to be spent on various projects after it has a fix on the overall spending.