From Halwa to Fiscal Discipline: A Comprehensive Guide to the Union Budget

About the budget 

As January comes to a close, the middle class in India eagerly awaits the Union Budget, hoping for tax concessions and financial relief. For them, savings, investments, and spending are closely tied to post-tax income, making even minor changes in tax slabs, deductions, or exemptions highly significant. Key expectations often include an increase in the basic exemption limit, revised tax rates, and simplified tax structures, especially adjustments between the New and Old Tax Regimes.

However, it’s not just the salaried middle class that closely tracks the Budget. Various stakeholders, including investors, brokers, regulators, and policymakers, also analyze the Budget for valuable insights. This is because the Ministry of Finance outlines its plans for allocating funds across sectors, industries, subsidies, and state-specific projects during the Budget announcement. These decisions have a direct impact on markets and economic activities.

The word “budget” itself has historical roots. It originates from the Middle French word bougette, meaning a small bag or pouch. In 18th-century England, the Chancellor of the Exchequer carried documents detailing the government’s financial plans in a leather bag. Presenting these plans to Parliament was referred to as “opening the budget,” symbolizing the unveiling of financial strategies. Over time, the term evolved to represent the financial statement itself, encompassing both revenue and expenditure plans.

In India, the Union Budget is presented by the Finance Minister in Parliament, and its formulation begins months in advance, typically around August or September. This process is overseen by the Budget Division within the Department of Economic Affairs, under the Ministry of Finance.

An interesting tradition associated with India’s Budget is the Halwa ceremony. Recently, Finance Minister Nirmala Sitharaman prepared halwa and served it to officials in North Block. This ceremony celebrates the hard work of those involved in drafting the Union Budget and marks the start of the lock-in period to ensure confidentiality. During this period, finance ministry staff are quarantined in North Block, cut off from external communication, and without access to devices. The lock-in continues until the Budget is approved by the Prime Minister and printed in a secured basement, with surprise inspections by the Intelligence Bureau to prevent leaks.

Over the years, budget traditions in India have evolved. Until 2016, the Budget was presented on the last day of February. Starting in 2017, it has been presented on February 1 each year to allow more time for implementation. In 2019, Nirmala Sitharaman, India’s first full-time woman Finance Minister, replaced the colonial-era briefcase with a bahi-khata, a traditional Indian accounting ledger, symbolizing a move towards Indian traditions. In the 2021-2022 Union Budget, she replaced the bahi-khata with a digital tablet encased in a red pouch featuring the National Emblem, marking India’s first paperless Budget. This shift, driven by the COVID-19 pandemic, also aligned with the government’s ‘Make in India’ initiative.

Understanding the budget

This section will walk you through broad aggregates of the budget for easy understanding. 

A government budget is a detailed plan that explains how a government will manage its money over a specific period, usually a year. It shows how much money the government expects to earn (called revenue) and how it plans to spend that money (expenditure).

The budget size, ₹48.21 lakh crore, is the sum of all planned revenues and expenditures, offering a snapshot of the government’s financial plans for the year.

The left side of the chart represents the government’s revenue sources. 

• The primary source of income is taxes, including direct taxes like income tax and indirect taxes such as GST on goods and services. 
• Additionally, the government earns from non-tax sources, such as interest on loans it provides, dividends from its investments, and other miscellaneous income. 
• Beyond taxes, revenue also comes from borrowing (debt receipts), loans, and investments, classified as capital receipts.

The right side of the chart represents Govt expenditures. 

• Usually, the largest expenditure is towards transfers, establishment, and other expenditures.
  • Transfers are funds allocated by the central government to states, Union Territories, or other entities to support their financial needs without expecting goods or services in return. 
  • Establishment expenditure covers costs for running the government, including salaries, pensions, and operational maintenance. 
  • Other expenditure includes all spending beyond transfers and establishment, such as developmental and non-developmental projects.
• Scheme expenditure in the Indian budget refers to the funds allocated for specific programs, initiatives, or schemes designed to achieve the government’s developmental goals and policy priorities. These expenditures are directed toward implementing projects and schemes across various sectors, such as health, education, infrastructure, and rural development.

Fiscal deficit is the gap between the government’s total expenditure and its revenue receipts (including non-debt capital receipts), representing its borrowing needs. Measured as a percentage of GDP, it indicates fiscal health. A higher ratio shows greater reliance on borrowing, while a lower ratio suggests a balanced budget. Persistently high deficits may raise concerns about debt sustainability, whereas rising deficits during slowdowns often reflect stimulus efforts. A declining ratio in stable times indicates fiscal discipline and reduced debt reliance. 

The Fiscal Responsibility and Budget Management (FRBM) Act recommends keeping India’s fiscal deficit below 3% of GDP, though this target is often relaxed during economic challenges (e.g., during the COVID-19 pandemic). For 2024-25, India’s fiscal deficit target is set at 4.9% of GDP, with a focus on gradual reduction in subsequent years.

Conclusion 

Every year, the Union Budget ushers in new investment opportunities for investors, driven by developments across various economic and sectoral themes. At Windmill Capital, we specialize in building portfolios rooted in simple yet powerful ideas, focusing on broad economic shifts, sectoral trends, and megatrends that shape the future. The Union Budget provides actionable insights that directly influence these themes, offering significant potential for our investor base.

After the Budget is presented, we will outline the key developments and their implications for some of our smallcases, helping you identify opportunities to align your investments with these evolving trends. Watch this space for detailed insights and analysis to stay ahead in your investment journey.

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