Here are 10 things to know before you head the finance minister's Budget speech this year:
1. Union Budget: It is the most comprehensive report of government's finances in which revenues from all sources and outlays for all activities are consolidated. The Budget also contains estimates of government's accounts for the next fiscal year, which is called Budget Estimates.
2. Taxes- direct and indirect: Direct taxes are the taxes that are paid directly by individuals and corporations. For instance, income tax, corporate tax etc. Indirect taxes are imposed on goods and services and can be passed on to the end consumer. They are paid by the consumers when they buy the goods and services. These include excise duty and customs duty, among others.
3. Inflation: Inflation is a sustained increase in the general price level. The inflation rate is the percentage rate of change in the price level. There are two main kinds of inflation. One is headline inflation which deals with prices of all goods. These include food and fuel, which makes headline or wholesale inflation far more volatile. Core inflation covers the prices of all consumer goods barring fuel and food, which makes core inflation less volatile than headline inflation.
4. Capital budget: The capital budget consists of capital receipts and payments. It includes investments in shares, loans and advances granted by central government to state governments, government companies, corporations and other parties.
5. Revenue budget: The revenue budget consists of revenue receipts of government and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues constitute taxes such as income tax, corporate tax, excise, customs, service and other duties that are levied by government. The non-tax revenue sources include interest on loans, dividend on investments.
6. Revenue deficit: The difference between revenue expenditure and revenue receipt is known as revenue deficit. It shows the shortfall of government's current receipts over current expenditure.
8. Fiscal deficit: When government receipts (income) fall short of its expenditure, the difference is known as fiscal deficit. To meet the shortfall, government borrows money from the public. In other words, the excess of total expenditure over total non-borrowed receipts is called fiscal deficit.
9. Monetary policy: It comprises actions taken by the Reserve Bank of India (RBI) to regulate the level of money or liquidity in the economy or change the interest rates. It essentially involves the raising or decreasing of key interest rates (repo rate and cash reserve ratio) to contain inflation. Alternatively, it entails reducing of interest rates to push inflation higher. The connection between interest rates and inflation is very straight forward. In case of inflation, the RBI wants to suck out the liquidity so as to dissuade the investors from investing more money in its quest to curb inflation. For doing so, it raises the interest rates, raising the cost of borrowing money. As a result, investors are compelled to borrow less, a trend that eventually leads to halt in the price rise. Conversely, when the general prices are falling, the central bank gives an impetus to inflation by cutting down on interest rates, making the borrowing cheaper.
The RBI also resorts to open market operations (OMO), which entails buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.
10. Repo rate: It is the rate of interest paid to the RBI by commercial banks for short-term loans it lends against government securities. 'Repo' means repurchase of securities. When a bank borrows money from the RBI, it gives government shares that it holds to the central bank as collateral for the amount of loan. At the time of repayment of loan, the borrower bank simply repurchases the securities by paying a premium, which is the repo rate prevailing at that time.
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