Budget 2023: Where Does Government Money Come From? Understanding Revenue Budget

Union Budget consists of two parts Revenue Budget and Capital Budget. To understand where the government gets money to spend on the essential schemes, we have to understand what is Revenue Budget

In less than a month Modi government will announce the Union Budget for the financial year 2023-24. This Budget is going to be a significant one amid an uncertain global economic situation and concerns over an impending recession this year. The annual Union Budget consists of the government’s revenue receipts and expenditures, which will be done using earned revenue. It gives the details of the sources from where the government's revenue is coming.

Before Finance Minister Nirmala Sitharaman presents the last full Budget for this government on February 1, it is important to understand how the government earns. To decode this we have to look at the sources of the government’s revenues. Union Budget consists of two parts Revenue Budget and Capital Budget. To understand where the government gets money to spend on the essential schemes for the Indian common people, we have to look at what is Revenue Budget, how it works, and how it affects the common man. 

What Is Revenue Budget?

In simple terms, Revenue Budget is a description of the government's anticipated revenue inflows and expenditures for a fiscal year. The Revenue Budget covers recurrent, non-redeemable revenue items. Revenue Budgets ensure that the government is effectively allocating resources, saving them money, time, and effort. The Revenue Budget for the government accounts for both revenue receipts and expenses that must be fulfilled with those receipts.

The Revenue Budget has two main components – revenue receipts and revenue expenditures. 

Revenue receipts by definition are those receipts that directly do not influence the government's assets and liabilities. It consists of money earned by the government from tax revenue and non-tax revenue. Income tax, corporate tax, excise, customs, and other duties make the tax revenues. Non-tax revenues consist of interest payments on loans given by the government to states, railways, and others, and dividends and profits received from public sector companies.

Revenue expenditures are spending that has no effect on the government's assets or liabilities. Salaries, interest payments, pensions, and administrative costs are all examples of revenue expenditures. Revenue expenditures include, among other things, costs for the ongoing administration of government agencies and services, interest charges on debt, and subsidies.

Other Sources Of Income

There is another important source of revenue for the government. The government most of the time spends more than it can earn. If you subtract revenue receipts from revenue expenditure it is usually negative. That is why the government has to borrow money from the capital market. In the Budget government presents them in the form of Capital Receipts. Capital Receipts are one of the components of the Capital Budget that results in the creation of liabilities or the reduction of financial assets. It can be both non-debt capital (such as the recovery of loans and advances, disinvestment, and the issuance of bonus shares) and debt capital (such as loans from foreign governments or RBI, market loans, issuance of special securities to public-sector banks, securities issues, short-term bank debt, treasury bills, securities against small savings, state pension schemes, relief bonds, saving bonds, and gold bonds)

Composition Of Government’s Sources Of Income

To better understand budgetary revenue let's take a look at the Union Budget 2022. According to Budget at a Glance provided by the finance ministry, the Budget size of the Union Budget 2022 was Rs 39.45 lakh crore, out of which, Revenue Receipts contributed around Rs 22.04 lakh crore and Capital Receipt around Rs 17.40 lakh crore. Revenue Expenditure for Budget 2022 was Rs 31.95 lakh crore, which generated a revenue deficit of around Rs 9.91 lakh crore. 

Now, Revenue receipts consist of tax revenue and non-tax revenue. Income tax, corporate tax, excise, customs, and other duties make up the tax revenues. Which was estimated to be around Rs 19.25 lakh crores. Non-tax revenues estimates, in which interest payments on loans given by the government to states, railways, and others; dividends and profits received from public sector companies; and external grants are included, were around Rs 2.70 lakh crore. 

This graph shared in the Budget at a Glance documents shows the percentage competition of the government’s earnings

Source: Budget At A Glance, Budget 2022, Ministry of Finance

Out of Rs 17.40 lakh crore capital receipt, recoveries of loans and advances were estimated at Rs 14,291 crore, disinvestment revenue was estimated at Rs 65,000 crore, and debt was estimated at Rs 16.60 lakh crore. 

How Do Government Earnings Affect Economy And Common People?

It is easily understood that with bigger revenue government could spend more on welfare schemes, poverty upliftment, providing better public service, and running the government efficiently, but as you have seen above major part of the government’s income comes from capital receipts as revenue receipts do not provide necessary income and government’s fiscal deficit has shot up since the Covid-19 pandemic. 

For its part, the Modi government since it came into power in 2012 has tried to control capital receipt and consistently lower fiscal deficit in subsequent Budgets. The fiscal deficit touched its lowest mark in FY18-19 but a change in the tax mechanism resulted in a decline in tax revenue and with that fiscal deficit also widened. This was exacerbated by the pandemic although in the last two Budgets government has tried to bring it down to the range of 7-6 per cent of GDP. 

Difficulty with capital receipts is that they either decrease the value of the government's asset or increase the value of the liability in form of debt. When we look at the composition of capital receipts in the past two Budgets, it is observed that while the non-debt receipts have gone down, debt receipts have increased. The government has increased the market borrowing against securities of small savings. External debt has also been increasing. 

A senior IMF official in October said that India's debt ratio is expected to reach 84 per cent of its GDP by the end of 2022, which will top many emerging economies, but its debt is easier to sustain as most of India's debt is in non-indexed domestic currency and there's a large investor base from India. So those are good features to have and that's what makes this debt a little bit easier to sustain. 

Expectations From Budget 2023 

According to the latest data from the income tax (I-T) department, India's gross direct tax collections for FY22-23 grew by 25.90 per cent. The gross collection stands at Rs 13.64 lakh crore as of December 17, 2022. The net direct tax collection after adjusting refunds stood at Rs 11.36 lakh crore, which is about 80 per cent of the full-year Budget target. This includes Corporation Tax (CIT) at Rs 6,06,679 crore (net of refund) and personal income Tax (PIT), including Securities Transaction Tax (STT) at Rs 5,26,477 crore (net of refund). The Budget 2022 had estimated direct tax collection of Rs 14.20 lakh crore this financial year.

According to a Business Standard report, the central government expects net tax mop-up to exceed budget targets by Rs 4.5 lakh crore in 2022-23. A government official told the publication, the Budget Estimate for direct taxes could exceed Rs 3.5 lakh crore, while the indirect tax collection could be higher by Rs 70 thousand crores to Rs 1 lakh crore. The official also said that tax collected more than the budgeted target would help the government in meeting the fiscal deficit target of 6.4 per cent of GDP for 2022-23.