The significance of India’s Union Budget

By Kealan Finnegan

India’s Budget has huge ramifications not only in India but increasingly for the wider global economy. That reality is become ever more notable, with India now the world’s fifth largest economy.

In consideration of the economic downturn triggered by the COVID-19 pandemic, the 2021 Union Budget is unique and important.

What is the Union Budget exactly?

In short, the Union Budget of India is the country’s annual financial statement for the following fiscal year that starts on April 1st and runs to March 31st. In recent years, the Budget has been announced by the Finance Minister on February 1st, providing sufficient time for Parliament to vote on its approval in advance of the beginning of the financial year.

The union budget is divided into two parts:

1) Capital Budget, which provides details regarding the capital payments and capital receipts of the government. This includes money spent on infrastructure, healthcare, and education facilities for example. (The capital receipts account for the loans from the Reserve Bank of India (RBI) or international organisations/governments, and capital payments for the outgoing expenditure.)

2) Revenue Budget, comprising of the revenue expenditure and revenue receipts (such as tax revenues and interest/dividends on investments). Revenue expenditure is the amount spent on day to day functioning of the government and related services like social services.

Why is the Budget so important?

The Union Budget sees the government direct its resources to specific sectors and areas in detail. This is vital for the Government to proactively maximise its limited resources in order to stimulate economic growth and development. Additionally, one of the most important duties of the union budget is to manage inflation and deflation, and ultimately to keep the economy stable.

Thus, if the GoI decides to spend more or pull back spending in certain areas, the ramifications are huge, affecting the opportunities for businesses in India as well as foreign investors in the country.

As well as business, the impact is large for the wider population. From tax breaks and modifications that can constrict or support consumer spending, to increases in public spending and investment.

Furthermore, the Budget has great indirect effect, by setting the tone for the Government’s priorities for the year, which can affect consumer and business sentiment.

Setting expectations

Priority areas include reviving consumption expenditure, which had dipped even prior to the pandemic, job-creation, i.e. in industry-intensive sectors like construction, and attracting and revitalising investment, both domestically and internationally.

With the government taking several unforeseen measures in the last FY to navigate the pandemic, this year’s Budget is unusual and accordingly comes with distinctive expectations and hope. We should consider that the recovery is still unclear and has impacted sectors and regions differently, and there are constraints in the government’s execution capacity due to the continuing disruption and required management of the pandemic. Yet, as always with great challenge comes opportunity, and these challenging times require competent Government support now more than ever.

Read UKIBC CEO Jayant Krishna’s Op-Ed in Financial Express on UKIBC’s budget recommendations, including tax parity to attract foreign investment, here.

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