How Budgetary items are classified?

The government budget has large number of expenditure items and receipt items. To overcome the complexity of dealing with large number of items, there should be a classification system for both expenditure and revenue items. In India, the major classification system adopted is to divide the budget into revenue budget and capital budget.

Expenditure and Receipts

          Expenditure and receipts are the two important components of the budget. Total expenditure and total receipts in any budget will be equal. The total expenditure and total receipts also shows the size (amount) of the budget. 

In the budget, instead of revenue to refer to the accruals to the government, the term receipts are used.  This is needed because; all the accrued funds to the government are not revenue in the pure sense. Borrowing is one of the major item of fund for the government. We can’t describe borrowing as revenue. Hence, on the matching side of expenditure, the term receipts is used. Receipts include- tax revenues, non-tax revenues as well as borrowing made by the government to finance the budget. So in the budget, all items are entered as either expenditure or receipts.

Revenue budget and Capital budget

Budget is basically divided into Revenue budget and capital budget. Receipts and expenditure are divided among these two.

Hence the terms revenue budget and capital budget indicates different types of expenditure and receipts for the government. This means that in the revenue budget there will be the revenue receipts and revenue expenditure. Similarly, in the capital budget, there will be capital receipts and capital expenditure.

The Revenue Budget

Revenue budget doesn’t mean budget about government revenue, rather it describes the current (day to day function related expenditure and receipts) activities of the government.

Revenue budget involves revenue receipts and revenue expenditure. These expenditures and receipts are related to the day to day functioning of the government. Expenditure is needed to finance government functions like defense, social services, administration et. These are the main revenue expenditures.

Similarly, when the government is performing its day today functions, lot of revenue will be accrued to it. Tax revenues and non-tax revenues are the two types of revenue receipts.

Really, revenue expenditure is considered as unproductive expenditure because it is mainly used for the running of the government machinery. Unlike in the case of capital expenditure, revenue expenditure will not give any revenue to the government in future. 

Important revenue expenditure are: interest payments (for the borrowing that the government has made in the past), defence (almost 70% of the defence expenditure are revenue expenditure), subsidies (subsidy is not a productive item for the government as there is no return from it for the government), salaries etc.

Important revenue receipts are: tax revenues including corporate income tax, personal income tax, customs duties, service taxes etc, and non-tax revenues including revenue from mint, profits from Public Sector Enterprises etc.

In India, there is revenue deficit since 1978. This situation means government’s revenue receipts including tax revenues are not enough to meet its revenue expenditure. Hence the government is borrowing to finance its revenue deficit. 

Revenue budget involves those receipts and expenditure coming out of the day to day activities of the government. Don’t misunderstand that the Revenue budget is solely aimed at describing revenues of the government. The revenue budget, on the other hand, is actually related to the day to day functioning of the government. Revenue budget is recurring or current in nature and is often termed as unproductive expenditure.

The Capital Budget

The word capital means productive investment. This meaning is quite applicable to capital budget as well. Capital budget involves both capital receipts and capital expenditure.

Capital Expenditure: Capital expenditure denotes future revenue yielding type of expenditure by the government. Capital expenditure consists of expenditure made by the government to acquire assets-buildings, machineries etc. Loans to the states and other entities are also capital expenditure. When the government gives loans to the states it gets interest and principal in future. (On the other hand, grants to the states are revenue expenditure for the government because grants will not be repaid). Similarly, the centre subscribes shares of public sector enterprises under capital expenditure. Capital expenditure is treated as a productive activity by the government. 

Capital receipts: Capital Receipts means either loans or receipts from past productive activities. Major capital receipts are: internal and external borrowings of the government proceeds from the sale of PSU or disinvestments and recovery of loans.

Usually, borrowing constitutes to the bulk of the receipts under capital budget (constitute nearly 90% of the total capital receipts). These are loans raised by the government in the form of market borrowing, loans from its own institutions and a negligible amount of loans from foreign sources. Recovery of loans from the state governments is also comes under capital receipts.

Budget at 2016-17 at Glance

 

 

2014-2015  (A)

2015-2016 (BE)

2015-2016 (RE)

2016-2017 (BE)

1

Revenue Receipts

1101472

1141575

1206084

1377022

 

2

Tax Revenue (net to centre)

903615

919842

947508

1054101

 

3

Non-Tax Revenue

197857

221733

258576

322921

4

Capital Receipts (5+6+7)$

562201

635902

579307

601038

 

5

Recoveries of Loans

13738

10753

18905

10634

 

6

Other Receipts

37737

69500

25312

56500

 

7

Borrowings and other liabilities *

510725

555649

535090

533904

8

Total Receipts (1+4)$

1663673

1777477

1785391

1978060

9

Non-Plan Expenditure

1201029

1312200

1308194

1428050

 

10

On Revenue Account

1109394

1206027

1212669

1327408

of which,

 

11

Interest Payments

402444

456145

442620

492670

 

12

On Capital Account

91635

106173

95525

100642

13

Plan Expenditure

462644

465277

477197

550010

 

14

On Revenue Account

357597

330020

335004

403628

 

15

On Capital Account

105047

135257

142193

146382

16

Total Expenditure (9+13)

1663673

1777477

1785391

1978060

 

17

Revenue Expenditure (10+14)

1466992

1536047

1547673

1731037

 

18

Of Which, Grants for creation of Capital Assets

130760

132472

132004

166840

 

19

Capital Expenditure (12+15)

196681

241430

237718

247023

20

Revenue Deficit (17-1)

365519

394472

341589

354015

 

-2.9

-2.8

-2.5

-2.3

21

Effective Revenue Deficit (20-18)#

234759

268000

209585

187175

 

-1.9

-2

-1.5

-1.2

22

Fiscal Deficit {16-(1+5+6)}

510725

555649

535090

533904

 

-4.1

-3.9

-3.9

-3.5

23

Primary Deficit (22-11)

108281

99504

92469

41234

 

-0.9

-0.7

-0.7

-0.3