Union Budget: Formulation and Its Implications

Jan 313 min read

Current Context

Finance Minister Nirmala Sitharaman is set to present her eighth consecutive Union Budget on February 1, 2025 (Tomorrow) at approximately 11 AM in Parliament.

Understanding the Union Budget

The Union Budget serves as a detailed financial blueprint for the government's revenue and expenditure for the financial year (April 1 to March 31). It significantly influences economic strategies and impacts key sectors such as infrastructure, healthcare, education, and social welfare.

Constitutional Framework

The Indian Constitution refers to the Union Budget as the Annual Financial Statement (AFS) under Article 112. While the term “budget” is not explicitly mentioned in the Constitution, this document plays a crucial role in shaping economic policies and governance.

How is the budget prepared?

The formulation of the budget begins months in advance, coordinated by the Budget Division of the Department of Economic Affairs under the Ministry of Finance. Several key stakeholders contribute to the process:

Ministry of Finance – Oversees and manages the budget-making process.
NITI Aayog—Provides insights on economic policies and spending priorities.
Reserve Bank of India (RBI) – Advises on macroeconomic factors such as inflation and monetary policy.
Central Ministries & Departments—Submit their expenditure estimates and financial proposals.
State Governments—Provide inputs, especially for centrally sponsored schemes.

The preparation process follows a structured timeline:

Budget Circular (September – October): Ministries receive guidelines for submitting proposals.
Revenue & Expenditure Estimates (October – December): Ministries provide income projections and spending plans.
Pre-Budget Consultations (December – January): Experts, industry leaders, and stakeholders share insights.
Finalization by the Finance Minister (January – February): Proposals are evaluated, and allocations are confirmed.
Printing of Budget Documents: Conducted confidentially, often in a secure location.

Presentation in Parliament

On February 1, the Finance Minister presents the Union Budget in Lok Sabha, highlighting the government’s financial priorities. Some key components of the budget include:

Annual Financial Statement (AFS) – A detailed breakdown of income and expenditure.
Finance Bill – Introduces changes in taxation policies.
Appropriation Bill – Allows the government to withdraw funds from the Consolidated Fund of India.
Expenditure Budget – Outlines financial allocations for various ministries.
Revenue & Capital Budget – Differentiates between regular revenue and capital investments.
FRBM Compliance – Ensures adherence to responsible fiscal management.

Parliamentary Approval Process

After its presentation, the budget undergoes a thorough review in Parliament:

General Discussion (First Week of February): MPs debate overall financial policies and economic direction.
Departmental Scrutiny (February – March): Committees analyze budget allocations for different ministries.
Voting on Demands for Grants (March): Parliament approves budget allocations.
Appropriation Bill Approval (March): Official endorsement for government spending.
Finance Bill Enactment (March – April): Changes in taxation and fiscal policies are finalized.

Execution and Implementation

Once approved, the budget is put into action. Funds are disbursed in phases, ensuring smooth implementation. Key mechanisms include:

Fund Allocation & Tracking—Managed through the Public Financial Management System (PFMS) to ensure transparency.
Monitoring & Auditing—Agencies like the Controller General of Accounts (CGA) and Comptroller and Auditor General (CAG) track spending.
Parliamentary Oversight—Committees such as the Public Accounts Committee (PAC) review budget utilization.
Mid-Year Reviews—Adjustments are made based on actual revenue collections and spending needs.

Challenges in Budget Execution

Despite careful planning, several challenges arise:

Revenue Shortfalls—Economic slowdowns can lead to lower tax collections.
Fiscal Deficit Management—Balancing spending while staying within FRBM limits is difficult.
Underutilization of Funds—Ministries sometimes fail to fully use allocated budgets.
Leakages & Corruption—Ensuring funds are used effectively without mismanagement.
Policy Execution Delays—Bureaucratic hurdles slow down infrastructure and welfare projects.

Conclusion

The Union Budget is more than just a financial statement—it is a strategic roadmap for India’s economic policies. A well-planned and efficiently executed budget promotes fiscal discipline, economic stability, and social welfare by prioritizing key sectors. Its success relies on transparency, accountability, and diligent monitoring to ensure effective resource utilization. When managed efficiently, the budget becomes a powerful tool for inclusive growth, national progress, and improved quality of life for all citizens.