How the Union Budget works, from the speech to the Finance Act

On the receipts side the government counts tax revenue (income tax, corporation tax, GST, customs and excise duties), non-tax revenue (such as dividends from the Reserve Bank and public sector companies) and capital receipts, which include borrowing and the sale of government stakes.

On the spending side there is a difference between revenue expenditure, the day-to-day cost of government such as salaries, pensions, subsidies and interest, and capital expenditure, which creates assets such as roads, railways and defence equipment. A large share of the money raised by the Union government is not spent by it at all but passed to the states under the recommendations of the Finance Commission.

After the speech there is a general discussion. Parliament then breaks, and the standing committees examine the demands for grants of each ministry in detail. When the House meets again, the Lok Sabha votes on the demands for grants, and an Appropriation Bill authorises the money to be taken from the Consolidated Fund of India. A separate Finance Bill gives legal effect to the tax proposals.

These are money bills, which are introduced only in the Lok Sabha. The Rajya Sabha may discuss them and return them within 14 days with recommendations, but it cannot amend or reject them, and the Lok Sabha may accept or ignore its suggestions. The process must be finished before 1 April. In an election year the government usually presents an interim budget and asks for a vote on account, which lets it spend for a few months until the new government presents a full Budget.

The revenue deficit is the amount by which revenue expenditure exceeds revenue receipts. The fiscal deficit is the broadest measure: total expenditure minus total receipts that are not borrowing, so it equals what the government has to borrow in the year. The primary deficit is the fiscal deficit minus interest payments, and shows how much of the borrowing is for new spending rather than for paying interest on old debt.

Deficits are usually quoted as a percentage of GDP, the value of everything the economy produces in a year, so that they can be compared across years and countries. The Fiscal Responsibility and Budget Management Act of 2003 requires the government to follow a declining path for its deficits. Heavy government borrowing matters because it competes with private borrowers for savings and can push up interest rates, and because interest on past debt takes a growing share of each year's spending.

For every item the Budget documents show three numbers: the actual spending of two years ago, the revised estimate for the current year, and the budget estimate for the coming year. Comparing them tells you whether a ministry spent what it was given.

An allocation is permission to spend, not money already spent, and not every rupee allocated is used. When a headline says a scheme's allocation has risen by 20 per cent, ask what it was compared with: last year's budget estimate, or what was actually spent. Also remember that a rise in rupee terms may be smaller than the rise in prices.

India is a federation, and each state presents its own budget, usually in February or March. States raise some taxes themselves, share in GST, and receive a portion of Union taxes. The Union Budget is the largest single financial document, but a great deal of spending on health, education, police and local services is decided in the states.

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