Understanding the types of budgets in India

Every government needs budgets to function. They dictate how public funds are allocated between numerous sectors, including healthcare, education, infrastructure, and defence. Put simply, the budget is like a roadmap that guides the government on how to allocate its resources to meet its objectives.

In India, the government creates an annual financial statement (Union Budget), which outlines the estimated expenditures and revenues for the upcoming fiscal year. Based on the financial outcomes of the Union Budget in a fiscal year, the budget can turn out to be a balanced, surplus, or deficit budget.

Here is an in-depth classification of budgets to help you understand the importance of budgeting in a nation's economic success.

Balanced budget
 

A balanced budget means projected revenue matches expected expenses. Simply put, a balanced budget emerges when the government's projected spending matches its expected income in a specific financial year. Many classical economists support this view, emphasising the idea of "living within means." They believe that the government's expenses should mirror its revenue.

This budgetary approach aims to strike harmony in the economy, promote fiscal discipline, prevent excessive borrowing, and reduce the burden of interest payments. However, during economic depression or deflation, a balanced budget might not guarantee economic stability. While the concept sounds simple on paper, aligning estimated spending with anticipated income can be challenging in reality. 

Features
 

• May promote economic stability if implemented successfully.
  
• Reduces the need to borrow or cut services.
• Displays discipline in managing resources.

Surplus budget

A surplus budget arises when a government expects its revenue to surpass its expenditure within a fiscal year. This scenario suggests that earnings, primarily from taxes, outweigh what the government intends to spend on public welfare. Such a budget reflects positive fiscal health and suggests prudent financial management. Surplus funds often pave the way for investments, debt reduction, or reserves for future uncertainties.

At times of inflation, a government can choose this budget type to reduce aggregate demand and achieve economic stability. It highlights a country's approach to budget management, allocating resources prudently, and investing in future projects without borrowing. For citizens, it serves as a sign that their nation stands on strong economic ground. Therefore, a surplus budget acts not just as a testament to good governance but also as a tool for economic stability.

Features

• Acts as a cushion during economic downturns.
  
• Can help in paying off existing debts.
• Offers a chance to save for future projects.

Deficit budget

A deficit budget arises when government expenses surpass anticipated revenue in a particular fiscal year. Simply put, the government spends more than it earns. This scenario often sparks debate among economists, politicians, and the general public. But the deficit budget does have its benefits – it can help stimulate economic growth, promote investments in infrastructure, or address critical needs.

For nations like India, striving for growth, such a financial budget proves beneficial. It acts as a stimulus, especially during economic slowdowns. By increasing spending, a government boosts demand, thus reviving economic growth. Another important aspect of this budget lies in job creation. With increased public spending, employment opportunities rise. Consequently, demand for goods and services soars.

But how does the government manage additional expenditures while also ensuring prudent budget accounting practices? To cover the gap between spending and revenue, the government leans on public borrowing methods such as issuing bonds, and sometimes they utilise reserved surplus funds.

Features

• Provides flexibility in addressing economic downturns.
  
• Can stimulate growth when necessary.
• Allows for public welfare investments.

The role of budgets

Budgets act as a mirror reflecting a country's ambitions, needs, and limitations. Each type of budget in India serves a unique purpose. A surplus budget signals the financial affluence of a country, a balanced one reflects stability, and a deficit can indicate adaptability or economic challenges.

Just like the government of India makes budgets to make life better for citizens, create growth, and maintain stability, you too should create a personal budget for effectively managing your finances and meeting different goals. For an individual, a handy tool to manage their finances and budget strategically is a savings bank account.

IDFC FIRST Bank Savings Account can help you manage your finances better with features like high interest rates, special variants for kids, women, and seniors, as well as an exclusive mobile banking app. So, incorporate this savings account into your financial planning and enjoy both security and growth.

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