A question that keeps cropping up every so often is ‘what role does the Governor of the Reserve Bank of India have in preparing the Union Budget’.
Well, before we address that, let’s take step back and look at what’s the first thing that you keep in mind when you go shopping? For the average consumer, it’s her budget, i.e. what part of her disposable income can she spend on a particular item.
There are two considerations to be made here - income and expenditure. Imagine this process, but carried out by a whole country and you have the Union Budget.
So what is the Union Budget?
As per Article 112 of the Constitution of India, the Union Budget is a comprehensive statement of the estimated income and expenditure of the government in a particular year. Also referred to as the Annual Financial Statement, it is presented on the last working day of February each year by the Finance Minister in Parliament. This has to be passed by the Lok Sabha before it can come into effect from April 1, the start of the Indian financial year.
Preparing the Budget
The finance minister prepares the budget in consultation with multiple bureaucrats and financial advisors. S/he seeks assistance and advice from the leading economists and industry titans in the country. Various accounting and finance organizations also send in their two cents. Typically, this process begins in the third quarter of the financial year and comprises four stages:
Expenditure and Revenue Estimates
The first estimate of the deficit
Narrowing down the deficit
Final presentation and approval
What is the role of the RBI chief in preparing the Budget?
In a word, none! Zero. Zilch. Nada. The RBI chief, or even the RBI, as an independent government body, has no role in the formulation of the Union Budget.
A country’s economic policy has two broad pillars - Monetary and Fiscal. The RBI governs the monetary policies by regulating the supply of money in the economy. It accomplishes this through measures like determining the key banking rates (repo rate, reverse repo rate), Reserve Ratio, Open Market Operations, and more. Its primary responsibility is to keep inflation in check. It also has a decisive say in the issuance of notes, modification of interest rates, and foreign currency regulation.
The government handles the fiscal part - keeping an eye on the revenues, expenses, and deficits. It looks after big picture stuff like economic growth and GDP. Similarly, the Budget falls under the ambit of fiscal policies, and the RBI cannot intervene here.
What to expect from Budget 2021
Budget 2021, to be announced on February 1, is poised to revive spending and provide a fiscal stimulus to jumpstart the economy hit hard by the pandemic. Expect it to focus on non-tax revenues and a fire sale of large-scale government assets. Additional tax reliefs are improbable but not impossible as the government might elect to be fiscally lenient in these exceptional circumstances in a bid to boost consumer demand.