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Budget Basics 101: Important Economic Terms

By Sahil Mehta 

Okay, I am back with part 2 of our series in trying to understand the budget. Over the course of this article we shall cover some of the important terms you might come across while going through the newspapers or TV. The list is not exhaustive but hopefully comprehensive enough.

GDP - Gross domestic product (GDP) refers to the market value of all goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living. India's GDP stood at $ 1.846 trillion in 2011. GDP represents the size of the economy. In the budget, many of the important numbers are given as a percentage of the GDP. The highly publicized growth rate is also the year-on-year change (increase) in GDP.

Inflation - Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. A moderate inflation of 3-5% is necessary for the growth of a country but anything higher can cause severe problems. The poorer sections of the society are worst hit by inflation.

Fiscal Policy - Fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the economy. The two main instruments of fiscal policy are government expenditure and taxation. Fiscal policy refers to the use of the government budget to influence economic activity.
Monetary Policy - Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability

Current Account – The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The current account is one of the two primary components of the balance of payments.
The balance of trade is typically the most important part of the current account.

Balance of Payments - A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers.
Capital Account - Whereas the current account reflects a nation's net income , the capital account reflects net change in national ownership of assets. These assets include investment in shares, machinery, land or building.

Capital Budget :- This budget comprises of loans & advances that are granted to Union & State territory by the Union government, corporations, government companies and other parties. Capital budget also includes capital receipts and payments by the government.

Fiscal Deficit - A deficit is the amount by which a sum of money falls short of the required amount. Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. High fiscal deficit can lead to high inflation.

Fiscal Consolidation – Managing the fiscal deficit to an acceptable level.

Plan Expenditure :- Money provided for the execution of Central Plan. This monetary aid is given from the government's account and consists of expenditure both capital & revenue and Central assistance to Union territories & States.

FDI - Foreign direct investment (FDI) or foreign investment refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. Direct investment excludes investment through purchase of shares.
FII – Foreign Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. As such they have a critical importance in the functioning of the financial markets.
Financial Inclusion - Financial inclusion is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society. It is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of public policy.

In the next part, we'll talk about all the taxes!


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