UPSC NCERT Notes – Indian Economy – Public Finance and Budget

As a UPSC aspirant navigating through the complexities of the examination, the significance of well-structured study materials cannot be overstated. In the realm of Indian Economy, particularly Public Finance and Budget, NCERT notes serve as indispensable tools for comprehensive understanding and preparation. These notes, crafted meticulously to align with the UPSC syllabus, offer a lucid yet profound exploration of the intricate workings of India’s fiscal landscape. Delving into concepts ranging from taxation policies to government expenditure, they provide aspirants with a solid foundation to comprehend the dynamics of public finance. With their succinct elucidation of key economic principles and astute analysis of budgetary mechanisms, UPSC NCERT notes on Indian Economy – Public Finance and Budget emerge as essential companions for aspirants striving towards mastery in this crucial domain.

Public Finance

• In essence, Public Finance scrutinizes the financial activities of a government and their related functions. It can be categorized into five sections:
  • Public revenue
  • Public expenditure
  • Public debt
  • Fiscal policy
  • Financial administration

Public revenue

• Public revenue, a vital component of public finance, comprises all government income and receipts from diverse sources. These sources can be broadly classified into two categories: revenue receipts, which do not increase government liability or decrease assets, further divided into tax revenue and non-tax revenue.
• Capital Gains Such receipts, in return of which the government has to pay, are called capital receipts. This payment is made in the next financial year.
• Loans received from Foreign Government, loans received back from State Governments and funds received from the Reserve Bank of India (RBI) are its main items

Difference between Revenue Receipts and Capital Gain

Difference between Revenue Receipts and Capital Gain	Revenue Receipts	Capital Gain
Effect on Liability Position	It does not affect the liability position of the government. Assets do not decrease.	These receipts affect the liability of the government. This decreases assets or increases liabilities.
Tax Burden for Future Generation	It does not create tax burden for the future generation.	This can lead to tax liabilities for future generations.
Financial Position Indication	Higher level (tax receipts) reflects better financial conditions of the economy.	Higher level (borrowing) reflects weak financial position of the economy.

Public Expenditure

• Before independence, the government’s activities in India were influenced by classical thinking. Classical economists were against entrusting too many functions to the government, resulting in limited public expenditure.
• Post-independence, there was a shift in perspective, and the government decided to directly intervene in the country’s economy. 
• It was recognized that economic growth and the welfare of the people required significant government involvement.
• Centralized planning and the public sector were designated to play crucial roles in this transformation. Consequently, the scope of public expenditure expanded rapidly after independence.
• Revenue Expenditure: This pertains to ongoing expenses that neither create assets nor reduce the government’s liability. These expenditures are regular and recurring, including items like salaries, maintenance of roads, and street lights.

Difference between Revenue and Capital Expenditure	Revenue Expenditure	Capital Expenditure
Effect on Asset Liability	It does not affect the asset liability of the government.	It affects the liability of the assets of the government.
Change in Assets and Liabilities	There is no decrease or increase in assets and liabilities due to its nature.	Assets and liabilities decrease or increase due to its nature.
Purpose	It is related to the welfare of the people.	This expenditure is related to the growth of GDP.
Economic Indication	High revenue expenditure reflects the poverty of the people.	High capital expenditure shows a lack of investment in the economy.

Government Expenditure Sources

• Government expenditure has various sources, outlined below:
  • Subsidies: Funding provided for the purchase and provision of goods and services.
  • Investments and Money Transfer: Allocation of funds for investments, as well as money transfers.
  • Creation and Maintenance of the Military: Funding for the establishment and upkeep of the military, police, emergency, and firefighting organizations.
  • Capital Expenditure Account: A detailed account covering capital expenditures.

Government Accounts Division

• The accounts of both the Central and State Governments are segmented into three parts:
  • Consolidated Fund: This includes all income received by the government, such as tax income, non-tax income, and loan receipts.
  • Contingency Fund: Reserved for meeting urgent government expenses that cannot be delayed.
  • Public Account: Money collected in this account does not belong to the government but serves specific purposes.

Public Debt

• In the Indian context, public debt refers to the borrowings of both the Central and State Governments. The Central Government’s public debt comprises internal and external debt along with other liabilities.

Significance of Public Debt

• Public debt is deemed necessary for the following reasons:
• Smoothing Out Tax Rates: Borrowing allows for the avoidance of sharp increases or decreases in tax rates.
• Economic Stimulus: During recessions, borrowing can be employed to pump-prime the economy by spending money.
• Financing Emergencies: Public debt can be used to finance war or other emergency expenditures.
• Investment in Social Sector: It enables the financing of expenditure on the social sector for human capital formation.
• Capital Formation: Public debt contributes to capital formation, fostering economic activities in the country.
• Despite these advantages, high levels of public debt face criticism for the following reasons:
• Interest Burden: It creates an interest burden that must be paid from current revenue.
• Limited Returns: Public debt often does not lead to direct or indirect returns, making repayment challenging.
• Impact on Private Sector: It reduces the availability of funds to the private sector.
  • Inflationary Tendencies: High public debt can increase inflationary tendencies by expanding the money supply.

Internal and External Debt

• Internal debt includes market borrowings, money raised through bonds, treasury bills, and special securities issued to the Reserve Bank of India (RBI). External debt encompasses borrowings from foreign countries and International Financial Institutions (IFI). Non-government external debt includes NRI deposits, trade credit, external commercial borrowings, etc.
• India’s external debt is denominated in multiple currencies, with the United States dollar accounting for the largest share at 48.2%.

Debt to GDP Ratio

• The debt-to-GDP ratio, indicating a country’s ability to repay its debt, reached 87.8% in Fiscal Year (FY) 2021 in India. It is estimated to decline slightly to 89.4% in FY 2022, influenced by high nominal growth.

Debt Trap

• A debt trap occurs when new loans are borrowed to repay existing borrowings, often due to higher interest rates and exceeding the capacity to repay.

Financial Administration

• Financial administration encompasses all financial activities, including the public budget, its approval, auditing, and related matters.
•  An in-depth study of financial administration is crucial for a comprehensive understanding of public finance.

Fiscal Policy

• Fiscal policy, part of government policy, involves raising revenue through taxation and determining the amount and purpose of government spending. 
• Introduced by John Maynard Keynes in the 1930s, fiscal policy in India aims to improve economic growth performance and ensure social justice through resource mobilizati
• Influencing Efficient Resource Allocation: This involves strategically allocating resources to maximize the rate of growth in an efficient and rational manner.
• Social Justice Measures in Fiscal Policy: Fiscal policy aims to achieve social justice through various measures, including:
  • Relying more on direct taxes rather than indirect taxes.
  • Increasing taxes on the wealthy and luxury goods while reducing them on the less affluent and essential goods.
  • Allocating funds to welfare and development projects.

Types of Fiscal Policy

Expansionary Fiscal Policy:

• Governments opt for this policy to increase their financial contributions to the national economy.
• It results in the production of a significant number of goods and services, expanding employment opportunities and generating growth in individual and governmental profits.

Contractionary Fiscal Policy:

• Employed during economic booms, this policy aims to control rapid economic expansion, addressing both inflation and excessive growth.
• The government intervenes to prevent the negative consequences of an economic boom.

Neutral Fiscal Policy:

• Applied when the country’s economy is in balance, indicating stable economic conditions.
• Involves government expenditures funded by taxes, with no significant impact on the nation’s economic situation.

Fiscal Imbalance and Deficit Financing

• Fiscal imbalance refers to the situation where government expenses exceed revenue in a given financial year, resulting in a fiscal deficit.
• Deficit financing involves filling this gap by borrowing from the Reserve Bank of India (RBI), issuing treasury bills, and using accumulated cash balances, effectively creating money.
• Deficit financing is necessary when the government fails to mobilize sufficient resources to fund its plans, leading to a shortfall.

Fiscal Burden and Financial Deficit

• Fiscal burden is calculated as the sum of all taxes and social security contributions received by the government.
• A financial deficit occurs when the government’s spending exceeds a reference amount. It differs from debt, which is the accumulation of yearly deficits.

Financial Deficit

A financial deficit refers to a situation where expenditures exceed revenues or income within a given period, typically within a government, organization, or individual’s finances. It indicates that there is insufficient funding to cover expenses, resulting in a negative balance or shortfall. Financial deficits can occur due to various reasons such as overspending, declining revenues, economic downturns, or unexpected expenses. They often necessitate corrective measures such as cost-cutting, revenue generation, borrowing, or seeking external assistance to restore financial stability.

Budget Deficit

• The budget deficit occurs when a government, company, or individual’s spending exceeds its income over a specific period. It includes:
• Revenue account deficit when government expenses surpass revenue receipts.
• Capital account deficit when capital disbursements exceed capital receipts.

Budget Deficit Formula:

• Budget Deficit=(Total revenue receipts+Total capital receipts)−(Total revenue expenditure+Total capital expenditure)
• Budget Deficit=(Total revenue receipts+Total capital receipts)−(Total revenue expenditure+Total capital expenditure)
• ((Tax revenue+Non-tax revenue)+(Recovery of loans, other receipts+Borrowing and other liabilities))−((Non-plan expenditure on revenue account+Non-plan expenditure on capital account)+(Planning expenditure on revenue account)+(Plan expenditure on capital account))
• ((Tax revenue+Non-tax revenue)+(Recovery of loans, other receipts+Borrowing and other liabilities))−((Non-plan expenditure on revenue account+Non-plan expenditure on capital account)+(Planning expenditure on revenue account)+(Plan expenditure on capital account))

Revenue Deficit Formula:

• Revenue Deficit=Revenue expenditure−Revenue receipts
• Revenue Deficit=Revenue expenditure−Revenue receipts
• Revenue Deficit=(Tax Revenue+Non-tax Revenue)−(Non-plan expenditure on revenue account+Plan expenditure on revenue account)
• Revenue Deficit=(Tax Revenue+Non-tax Revenue)−(Non-plan expenditure on revenue account+Plan expenditure on revenue account)

Explanation:

• Revenue Deficit represents the excess of government’s revenue expenditure over its revenue receipts.
• It includes transactions impacting the current income and expenditure.
• A higher revenue deficit indicates government dissaving and using saved resources, leading to increased borrowing for regular consumption.

Measures to Reduce Revenue Expenditure:

• Rationalization of expenditure through planned cuts.
• Borrowing from the general public, RBI, or international sources.
• Selling government ownership (shares) in public enterprises through disinvestment and selling other assets.

Fiscal Deficit Formula:

• Fiscal Deficit=Revenue receipts+Capital receipts (only recoveries of loans and other receipts)−Total expenditure (Plan and Non-plan)
• Fiscal Deficit=Revenue receipts+Capital receipts (only recoveries of loans and other receipts)−Total expenditure (Plan and Non-plan)

Explanation:

• Fiscal Deficit provides a comprehensive view of the government’s deficit, considering all receipts and expenditures except loans taken.

Types of Fiscal Deficit:

Gross Fiscal Deficit (GFD):

• Gross Fiscal Deficit (GFD)=Total expenditure−(Revenue receipts + Non-debt creating capital receipts)
• Gross Fiscal Deficit (GFD)=Total expenditure−(Revenue receipts + Non-debt creating capital receipts)
• Non-debt creating capital receipts include recovery of loans and proceeds from the sale of Public Sector Units (PSUs).

Net Fiscal Deficit:

• Net Fiscal Deficit=Gross Fiscal Deficit (GFD)−Debt repayment
• Net Fiscal Deficit=Gross Fiscal Deficit (GFD)−Debt repayment

Explanation:

• Net Fiscal Deficit adjusts Gross Fiscal Deficit with net lending by the government.
• These indicators offer a nuanced understanding of the government’s financial situation, factoring in various revenue and expenditure components.

Categorization of Fiscal Deficit

• The equilibrium of the government budget is subject to the influence of both temporary (cyclical) and permanent (structural) factors, signifying that alterations in the fiscal deficit arise from either temporary shifts in output or responses to enduring structural elements.
• Structural Deficit: This emerges when a country undergoes a deficit while its economy is functioning at full employment.
• Cyclical Deficit: This materializes when an economy operates beneath its maximum potential, such as during a recession.
• Details of Structural Deficit A structural deficit endures irrespective of the economy’s performance during recessions and economic upswings. It encompasses three facets:
• Fiscal Burden: This encompasses the total of all taxes and social security contributions received by the government.
• Discretionary Fiscal Policy Action: This involves government interventions to influence the economy through planned alterations in revenue and expenditure.
• Base Year Balances: An analysis of balances from a base year to gain deeper insights into the determinants of the structural deficit.
• Among these factors, the first two are pivotal for comprehending fiscal positions. Sources for meeting the fiscal deficit include internal market borrowings, foreign loans, small saving schemes, special deposits, and provident funds.

Components for Calculating Fiscal Deficit

• The computation of the fiscal deficit relies on two components:
  • Revenue or Income Component: Encompasses revenue from taxes imposed by the center and income from non-tax variables. This includes corporation tax, customs duties, excise duties, Goods and Services Tax (GST), interest receipts, grants, dividends, and receipts from Union Territories.
  • Expenditure or Expense Component: Involves funds designated for various purposes, such as pensions, salaries, asset generation, development, health, and other areas.

Financing of Fiscal Deficit

• Fiscal deficits are funded through diverse channels, including internal borrowings, external sources like the International Monetary Fund (IMF) and other governments, the issuance of new currency, and borrowing funds from the Central Bank against its securities.

Primary Deficit

• The primary deficit gauges the variance between the fiscal deficit of the current year and the interest payment made in the previous fiscal year. It is a crucial indicator for determining the government deficit:
• Reflects the government’s borrowing needs, excluding interest.
• Highlights the amount of government expenses to be covered through borrowing, excluding interest payments.
• While the fiscal deficit encompasses total borrowings, including interest payments, the primary deficit concentrates on borrowings excluding interest payments. The primary deficit is calculated using the formula:

Primary Deficit = Fiscal Deficit−Interest Payments

Primary Deficit=Fiscal Deficit−Interest Payments

where,

Fiscal Deficit=Total Expenditure−Total Income of the Government

Fiscal Deficit=Total Expenditure−Total Income of the Government

Interest payments refer to the outstanding payments from the previous fiscal year.

Types of Primary Deficit

• Primary Deficit (Consumption):Primary Deficit (Consumption)=Revenue Deficit−Interest Payments+Interest Receipts+Profits and Dividends
• Primary Deficit (Consumption)=Revenue Deficit−Interest Payments+Interest Receipts+Profits and Dividends
• Primary Deficit (Investment):Primary Deficit (Investment)=Capital Expenditure−Interest Receipts−Profits and Dividends−Repayment of Loan, Other Receipts
• Primary Deficit (Investment)=Capital Expenditure−Interest Receipts−Profits and Dividends−Repayment of Loan, Other Receipts

Capital Deficit

• It signifies an imbalance in a nation’s Balance of Payments capital account, where payments for purchasing foreign assets exceed payments received for selling domestic assets. 
• In simpler terms, the domestic economy’s investment in foreign assets is less than foreign investment in domestic assets.
• This situation is generally unfavorable for a domestic economy and can be categorized into three parts:
  • Capital Deficit=Capital Receipts−Disbursement on Capital Account
  • Capital Deficit=Capital Receipts−Disbursement on Capital Account

Fiscal Consolidation

• Fiscal consolidation involves various government policies, both at the national and sub-national levels, aimed at reducing debt accumulation and deficits. It can be achieved by increasing revenue and decreasing expenditure.
• The fiscal deficit serves as a crucial indicator of the government’s financial health, representing the amount of government borrowing for a given year. The two major deficits are Revenue 

Deficit and Fiscal Deficit.

• Negative consequences of a budgetary deficit include:
  • Rising interest rates
  • Increased inflation rates
  • Growing burden of interest payments for the government

Fiscal Consolidation Tools

• Government Spending: Government expenditure can impact economic output, categorized as Government Final Consumption Expenditure.
• Government Gross Capital Creation focuses on spending on research and infrastructure for future benefits. Efficient resource utilization is emphasized for fiscal consolidation.
• Transfer Payments: Payments to individuals through social welfare programs, student subsidies, and social security constitute transfer payments.
• Fiscal consolidation involves reducing spending on transfer payments and welfare programs.
• Taxes: Changes in taxes affect consumer income and consumption, leading to changes in real GDP.
• The government can influence economic output by altering taxation, considering revenue maximization.

Kelkar Committee Report on Fiscal Consolidation

• The Vijay Kelkar Committee, tasked with preparing a fiscal consolidation plan, proposed several steps:
• Immediate increase in diesel price by 4 liters, kerosene by 2 liters, and cooking gas by 50 per cylinder.
• Transition from subsidies to a market-based pricing system for diesel, kerosene, and gas by March 2014.
• Implementation of Goods and Service Tax (GST).
• Reduction of excise and Sales Tax rates to 8%.
• Creation of a comprehensive profile of all tax-paying individuals and institutions to decrease tax evasion and fraud.

Fiscal Consolidation and Government Measures

• Achieving rapid, real, and self-sustaining economic growth requires fiscal consolidation, with indicators such as a low inflation rate and a strong balance of payments reflecting economic stability. 
• The government has implemented various measures to achieve fiscal consolidation, focusing on increasing revenue, rationalizing public expenditure, and reducing revenue and fiscal deficits.

Cash Management

• Cash management is not just a form of expenditure management; it is a crucial condition for effective expenditure management. Effective cash management is integral to current expenditure management.
• Monthly or quarterly cash limits are now set based on the actual requirements of all ministries. This practice aims to prevent imbalances between receipts and expenditures, minimizing the risk of excessive spending and resource wastage in the final quarter.

Fiscal Responsibility and Budget Management Act, 2003 (FRBM)

• The FRBM Act, of 2003, was enacted by the Union Government to legislatively control the country’s fiscal situation, addressing previous deterioration. The objectives included bringing fiscal discipline, increasing plan expenditure, ensuring autonomy for the Reserve Bank of India (RBI) in money creation, and funding government consumption expenditure from its own resources.

Amendments to the FRBM Act

• The FRBM Act underwent amendments in 2012, introducing two key concepts to reform the expenditure aspect of fiscal policy:
• Effective Revenue Deficit: Excludes grants for the creation of capital assets from the conventional revenue deficit. This development is crucial as the revenue deficit of the government fully reflects total capital expenditure, making the mandate of eliminating the conventional revenue deficit challenging.
• Medium-Term Expenditure Framework Statement: Sets a three-year rolling target for expenditure indicators, facilitating a fresh assessment for allocating resources to prioritized schemes and phasing out others that have outlived their utility.
• Further Amendments In 2018 and 2020, the FRBM Act was amended to target a fiscal deficit of 3% of GDP in 2020, 2.8% of GDP in 2020-2021, and 2.5% of GDP by 2021.

Main Provisions of FRBM Act

• The key provisions of the FRBM Act include:
• Obligation to reduce fiscal deficit and revenue deficit, with the aim of eliminating the revenue deficit by March 31, 2009, and subsequently creating a revenue surplus.
• Annual targets for reducing fiscal deficit by 0.3% of GDP and revenue deficit by 0.5% of GDP.
• Provision for adjustments through expenditure reduction in case of failure to meet the annual targets.
• Permission for actual deficit increases beyond targets only in cases of national security, natural calamity, or other grounds specified by the Central Government.
• Prohibition on the Central Government from borrowing from the RBI, except for advances to address temporary excesses of cash disbursements over cash receipts.
• Since the fiscal year 2006-07, the issuance of Central Government securities has been a primary concern.
• The associated Act emphasizes the imperative of ensuring increased transparency in fiscal operations.
• Additionally, it mandates the Central Government to present three statements to Parliament: the Medium-term Fiscal Policy Statement, Fiscal Policy Strategy Statement, and the Macro-economic Framework Statement, along with the Annual Financial Statement (Budget).
• Moreover, the Act stipulates a quarterly review of trends in receipts and expenditures concerning the budget, to be presented in both Houses of Parliament. Notably, 26 states have already enacted fiscal responsibility legislations, contributing to the government’s rule-based fiscal reform program.
• Despite the government’s assertion that the Fiscal Responsibility and Budget Management Act (FRBMA) serves as a crucial institutional mechanism for fiscal prudence and macro-economic balance, concerns have been raised regarding potential reductions in welfare expenditure to meet the Act’s mandated targets.

Review Committee Recommendations

• The Review Committee recommends a debt-to-GDP ratio of 60% for the general (combined) government by 2023, with 40% allocated to the Central Government and 20% to the State Governments. 
• According to the Indian Constitution, a State must obtain the Central Government’s consent for raising any loan if it has outstanding liabilities to the latter.

Fiscal Council

• A Fiscal Council, staffed by non-elected professionals, is a publicly funded entity tasked with providing non-partisan oversight of fiscal performance and advising on key aspects of a country’s fiscal policy. Such institutions play a crucial role in ensuring stable and sustainable fiscal policies through objective and scientific analysis.
• The 13th Finance Commission recommended the establishment of a committee, initially appointed by the Ministry of Finance, to eventually evolve into a Fiscal Council.
• This entity would conduct an annual independent review of the government’s compliance with the Fiscal Responsibility and Budget Management Act in its functioning and policies.
• The NK Singh Committee in 2017 and the K Srivastava Committee in 2018 both supported the idea of an independent Fiscal Council. The former suggested that the council advise the government on potential deviations from mandated fiscal rules, while the latter recommended the coordination of fiscal statistics across government levels and an annual assessment of overall public sector borrowing requirements.

Expenditure Reform Commission

• The Ministry of Finance established the Expenditure Reforms Commission (ERC) under the chairmanship of Shri KP Geetha Krishnan on February 28, 2000. The ERC’s objective is to address the challenge of high non-developmental expenditure growth by the government and initiate a systematic downsizing process to reduce the government’s role and administrative structure.
• The ERC submitted ten reports covering 36 Ministries/Departments/Organizations. Among the recommendations, the ERC proposed abolishing approximately 42,000 posts, and 26,581 posts have been abolished.

Expenditure Management Commission:

• Established in 2014 under the Chairmanship of Dr. Vimal Jalan, the Expenditure Management Commission aimed to reduce the fiscal deficit and provide recommendations for effective management.

Key Functions:

• Review major areas of expenditure of the Central Government.
• Evaluate expenditure targets for consumption and assess operational efficiency outlined in the reform plan.
• Review the budget process and FRBM rules, suggesting improvements.
• Consider other relevant matters related to public expenditure management and make recommendations for improvement.

Budget:

• The budget serves as a comprehensive account of the government’s finances, aggregating revenues from all sources and expenses from all activities.
• The Union Budget expresses the Fiscal Policy of the Government, presented annually by the Finance Minister in Parliament. It outlines the Government of India’s revenue and expenditure for one Fiscal Year, running from April 1 to March 31.

Government Budget Components:

• The government budget is divided into two main components:

Capital Budget:

• The capital budget encompasses non-recurring transactions involving capital expenditures and incomes generated from the sale of assets.
• These transactions involve receipts that decrease the government’s assets and increase its financial liabilities.
• Government capital expenditure contributes to the creation of assets and the reduction of liabilities.
• The capital budget provides an account of the government’s liabilities and assets, reflecting changes in total capital.

Revenue Budget:

• The revenue budget is a statement outlining the government’s anticipated revenue receipts and expenditures for a fiscal year.
• This budget focuses on revenue items that are recurring and non-redeemable.
• It encompasses revenue receipts and expenses resulting from these receipts, including both tax and non-tax revenue.
• Examples of items in the revenue budget include salaries of employees, interest payments on past debts, and grants provided to State Governments.

Terms Related to Budget	Description
Revenue Receipts	Revenue receipts do not lead to a claim on the government and are termed non-redeemable. They are divided into tax and non-tax revenues.
Tax Revenues	An important component of revenue receipts, tax revenues include direct taxes (personal income tax, corporation tax) and indirect taxes (excise taxes, customs duties, Goods and Services Tax, etc.).
Non-tax Revenue	Non-tax revenue of the Central Government consists mainly of interest receipts on government loans, dividends and profits on investments, fees, and other receipts for services rendered by the government.
Revenue Expenditure	It includes interest payments, subsidies, wages to government employees, pensions, social services, etc. Expenditure under this category does not lead to the formation of any asset or liability for the government.
Capital Receipts	Receipts of the government that create liability or reduce financial assets. Main items include market borrowing, loans from the Central Bank, and recovery of loans granted by the Central Government.
Capital Expenditure	Expenditures that create some liability or asset for the government, including loans to public enterprises, loans to states, Union Territories, foreign governments, and acquisition of valuables.

Historical Overview:

• The term “budget” originates from the French word “Bougette,” meaning a sack or pouch, first used in France in 1803. Although not explicitly mentioned in the Constitution of India, it is referred to as the Annual Financial Statement under Article 112. This statement includes the revenue budget, capital budget, and budgeted estimates for the upcoming fiscal year.
• Following the British legacy, the Union Budget of India was traditionally presented on the last working day of February. However, during the NDA regime, Finance Minister Yashwant Sinha presented the budget on February 28, 2001, at 11 am. The budget must be passed by the Lok Sabha before taking effect on April 1.
• The first mini-budget, presented by TT Krishnamachari on November 30, 1956, introduced fresh taxation proposals in response to prevailing economic conditions. John Mathai proposed the first budget of the Republic of India in 1950 and advocated for the creation of the Planning Commission.
• Finance Minister Morarji Desai holds the record for presenting the budget the most times (10), followed by P Chidambaram with 9 budgets. CD Deshmukh, the first Indian Governor of RBI, presented the interim budget for 1951-1952.
• Indira Gandhi, as the Prime Minister, became the first woman to hold the position of Finance Minister and present the budget in 1978.
• Plan expenditure was separately presented in the budget for the first time in 1959-1960.
• The 87th Budget (2017-18) of India introduced significant changes, merging the Rail budget into the General Budget. Additionally, budgets for 2017-18 and 2018-19 were presented one month earlier, on February 1, 2017. There is a proposed shift in the financial year from April-March to January-December, with the budget also suggested to be presented in December each year.

Agencies Involved in Indian Budget Preparation

The key agencies involved in the preparation of the Indian budget include:

• Minister of Finance: The Finance Minister, leading the Ministry of Finance of the Government of India, is a senior office in the Union Cabinet. The Finance Minister is responsible for the government’s fiscal policy and plays a crucial role in presenting the annual Union Budget in Parliament. 
• This budget outlines the government’s plans for taxation and spending in the upcoming financial year.
• Comptroller and Auditor General (CAG) of India: The CAG is an authoritative figure responsible for auditing all receipts and expenditures of both the Government of India and the State Governments. This includes audits of bodies and authorities significantly financed by the government.
• Administrative Agencies: These agencies handle administrative affairs to fulfill the financial needs of various government entities.

Stages in Budget Enactment

The budget undergoes the following six stages in Parliament:

• Presentation of the budget on the floor of the House before the Lok Sabha.
• General discussion on the budget.
• Vote of account.
• Scrutiny by departmentally related Standing Committees.
• Voting on demands for grants.
• Passing of the Appropriation Bill (Article 114 of the Constitution of India).

Types of Budgeting

Various types of budgeting are used globally:

• Traditional Budgeting: This type of budget outlines the amount allocated for financial obligations over a set time period, covering expenses like rent, entertainment, or insurance. It helps individuals manage spending according to a predetermined plan.
• Outcome Budgeting: An outcome budget focuses on measuring the development outcomes of government programs. It aims to inform citizens whether allocated funds have translated into tangible results, such as the construction of a primary health center. In India, Outcome Budgeting was introduced by former Finance Minister P Chidambaram in the Budget of 2005-06.

The introduction of Outcome Budgeting aimed to:

• Emphasize that financial allocations may not directly lead to outcomes.
• Improve budget formulation, review, and decision-making at all levels of government management.
• Facilitate better appreciation and review by the legislature.
• Enhancing Performance Effectiveness and Budget Approaches
• The objective is to enhance performance effectiveness, measure progress toward long-term objectives as outlined in the plan, and integrate annual budgets and developmental plans using a common language.

Zero-Based Budgeting (ZBB)

• Zero-Based Budgeting is an approach that requires all expenses to be justified for each new period. It initiates from a zero base, analyzing every function within an organization for its needs and costs.
• Budgets are then constructed based on the upcoming period’s requirements, irrespective of whether the budget is higher or lower than the previous one. ZBB aligns top-level strategic goals with the budgeting process, connecting them to specific functional areas where costs are grouped, measured against previous results, and aligned with current expectations.

Balanced Budgeting

• A balanced budget, especially in the context of government, indicates a scenario where revenues match expenditures, resulting in neither a budget deficit nor a surplus. While it can refer to a budget without a deficit, it might still allow for a surplus.

Gender Budgeting

• Gender budgeting involves the entire budget process—conception, planning, approval, execution, monitoring, analysis, and auditing—in a gender-sensitive manner. It includes examining actual expenditures and revenues, typically of governments, on women and girls in comparison to expenditures on men.

General Types of Budget

• Budget Deficit: When expenditures exceed revenue, indicating financial health issues. Often associated with government spending.
• Single Budget: A unified budget covering all departments and programs. Commonly used in the UK and the USA.
• Polymer Budget: Different budgets for various departments. This system is prevalent in France, Switzerland, Germany, and other countries.
• Item-Based Budget: Department-wise allocation is not done, allowing funds to be used in any category with prior permission.
• Supplementary Budget: Prepared for emergencies like natural calamities or revenue decreases.
• Interim Budget: Created for special situations such as elections, wars, or natural calamities. Valid for only six months, specifying expenditures without specifying revenues for any financial year.

Types of Funds in Budget

• Consolidated Fund of India: The most critical government account, including revenues received and expenses made, excluding exceptional items.
• The Consolidated Fund of India, established under Article 266 (1) of the Constitution of India, encompasses all revenues received by the government. This includes direct and indirect taxes, borrowed money, and receipts from loans given by the government. All government expenditures, excluding exceptional items covered by the Contingency Fund or the Public Account, are sourced from this fund. Notably, any withdrawal from this fund requires parliamentary approval.

Public Account of India

• The Public Account of India, created under Article 266 (2) of the Constitution, manages transactions where the government serves as a banker. 
• Examples include provident funds and small savings. These funds do not belong to the government and must be repaid to their rightful owners. Due to the nature of the fund, expenditures from it do not necessitate parliamentary approval.

Contingency Fund of India

• Established as an imprest account to address urgent or unforeseen government expenditures, the Contingency Fund was constituted under Article 267 of the Constitution. The President has control over this fund, and any expenditure from it requires subsequent parliamentary approval. The withdrawn amount is returned to the fund from the Consolidated Fund.

Vision 2030 in the Union Budget of India 2019

• In the Union Budget of India 2019, the Finance Minister outlined Vision 2030. India aims to become a trillion-dollar economy by 2025 and aspires to reach a US$10 trillion economy by 2030.

Dimensions of Vision 2030:

• Infrastructure: Creation of physical and social infrastructure for a trillion-dollar economy, focusing on providing ease of living.
• Digital India: Led by youths with numerous start-ups and millions of jobs.
• Pollution-Free India: Emphasis on electric vehicles and renewables.
• Rural Industrialization: Using modern technologies to generate massive employment.
• Clean Rivers: Ensuring safe drinking water for all Indians and efficient water use in irrigation through micro-irrigation techniques.
• Coastline Development: Scaling up Sagarmala for development using India’s coastline and ocean waters.
• Space Programme: Gaganyaan making India the launch pad for satellites worldwide.
• Food Self-Sufficiency: Achieving self-sufficiency in food production using organic methods.
• Health and Wellness: Aiming for a healthy India by 2030 with a distress-free healthcare and wellness system, with a focus on Ayushman Bharat and women’s participation.
• Governance Transformation: Transforming India into a Minimum Government Maximum Governance Nation with elected government employees.

Prelims Facts 

• Long-term fiscal policy was announced by which Finance Minister of India? – VP Singh [UP RO/ARO (Pre) 2014
• Who introduced fiscal policy as a tool to rectify the Great Depression of 1929 to 1930? – Professor Keynes (UKPSC (Pre) 2012
• In the Union Budget, the sum of budgetary deficit and net increase in internal and external borrowings are known as – Fiscal deficit [IAS (Pre) 1994, JPSC (Pre) 2021)
• Which is the controlling authority of government expenditure? – The Ministry of Finance [BPSC (Pre) 2015] 
• A redistribution of income in a country can be best brought about through – Progressive taxation combined with progressive expenditure [IAS (Pre) 1996]
• Along with the budget, the Finance Minister also places other documents before the Parliament which include The Macro Economic Framework Statement. The aforesaid document is presented because this is mandated by -Provisions of the Fiscal Responsibility and Budget Management Act, 2003 [IAS (Pre) 2020]
• Budget is a document of- Receipts and Expenditures (UPPSC (Pre) 2015]
• The revenue estimates of the budget in India are prepared by – The Ministry of Finance [JPSC (Pre) 2013]
• The Indian Parliament exercises control on the audit of the budget through its – Public Accounts Committee [JPSC (Pre) 2015]
• Which country was first adopted zero-based budgeting? – USA [UPPSC (Mains) 2017]
• The concept of performance budget has been borrowed from – USA [UPPSC (Pre) 2010]
• Economic Survey of India is related to – Finance Ministry [CGPSC (Pre) 2018, 2019]
• Which department is responsible for the preparation and presentation of Union Budget to the Parliament? – Department of Economic Affairs [IAS (Pre) 2010]
• When was gender budgeting initiated in India?  – Union Budget, 2005-2006 [LAS (Pre) 2010]
• ‘Jal Jeevan Mission’ scheme was declared in the Union Budget of which financial year? -2019 to 2020 [UPPSC (Pre) 2022]
• Which forms the largest share of deficit in Government of India Budget?- Fiscal deficit [UPPSC (Main) 2004, MPPSC (Pre) 2006]
• The Finance Ministry (Government of India) has introduced the concept of ‘Outcome Budget’ from 2005. Under this, the monitoring of the outcomes will be the responsibility of – Finance Ministry [UPPSC (Mains) 2009]
• Which is the largest sector under non-plan expenditure of the Central Government?  – Interest payment [CGPSC (Pre) 2018]
• Vote on account is meant for – Appropriating funds pending passing of budget [BPSC (Pre) 2016] 
• A large part of the fiscal deficit in Union Government budget is filled by – Domestic borrowings [UPPSC (Mains) 2005]
• Effective revenue deficit was introduced in the Union Budget of – 2010 to 2011 [BPSC (Pre) 2015] 
• If interest payments are subtracted from gross fiscal deficit, the remainder will be – Gross primary deficit [UPPSC (Mains) 2004, 2008]
• In which year, Fiscal Responsibility and Budget Management Act was enacted in India? – 2003 [UPPSC (Mains) 2008]
• Adhoc Treasury bill system of meeting budget deficit in India was abolished on  – 31st March, 1997 [BPSC (Pre) 2015]
• Treasury bills are sold in India by  – Reserve Bank of India [UPPSC (Mains) 2009]
• In which budget, the Railway Budget was merged with the Union Budget in India? – Budget 2017 to 2018 [RAS/RTS (Pre) 2021, BPSC (Pre) 2022]

UPSC NCERT Practice Questions

1. Which statement is true for Finance Sector (Fiscal Management) in the Union Budget-2023? UPPSC (Pre) 2023

(a) Fiscal Deficit of 3.5% of GSDP allowed for states.

(b) Budget estimates 2023-24 for total expenditure is 55 lakh crore. 

(c) Fiscal Deficit 2025-26, the target is to be below 5.5%.

(d) Twenty years interest free loans to states.

2. In India, which one among the following formulates the fiscal policy? UPPSC (Mains) 2012, CGPSC (Pre) 2014

(a) Planning Commission

(b) Finance Commission

(c) Ministry of Finance

(d) Reserve Bank of India

3. With reference to the schemewise allocation in the 2023-24 Union Budget, which of the following statement(s) is/are correct? UPPSC (Pre) 2023

1. Compared to the previous year, highest percentage of decline has been recorded in the allocation for MGNREGA.

2. Compared to the previous year, highest percentage of growth has been recorded in the allocation for Jal Jeevan Mission.

Select the correct answer by using the codes given below.

(a) Both 1 and 2

(b) Only 1

(c) Only 2

(d) Neither 1 nor 2

4. Which among the following is not an example of fiscal policy? UPPSC (Pre) 2014

(a) Taxation

(b) Public expenditure

(c) Interest rate

(d) Public debt

5. The controlling authority of government expenditure is BPSC (Pre) 2015

(a) the Reserve Bank of India

(c) the Ministry of Finance

(b) the Planning Commission

(d) the Finance Commission

6. The revenue estimates of the budget in India are prepared by

(a) the Central Board of Direct Taxes

(b) the Cabinet Secretariat

(c) the Respective Commissions

(d) the Ministry of Finance

7. Fiscal deficit in the Union Budget means 

(a) difference between current expenditure and current revenue.

(b) net increase in Union Government’s borrow from the Reserve Bank of India.

(c) the sum of budgetary deficit and net increase internal and external borrowing.

(d) the sum of monetised deficit and budgetary defies. 

8. The Indian Parliament exercises control on the audit of the budget through its IPSC (pre 2015

(a) Estimates Committee

(b) Public Accounts Committee

(c) Privileges Committee

(d) Audit Review Committee

9. Consider the following actions of government. IAS (Pre)  2010

1. Reducing tax rates

2. Increasing government expenditure 

3. Abolition of gratuity

In the context of economic slowdown, which of the above functions can be considered as part of ‘fiscal stimulus package?

Codes 

(a) 1 and 2

(b) Only 2

(c) 1 and 3 

(d) 1, 2 and 

10. Which one of the following forms the largest share of deficit in the Government of India Budget?

(a) Primary deficit

(c) Revenue deficit

(b) Fiscal deficit

(d) Budgetary deficit

11. Which one of the following is not included in the revenue account of the Union Budget? RAS/RTS (Pre) 2018

(a) Interest receipts

(b) Tax receipts

(c) Profits and dividends of government department and public undertakings

(d) Small savings

12. There has been a persistent deficit budget after year. Which of the following actions can be taken by the government to reduce the deficit?

1. Reducing revenue expenditure

2. Introducing new welfare schemeshageb

3. Rationalising subsidies

4. Expanding industries

Select the correct answer by using the codes given below

(a) 1 and 3

(b) Only 1

(c) 2 and 3 

(d) All of the above

Know Right Answer 

1. (a) 

2. (a)

3. (b)

4. (c) 

5. (c)

6. (d)

7. (c)

8. (b)

9. (a)

10. (b)

11. (d)

12. (a)

Frequently Asked Questions (FAQs)

Q1: What is the significance of public finance in the Indian economy?

A1: Public finance plays a crucial role in the Indian economy as it involves the management of government revenue, expenditures, and debt. It ensures the allocation of resources for public goods and services, such as infrastructure, education, healthcare, and defense. Public finance also influences economic stability and growth by implementing fiscal policies that regulate aggregate demand, control inflation, and promote equitable distribution of income.

Q2: How does the Union Budget impact the Indian economy?

A2: The Union Budget is a comprehensive financial plan presented by the government, outlining its revenue and expenditure for the fiscal year. It has a significant impact on the Indian economy as it influences key economic variables such as taxes, government spending, and fiscal deficits. The budgetary policies can stimulate or restrain economic activity, promote social welfare, and address specific challenges. Citizens, businesses, and investors closely monitor the budget for insights into government priorities and economic prospects.

Q3: What role does fiscal policy play in India’s economic management?

A3: Fiscal policy, a component of public finance, is a crucial tool for economic management in India. It involves the use of government spending and taxation to achieve macroeconomic objectives like economic growth, employment generation, and price stability. The government can use expansionary fiscal policies, such as increased spending or tax cuts, to stimulate economic activity during downturns. Conversely, contractionary fiscal policies, involving reduced spending or increased taxes, help control inflation and prevent overheating of the economy. The effectiveness of fiscal policy depends on its alignment with the prevailing economic conditions.

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