Union Budget: India's Economic Compass

Navigating Receipts, Expenditures, and Fiscal Policy for a Prosperous Future.

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Introduction to the Union Budget

The Union Budget is the annual financial statement of the estimated receipts and expenditures of the Government of India for a particular financial year (1st April to 31st March). It is a crucial instrument of fiscal policy, reflecting the government's priorities, economic outlook, and resource allocation strategy.

The budget plays a pivotal role in macroeconomic management, influencing growth, inflation, employment, and income distribution. It is not merely an accounting exercise but a powerful tool for achieving socio-economic objectives.

(Source: NCERT Class 12 Macroeconomics, Chapter 5: Government Budget and the Economy; IGNOU EPA-01/MPA-011 Public Finance)

Constitutional Mandate

Article 112 of the Indian Constitution mandates the President to cause to be laid before both Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year, referred to as the ‘Annual Financial Statement’.

Important Note: The term ‘Budget’ itself is not mentioned in the Constitution.

(Source: M. Laxmikanth, Indian Polity)

Railway Budget Merger

The Railway Budget was separated from the General Budget in 1924 on the recommendations of the Acworth Committee. However, it was merged with the Union Budget from the Budget 2017-18.

(Source: PIB)

Budgetary Details

The Budget must distinguish expenditure on revenue account from other expenditure (i.e., capital account). It also contains estimates of revenue and capital receipts, ways and means to raise revenue, estimates of expenditure, details of actuals of closing financial year, reasons for deficit/surplus, and economic/financial policy of the coming year.

(Source: Ministry of Finance, Budget Manual)

Components of the Union Budget

The budget is broadly divided into two main accounts: Revenue Account and Capital Account. Understanding these is fundamental to grasping government finance.

A. Revenue Account

This account deals with receipts and expenditures that do not affect the government's assets or liabilities status. They are generally regular and recurring in nature.

Revenue Receipts

These are receipts that neither create any liability nor cause any reduction in the assets of the government.

  • Tax Revenue:
    • Direct Taxes: Levied on income/profits. Burden cannot be shifted. (e.g., Income Tax, Corporate Tax, STT)
    • Indirect Taxes: Levied on goods/services. Burden can be shifted. (e.g., GST, Customs Duty, Excise Duty)
  • Non-Tax Revenue:
    • Interest Receipts: On loans given.
    • Dividends & Profits: From PSUs, RBI.
    • External Grants: From foreign govts./orgs. (not returned).
    • Other: Fees, fines, penalties, escheats.

Revenue Expenditure

Expenditure incurred for purposes other than the creation of physical or financial assets.

  • Consumption expenditure: Administration, defence, salaries, pensions.
  • Subsidies: Food, fertilizers, petroleum, etc.
  • Interest Payments: On domestic and external loans. (Single largest component)
  • Grants to states & UTs: (even if some for asset creation).

(Source: NCERT Class 12 Macroeconomics, Chapter 5; Ramesh Singh, Indian Economy)

B. Capital Account

This account deals with receipts and expenditures that alter the government's assets or liabilities. They are generally non-recurring in nature.

Capital Receipts

These are receipts that either create a liability (e.g., borrowings) or reduce financial assets (e.g., disinvestment).

  • Recovery of Loans: From states, UTs, PSUs.
  • Disinvestment Receipts: Sale of government equity in PSUs.
  • Borrowings & Other Liabilities:
    • Market Loans: From public (G-Secs, Treasury Bills).
    • External Loans: From foreign govts./IFIs.
    • Small savings, provident funds, etc.

Capital Expenditure

Expenditure incurred for creating physical or financial assets or for reducing financial liabilities.

  • Creation of Assets: Roads, buildings, infrastructure, machinery.
  • Loans to States/UTs/PSUs: Advanced by Central Govt.
  • Repayment of loans: (reduces liability).

(Source: NCERT Class 12 Macroeconomics, Chapter 5; Ramesh Singh, Indian Economy)

Understanding Budgetary Deficits

Deficits indicate the gap between government receipts and expenditures, offering crucial insights into fiscal health.

Revenue Deficit (RD)

Formula: Revenue Expenditure – Revenue Receipts

Significance: Govt.'s current revenue is insufficient for day-to-day operational expenses. Implies dissaving.

  • Leads to borrowing for consumption.
  • Increased debt & interest payments.
  • Potential inflationary pressures.

Effective Revenue Deficit (ERD)

Formula: Revenue Deficit – Grants for Capital Assets

Significance: Introduced in 2011-12 to segregate revenue expenditure contributing to asset creation at state/local level.

  • More accurate consumption picture.
  • N.K. Singh Committee recommended discontinuing it.

Fiscal Deficit (FD)

Formula: Total Exp. – Total Rec. (excluding borrowings)

Significance: Most comprehensive measure; total borrowing requirements from all sources.

  • Risk of debt trap, inflation, crowding out.
  • Can boost growth if used for capital formation.

Primary Deficit (PD)

Formula: Fiscal Deficit – Interest Payments

Significance: Borrowing requirement excluding past debt interest. Shows current fiscal operations' impact.

  • Zero PD means borrowing only for existing interest.
  • Declining PD shows fiscal consolidation progress.

(Source: NCERT Class 12 Macroeconomics, Chapter 5; Economic Survey, various years)

Diverse Approaches to Budgeting

Beyond the standard financial statement, various types of budgets exist, each with a unique focus on transparency, efficiency, or specific socio-economic goals.

Outcome Budget

Concept: Links financial outlays to measurable physical outputs and qualitative outcomes. Focuses on what's achieved.

Implementation: Introduced in India in 2005. Integrated with main budget. Monitors through Output-Outcome Monitoring Framework (OOMF) aligned with SDGs.

(Source: Budget Documents, PIB)

Gender Budget

Concept: An analysis of the budget from a gender perspective, ensuring equitable resource allocation for women and girls. Not a separate budget.

Components: Part A (100% allocation for women), Part B (≥30% allocation for women). Introduced in India in 2005-06.

(Source: Budget Documents, PIB)

Zero-based Budgeting (ZBB)

Concept: Every expenditure item must be justified for each new budget period from a "zero base", re-evaluating all activities annually.

Objective: Promote efficiency and optimal resource allocation. Attempted in India in late 1980s but not widely adopted.

Performance Budgeting

Concept: Focuses on government functions/programs, establishing a relationship between inputs (finance) and outputs (services/results).

Implementation: Recommended by ARC. A precursor to Outcome Budgeting, focusing more on outputs than outcomes.

Long-term Fiscal Projections

Concept: Forecasting government revenues, expenditures, and fiscal balances over a multi-year horizon (e.g., 3-5 years).

Purpose: Assesses long-term sustainability, aids future resource planning. Mandated by FRBM Act (Medium Term Fiscal Policy Statement).

(Source: FRBM Act, 2003 and amendments)

(Source: Ministry of Finance, IGNOU material on Public Administration)

Fiscal Consolidation & FRBM Act

Fiscal consolidation refers to policies undertaken by governments to reduce their deficits and debt accumulation, crucial for long-term macroeconomic stability.

FRBM Act, 2003

Enacted to ensure inter-generational equity in fiscal management and long-term macroeconomic stability by achieving sufficient revenue surplus and removing fiscal impediments.

Objectives:

  • Reduce fiscal deficit and revenue deficit.
  • Achieve long-term macroeconomic stability.
  • Ensure fiscal prudence and sound financial management.
  • Enhance transparency in fiscal operations.
Escape Clauses

The FRBM Act allows for deviations from fiscal targets under specific circumstances:

  • National security, act of war.
  • National calamity.
  • Collapse of agriculture severely affecting farm output/incomes.
  • Structural reforms with unanticipated fiscal implications.
  • Sharp decline in real output growth (at least 3% below average of prev. 4 quarters).
  • Example: Finance Minister invoked escape clause due to COVID-19 pandemic (Budget 2021-22).

(Source: FRBM Act amendments, Budget Speeches)

Key Review Committees

Vijay Kelkar Committee (2012):

  • Suggested a fiscal consolidation roadmap.

N.K. Singh Committee (FRBM Review Committee, 2016):

  • Debt as primary target: Debt-to-GDP ratio of 60% for general government by 2022-23 (40% Centre, 20% States).
  • Fiscal Deficit: Target 2.5% of GDP by 2022-23.
  • Revenue Deficit: Target 0.8% of GDP by 2022-23.
  • Formation of a Fiscal Council.
  • Redefined escape clauses.
  • Recommended discontinuing ERD.

(Source: Report of the FRBM Review Committee, 2017)

Current Fiscal Consolidation Path:

The government aims to reach a fiscal deficit level below 4.5% of GDP by 2025-26. (Source: Budget Speech 2021-22, reiterated)

  • Interim Budget 2024-25 RE (2023-24): 5.8% of GDP
  • Interim Budget 2024-25 BE (2024-25): 5.1% of GDP (Target)
  • Revenue Deficit target for 2024-25 (BE): 2.0% of GDP.

(Source: Interim Budget 2024-25 documents, PIB)

Challenges in Achieving FRBM Targets:

  • Economic shocks (e.g., GFC, COVID-19, geopolitical conflicts).
  • Pressure for social sector spending and subsidies.
  • Tax revenue buoyancy issues (though GST has improved this).
  • Difficulty in controlling populist expenditure.
  • Balancing fiscal consolidation with public investment needs.

(Source: Economic Survey, RBI Reports)

Trends in the Union Budget

Analyzing historical and recent budget trends provides insights into the evolving fiscal landscape and policy shifts.

Composition of Revenue and Expenditure

Revenue Receipts:

  • Increasing share of direct taxes, indicating progressive tax system.
  • GST: Single largest indirect tax, showing buoyancy.
  • Non-tax revenue: Volatile, dependent on RBI surplus, disinvestment.

Expenditure:

  • Revenue Expenditure still dominates (interest payments, subsidies, defence).
  • Push for rationalization of subsidies (DBT).
  • Capital Expenditure: Significant push in recent years to boost infrastructure and long-term growth.
  • Interim Budget 2024-25: Capex outlay increased by 11.1% to ₹11,11,111 crore (3.4% of GDP).

(Source: Economic Survey, Union Budget documents)

Debt-to-GDP Ratio & Deficit Trends

Fiscal Deficit:

  • Spiked to 9.2% of GDP in 2020-21 (COVID-19).
  • Declining trend:
    • 2021-22 (Actual): 6.7%
    • 2022-23 (Actual): 6.4%
    • 2023-24 (RE): 5.8%
    • 2024-25 (BE): 5.1% (Target)

Revenue Deficit:

  • Also spiked during COVID-19. Target to reduce progressively.
    • 2023-24 (RE): 2.8%
    • 2024-25 (BE): 2.0% (Target)

Debt-to-GDP Ratio:

  • General government debt rose sharply post-pandemic.
  • Central government debt was 57.1% of GDP at end-March 2023.
  • N.K. Singh Committee target: 40% for Central Govt.
  • India's debt profile stable (high domestic, fixed-interest borrowings).

(Source: Interim Budget 2024-25, Economic Survey)

Interim Budget 2024-25: Key Highlights

  • Fiscal Discipline: FD target 5.1% (BE), RE 5.8%. Continued glide path to <4.5% by FY26.
  • Capex Boost: ₹11.11 lakh crore (3.4% of GDP).
  • 'Amrit Stambhs': Focus on Garib, Mahilayen, Yuva, Annadata.
  • Housing: 2 Cr more houses under PM Awas Yojana (Grameen); Middle Class Housing scheme.
  • Solarization: 1 Cr households to get up to 300 units free electricity via rooftop solar.
  • Health: Cervical cancer vaccination drive (9-14 girls); Ayushman Bharat to ASHA/Anganwadi workers.
  • Agriculture: Nano DAP expansion, Atmanirbhar Oil Seeds Abhiyan.
  • R&D Corpus: ₹1 lakh crore (50-year interest-free loan) for R&I in sunrise domains.
  • Taxation: No changes to rates. Withdrawal of old direct tax demands (₹25k till FY10, ₹10k FY11-15).
  • Expenditure BE 2024-25: Total: ₹47.66 lakh crore; Revenue: ₹36.54 lakh crore; Capital: ₹11.11 lakh crore.
  • Market Borrowings: Gross ₹14.13 lakh crore; Net ₹11.75 lakh crore.

(Source: Interim Budget 2024-25 Speech and Documents, PIB)

Economic Survey's Take on Fiscal Health (2022-23)

  • Highlighted commitment to fiscal prudence despite pandemic spending.
  • Emphasized improved quality of expenditure (higher capex).
  • Noted buoyancy in tax revenues (direct & GST).
  • Stressed continued fiscal consolidation for debt management.
  • Acknowledged medium-term fiscal path for FD below 4.5% by FY26.
  • Positive: India’s public debt profile stable (low foreign currency, fixed-interest borrowings).

(Source: Economic Survey 2022-23)

Analytical Insights: Mains-ready Notes

Major Debates/Discussions

Fiscal Consolidation vs. Growth

  • Pro-Consolidation: Macroeconomic stability, investor confidence, sustainable debt.
  • Pro-Stimulus: Counter-cyclical policy to boost demand, especially via capex.
  • Recent Example: Post-COVID, India opted for gradual consolidation, prioritizing capex-led growth.

Quality of Expenditure

  • Focus on increasing capital expenditure (asset-creating) over revenue expenditure (consumption-oriented).
  • High revenue deficit means borrowings for consumption, unsustainable.
  • Recent trend of increasing capex is a positive sign.

FRBM Targets & Flexibility

  • Debate between strict adherence vs. need for flexibility during crises.
  • "Escape clause" mechanism addresses this, but its invocation and glide path are debated.
  • N.K. Singh Committee recommended a more flexible framework with Fiscal Council.

Crowding Out vs. Crowding In

  • Crowding Out: High govt. borrowing raises interest rates, costs private sector.
  • Crowding In: Govt. infra spending improves logistics, creates demand, stimulates private investment.
  • Economic Survey 2022-23 argued government capex is "crowding in" private investment.

Historical & Long-term Trends

Post-1991

Shift from Physical Controls to Fiscal Instruments

Post-1991 reforms made fiscal policy a more prominent macroeconomic management tool.

Ongoing

Tax Reforms

Journey from complex, high-rate tax structures to simpler, broader-based systems (e.g., GST in 2017). Focus on compliance, tech use.

Recent Years

Expenditure Patterns

Conscious push towards higher capital expenditure and rationalization of subsidies (e.g., DBT), while social sector spending remains a priority.

2003 Onwards

Deficit Management (FRBM Act)

FRBM Act marked structural shift to rule-based fiscal policy, though adherence has been challenging due to shocks. Targets revised, N.K. Singh committee proposed debt as primary anchor.

Contemporary Relevance/Significance

Macroeconomic Stability

Sound fiscal policy crucial for controlling inflation, maintaining exchange rate stability, and sustainable debt.

Inclusive Growth

Budgetary allocations for social sectors, welfare schemes (PM Garib Kalyan Anna Yojana, Jal Jeevan Mission) are vital.

(Interim Budget 2024-25 emphasizes 'Sabka Saath, Sabka Vikas' and focus on poor, women, youth, farmers.)

Investment Climate

Fiscal stability and predictable policies attract domestic and foreign investment. High deficits can deter investment.

Climate Change & Green Transition

Budgets increasingly incorporate allocations for climate action, renewable energy, green initiatives.

(Interim Budget 2024-25 mentions offshore wind, rooftop solarization.)

Federal Fiscal Relations

Union budget impacts states through tax devolution, grants-in-aid, and centrally sponsored schemes. Finance Commission's recommendations are key.

Practice Zone: UPSC Questions

Prelims MCQs:

Q. (UPSC Prelims 2018) Consider the following statements:

  1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
  2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
  3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the statements given above is/are correct?

  • (a) 1 only
  • (b) 2 and 3 only
  • (c) 1 and 3 only
  • (d) 1, 2 and 3
Show Answer

Answer: (c)

Hint/Explanation: Statement 1 is correct (N.K. Singh Committee recommendation). Statement 2 is incorrect; Central government liabilities are much higher than states'. Statement 3 is correct as per Article 293(3) of the Constitution.

Q. (UPSC Prelims 2017) What is the difference between “Vote-on-Account” and “Interim Budget”?

  1. The provision of a “Vote-on-Account” is used by a regular Government, while an “Interim Budget” is a provision used by a caretaker Government.
  2. A “Vote-on-Account” only deals with the expenditure in Government’s budget, while an “Interim Budget” includes both expenditure and receipts.

Which of the statements given above is/are correct?

  • (a) 1 only
  • (b) 2 only
  • (c) Both 1 and 2
  • (d) Neither 1 nor 2
Show Answer

Answer: (b)

Hint/Explanation: Statement 1 is incorrect; both can be used in different contexts, but Interim Budget is more comprehensive and typically presented by any government in an election year or when there isn't enough time for a full budget discussion. Vote-on-Account is specifically for getting funds for a part of the year. Statement 2 is correct; Vote-on-Account is purely an advance grant for expenditure, whereas an Interim Budget is a complete set of accounts, including receipts and expenditures, akin to a full budget but for a shorter duration or as a provisional arrangement.

Q. Which of the following correctly describes 'Primary Deficit'?

  • (a) The excess of total expenditure over total receipts excluding borrowings.
  • (b) The excess of revenue expenditure over revenue receipts.
  • (c) The fiscal deficit minus grants for creation of capital assets.
  • (d) The fiscal deficit minus interest payments on previous borrowings.
Show Answer

Answer: (d)

Explanation: Primary Deficit is calculated as Fiscal Deficit less interest payments. It indicates the borrowing requirements of the government to meet expenditures other than interest payments on past debt.

Mains Questions:

Q. "While the recent Union Budgets have rightly emphasized augmenting capital expenditure, the persistence of a high revenue deficit poses significant challenges to sustainable fiscal health." Critically analyze this statement in the context of India's current fiscal situation and the FRBM framework. (15 marks, 250 words)

Show Direction/Value Points

Key Points/Structure for Answering:

  • Introduction: Briefly explain the importance of capex and the concern of RD.
  • Arguments for Capex Push: Multiplier effect, job creation, improved infrastructure, crowding-in private investment. Cite recent budget trends (Interim Budget 2024-25 capex at 3.4% of GDP).
  • Challenges Posed by High Revenue Deficit: Implies borrowing for consumption (dissaving), increases debt burden & future interest payments, reduces fiscal space, can be inflationary. Cite recent RD data (e.g., 2.0% target for FY25).
  • Interplay with FRBM Framework: FRBM aims to eliminate RD (or keep it very low) and control FD. Mention N.K. Singh Committee, current fiscal consolidation glide path.
  • Critical Analysis: Is capex push sustainable with high RD? Need for revenue augmentation (tax buoyancy, non-tax revenue) and revenue expenditure rationalization (subsidies, administrative costs). Balancing growth with fiscal prudence.
  • Conclusion: Suggest a balanced approach focusing on improving expenditure quality, enhancing revenue sources, and adhering to a credible fiscal roadmap.

Q. The Union Budget is not merely an accounting statement but a significant tool for achieving socio-economic objectives and signaling the government's policy direction. Illustrate with examples from recent Union Budgets, including the Interim Budget 2024-25. (10 marks, 150 words)

Show Direction/Value Points

Key Points/Structure for Answering:

  • Introduction: State that budget is more than just numbers; it reflects policy intent.
  • Socio-Economic Objectives:
    • Poverty Alleviation & Welfare: PM Garib Kalyan Anna Yojana, MGNREGA, Interim Budget focus on 'Garib'.
    • Gender Equality: Gender budgeting, women empowerment schemes (Nari Shakti focus, cervical cancer vaccine push).
    • Youth Empowerment & Skilling: Education, skill development, ₹1 lakh crore innovation fund.
    • Agricultural Development: PM-KISAN, Atmanirbhar Oil Seeds Abhiyan, Interim Budget focus on 'Annadata'.
    • Infrastructure Development: Capex for roads, railways (PM GatiShakti, 3 railway corridors).
  • Signaling Policy Direction:
    • Fiscal Consolidation: Setting deficit targets (FD 5.1% in Interim Budget 2024-25).
    • 'Make in India'/Atmanirbhar Bharat: PLI schemes, customs duty adjustments.
    • Green Economy: Allocations for renewable energy, climate action (rooftop solarization).
  • Conclusion: Reiterate how budgetary measures translate abstract policy goals into concrete actions and resource commitments.