60-second revision
- Article 112: Annual Financial Statement (Budget). Article 110: Money Bill. Article 265: no tax without authority of law.
- Fiscal deficit = total expenditure - (revenue receipts + non-debt capital receipts) = government's borrowing need.
- Primary deficit = fiscal deficit - interest payments. Revenue deficit = revenue expenditure - revenue receipts.
- FRBM Act, 2003; N. K. Singh review committee (2017) proposed debt as the main fiscal anchor.
- GST began on 1 July 2017 (101st Amendment Act, 2016). GST Council: Article 279A, chaired by the Union Finance Minister.
- In the GST Council the Centre has 1/3 of the vote weight and states 2/3; decisions need 3/4 of weighted votes.
- Since 22 September 2025 GST has two main slabs, 5% and 18%, plus a 40% rate for luxury and sin goods.
- The 16th Finance Commission (chair Arvind Panagariya) kept states' share of the divisible pool at 41% for 2026-31.
Fiscal policy and the Budget
Fiscal policy is the government's use of taxation, spending and borrowing to influence the economy. Expansionary policy (tax cuts, more spending) boosts demand in a slowdown; contractionary policy cools an overheated economy. The Union Budget is the annual statement of this policy. Since 2017 it is presented on 1 February so that money is available from 1 April, and the separate Railway Budget was merged into it the same year.
| Article | Provision |
|---|---|
| 112 | Annual Financial Statement laid before Parliament |
| 110 | Definition of Money Bills (Lok Sabha has the final say) |
| 265 | No tax shall be levied or collected except by authority of law |
| 266 | Consolidated Fund of India and Public Account of India |
| 267 | Contingency Fund of India (at the disposal of the President) |
| 270 | Distribution of central taxes with states (cesses and surcharges excluded) |
| 279A | GST Council |
| 280 | Finance Commission, constituted every five years |
Receipts and expenditure
| Category | Revenue side | Capital side |
|---|---|---|
| Receipts | Tax revenue (income tax, corporation tax, GST, customs) and non-tax revenue (interest, dividends, fees) | Borrowings, recovery of loans, disinvestment proceeds |
| Expenditure | Salaries, interest, subsidies, pensions, grants to states | Building assets (roads, railways, defence capital) and loans given |
The four deficits
| Deficit | Formula | What it tells you |
|---|---|---|
| Revenue deficit | Revenue expenditure - revenue receipts | Borrowing to meet day-to-day expenses |
| Effective revenue deficit | Revenue deficit - grants for creation of capital assets | Revenue gap net of grants that build assets (for example, for state roads) |
| Fiscal deficit | Total expenditure - (revenue receipts + non-debt capital receipts) | Total borrowing requirement |
| Primary deficit | Fiscal deficit - interest payments | Borrowing caused by current policy, excluding the burden of past debt |
FRBM and fiscal discipline
The Fiscal Responsibility and Budget Management Act, 2003 set legal targets to reduce deficits and requires the government to place medium-term fiscal policy statements before Parliament. The FRBM Review Committee chaired by N. K. Singh (report 2017) recommended public debt as the primary anchor, with general government debt of 60% of GDP (40% Centre, 20% states) and the fiscal deficit as the operational target. An escape clause allows deviation during events like war, national calamity or a sharp fall in growth.
Taxes: kinds and ideas
- Direct taxes are paid by the person on whom they are levied (income tax, corporation tax). Indirect taxes can be shifted to someone else (GST, customs).
- Progressive tax: the rate rises with income (income tax slabs). Regressive tax: takes a larger share of poorer people's income (many indirect taxes). Proportional: same rate for all.
- Laffer curve: beyond a point, higher tax rates can reduce total revenue by discouraging work or encouraging evasion.
- Crowding out: heavy government borrowing can push up interest rates and squeeze private investment.
GST basics
GST is a destination-based tax on the supply of goods and services, rolled out on 1 July 2017 under the 101st Constitutional Amendment Act, 2016. It subsumed central excise (largely), service tax, state VAT, entry tax, luxury tax and many cesses. Article 246A gives the Centre and states simultaneous power to levy it.
| Component | Where it applies | Collected by |
|---|---|---|
| CGST | Intra-state supply | Centre |
| SGST / UTGST | Intra-state supply | State / Union Territory |
| IGST | Inter-state supply and imports (Article 269A) | Centre, then apportioned to the destination state |
- Outside GST by the Constitution: alcoholic liquor for human consumption.
- Within GST's scope but not yet taxed under it until the Council recommends a date: petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel.
- GST Council: Union Finance Minister (chair), Union MoS Finance and state finance ministers. The Centre's vote counts for one-third, states together two-thirds; a decision needs three-fourths of weighted votes; quorum is half the members.
- Rates: from 22 September 2025 the 12% and 28% slabs were largely folded into two main slabs of 5% and 18%, with a 40% rate for luxury and sin goods.
Finance Commission and budgeting firsts
The Finance Commission (Article 280) recommends how central taxes are shared between the Centre and states (vertical devolution) and among states (horizontal devolution). The 15th Commission (N. K. Singh) set states' share at 41%; the 16th (Arvind Panagariya), covering 2026-31, retained 41%.
- First Budget of independent India: R. K. Shanmukham Chetty, 26 November 1947.
- Gender budgeting introduced in the Union Budget in 2005-06; Outcome Budget from 2005.
- Zero-based budgeting: every item must be justified afresh each year, not carried forward from the last budget.
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