The Union Budget, Fiscal Policy and the FRBM Framework

The budget in the Constitution

The Constitution does not use the word "budget". Article 112 requires the President to cause an Annual Financial Statement to be laid before both Houses of Parliament every financial year (1 April to 31 March). The budget is a statement of estimated receipts and expenditure. Related provisions:

• Article 113: demands for grants are voted by the Lok Sabha. Expenditure charged on the Consolidated Fund (such as the salaries of the President, judges and the CAG, and interest on debt) is not voted on.
• Article 114: the Appropriation Bill authorises withdrawals from the Consolidated Fund.
• Article 110: the Finance Bill, which contains tax proposals, is a Money Bill.
• Article 265: no tax can be levied except by authority of law.
• Article 266: the Consolidated Fund of India and the Public Account.
• Article 267: the Contingency Fund of India, held by the President for unforeseen expenses.

Reforms in budgeting:

• Since 2017, the budget has been presented on 1 February (earlier it was the last working day of February), so that it can be passed before the financial year begins.
• The Railway Budget was merged with the General Budget in 2017, ending a practice dating from 1924 (Acworth Committee).
• The plan/non-plan classification was replaced by revenue/capital classification.
• The budget is now paperless (since 2021).
• Outcome budgets are integrated into the Output–Outcome Monitoring Framework.

Structure of the budget

Revenue account

• Revenue receipts do not create liabilities or reduce assets. They comprise tax revenue (direct and indirect, net of the states' share) and non-tax revenue (dividends from the RBI and PSUs, interest receipts, fees, spectrum charges).
• Revenue expenditure does not create assets: interest payments (the largest single item), subsidies, salaries, pensions, defence revenue spending, and grants to states, including grants for creating capital assets.

Capital account

• Capital receipts create liabilities or reduce assets: market borrowings, small savings (National Small Savings Fund), recovery of loans, and disinvestment proceeds.
• Capital expenditure creates assets or reduces liabilities: infrastructure, machinery, loans to states and PSUs, and repayment of debt. The government has raised effective capital expenditure sharply since 2020–21, including through 50-year interest-free loans to states for capital spending.

Deficit concepts

Recent fiscal deficit path (Union government, % of GDP):

• 9.2% in 2020–21 (pandemic)
• 6.7% in 2021–22
• 6.4% in 2022–23
• 5.6% in 2023–24
• 4.8% in 2024–25 (revised estimate)
• 4.4% target in 2025–26 (budget estimate)

From 2026–27, the government has shifted the main fiscal anchor to the debt-to-GDP ratio, aiming for central government debt of about 50% (±1%) of GDP by 31 March 2031. Treat later-year figures as estimates subject to revision.

Fiscal policy: objectives and tools

Fiscal policy is the use of government spending and taxation to influence the economy. Its objectives are stabilisation (smoothing the business cycle), allocation (providing public goods), distribution (reducing inequality) and growth.

• Expansionary policy: higher spending or lower taxes during a slowdown. Keynesian economics recommends it when demand is weak.
• Contractionary policy: during overheating or high inflation.
• Multiplier: capital expenditure has a higher multiplier than revenue expenditure. RBI and NIPFP studies estimate capex multipliers above 2 over time, compared with below 1 for transfers. This is the case for capex-led recovery.
• Crowding out: large government borrowing can raise interest rates and reduce private investment.
• Automatic stabilisers: progressive taxes and unemployment benefits adjust automatically. They are weak in India because of informality.
• Counter-cyclical vs pro-cyclical: Indian fiscal policy has often been pro-cyclical at the state level because of fiscal rules.

FRBM Act 2003

The Fiscal Responsibility and Budget Management Act (2003, rules notified 2004) aimed to institutionalise fiscal discipline. Original targets were a fiscal deficit of 3% of GDP and elimination of the revenue deficit by 2008–09. These were suspended during the 2008–09 crisis (stimulus). The targets were revised repeatedly.

Documents required with the budget:

• the Medium-Term Fiscal Policy Statement;
• the Fiscal Policy Strategy Statement;
• the Macroeconomic Framework Statement;
• the Medium-Term Expenditure Framework Statement (presented separately).

The N.K. Singh Committee (2017) reviewed FRBM. It recommended:

• a debt-to-GDP anchor: 60% general government (40% Centre, 20% states) by 2023;
• a fiscal deficit of 3% by 2020;
• an independent Fiscal Council;
• an "escape clause" of 0.5% of GDP for national security, calamities or structural reforms.

The 2018 amendment adopted the debt anchor and the escape clause, but did not set up a Fiscal Council. The escape clause was invoked in 2020–21.

States: all states have their own Fiscal Responsibility Acts, with a fiscal deficit limit of about 3% of GSDP, plus additional borrowing allowed for power sector reforms. Article 293 requires states with outstanding debt to the Centre to obtain consent to borrow.

Analysis: quality of fiscal consolidation

Consolidation can come from higher revenue, lower wasteful spending, or capital expenditure cuts. The last is the easiest but most harmful. India's post-COVID consolidation has been praised for protecting capex while reducing the deficit, helped by buoyant tax revenues and large RBI dividends. Concerns remain:

• High interest burden: interest payments absorb about two-fifths of the Centre's revenue receipts.
• General government debt (Centre plus states) is above 80% of GDP.
• Off-budget borrowings: these were brought on-budget from 2020–21, for example the FCI's NSSF loans.
• States' fiscal stress: freebies, old pension scheme reversion in some states, and power distribution losses.

Common prelims traps

• Disinvestment receipts are non-debt capital receipts.
• Grants to states are revenue expenditure even when used for capital assets, hence the effective revenue deficit.
• The Contingency Fund is operated by the Finance Secretary on behalf of the President.
• Vote on account allows spending for part of the year before the full budget is passed, typically in election years. An interim budget is presented by an outgoing government.
• Gender budgeting and green budgeting are separate statements, not legal requirements of FRBM.

Practice: Mains question

*"Capital expenditure-led fiscal policy has supported growth after the pandemic, but fiscal space remains limited." Discuss with reference to the FRBM framework. (250 words)*

Quick self-test

1. *If revenue receipts are ₹30 lakh crore, non-debt capital receipts ₹0.8 lakh crore and total expenditure ₹50 lakh crore, what is the fiscal deficit?* 50 − 30.8 = ₹19.2 lakh crore.
2. *Why is the primary deficit a useful indicator?* It shows whether the current government is adding to debt beyond the cost of past borrowing.
3. *Which Article makes the Finance Bill a Money Bill?* Article 110.