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QUICK REVISION MODULE

(UPSC PRELIMS 2021) ECONOMICS QRM
UNION BUDGET IN INDIA
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CONSTITUTIONAL BACKGROUND
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• The constitution of India does not mention the term

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‘budget’.
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• Article 112 provides for the Annual Financial Statement

(AFS) (commonly known as Budget).

• It shows the estimated receipts and expenditure of the

Government of India.

• The Budget division of the Department of Economic Affairs is

the nodal agency responsible for preparing the Budget.

www.visionias.in Vision IAS 1

 BUDGET DOCUMENTS

Alongwith the AFS, following documents are presented by the Finance Minister
during the Budget session:
• Annual Financial Statement.
• Demand for Grants.
• Finance Bill.
• Statements Under FRBM Act:
» Macro - Economic Framework Statement.
» Medium - Term Fiscal Policy cum Fiscal
Policy Strategy Statement.
• Receipt Budget.
• Expenditure Budget.
• Expenditure Profile.
• Budgets at a Glance.
• Memorandum Explaining the Provisions in
the Finance Bill.
• Output Outcome Monitoring Framework.
• Key Features of Budget.

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• Implementation of Budget Announcements.

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BUDGET PROCESS
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House adjourns for a

General Discussion few weeks. Standing
on Union Budget in Committees scrutinise
Union Budget is both Lok Sabha and individual ministries'
presented. Rajya Sabha. Demand for Grants.

Demand for Grants of Detailed discussion

remaining ministries and voting on certain
Appropriation and are voted upon ministries' Demand for
Finance Bills passed. together. Grants in Lok Sabha.

www.visionias.in Vision IAS 2

 ANNUAL FINANCIAL STATEMENT

• Article 112 (central government) and Article 202 (state government) of the
constitution requires the annual financial statement to be laid before the
respective legislatures.

• It contains three types of information:

Actual figures of receipts Budget and revised Budget estimate of

and expenditure of the figure for the current the upcoming year
previous year(2019-20) year(2020-21) (2021-22)

• The receipts and disbursements are shown under three parts in which Government
Accounts are kept viz,
» The Consolidated Fund of India (Art. 266).
» The Contingency Fund of India (Art. 267).
» The Public Account of India (Art. 266).

GOVERNMENT ACCOUNTS

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CONTINGENCY FUND
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PUBLIC ACCOUNT
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• Small Savings, Provident Fund, Reserve Funds, Deposits and Advances,

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Suspense, Remittances and Cash Balance.

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CONSOLIDATED FUND

• Revenue

» Receipts

Tax, Non Tax and Grants-in-Aid.

» Expenditure

General Services, Social Services, Economic Services and

Grants-in-Aid.

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 • Capital

» Receipts

Public Debt, Loans.

» Expenditure/Payments.

General Services, Social Services, Economic Services, Public Debt,

Loans and Advances, Inter-State Settlement and Transfer to
Contingency Fund.

Funds of GOI Consolidated Public Accounts Contingency

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Fund Fund

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Constitutional Article 266 Article 266 (2) Article 267 (1)
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Status
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Income/Credit • All revenues received • Public Money Other • Fixed Corpus of Rs.
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by Govt. of India. than those under 500 Crore.

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Consolidated Fund.
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• All loans raised by • Under Contingency

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GOI through issue of • Such as Provident Fund of India Act in

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treasury bills, loans or Funds, Small 1950.

ways and means of
advances.
• All money received
through repayment of
loan.
Savings collections,
funds set aside for
specific expenditure
like road develop-
ment, primary
education.

Expenditure • All the legally • Developmental • Unforeseen

authorized payments works like Expenditure.
such as repayment of infrastructure,
debt, giving loans to healthcare and
the state education.
governments.

Parliamentary • Prior to Expenditure. • No prior approval • Approval after the

Authorization needed. Expenditure.

www.visionias.in Vision IAS 4

 COMPONENTS OF THE BUDGET

• Constitution – Budget shall distinguish expenditure on revenue account from

other expenditure.

• Therefore, Budget comprises of – Revenue Account and Capital Account:

Revenue Budget Capital Budget

• Receipts of Government (tax • Loans raised by Government

Revenue Receipts
revenues and other reve-
nues) and the expenditure
met from these revenues.
• Tax revenues comprise
proceeds of taxes and other
duties levied by the Union.
from public, called market
loans, borrowings by
Government from RBI and
other parties through sale of
Treasury Bills, loans received
from foreign Governments
and bodies, and recoveries
of loans from State and UTs.

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• Various taxation proposals

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made in the Finance Bill.

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• Other receipts mainly con-
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sist of interest and dividend

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on investments made by
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Government, fees, and

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other receipts for services

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rendered by Government.
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on debt, subsidies, etc.

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• Expenditure on the normal • Expenditure on acquisition

Expenditure running of Government
departments and various
services, interest payments
on debt and subsidies.
• Expenditure which does not
result in creation of assets
for GOI istreated as revenue
expenditure.
• All grants given to State/UTs
are also treated as revenue
expenditure even though
some of the grants may be
used for creation of assets.
of assets like land, buildings,
machinery, equipment.
• Also investments in
haresetc., &loans and
advances granted by Central
Government to State and
Union Territory Govern-
ments, Government compa-
nies, Corporations and other
parties.
• Capital Budget also
incorporates transactions in
the Public Account.

www.visionias.in Vision IAS 5

 DEMANDS FOR GRANTS

• Article 113 » estimates of expenditure from the CFI in the

Budget and required to be voted by the Lok Sabha are
submitted in the form of Demands for Grants.

• Generally, one Demand for Grant is presented in respect of

each Ministry or Department.

• However, in respect of large Ministries or Departments

more than one Demand is presented.

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APPROPRIATION BILL gm
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• After the demands for grants are voted by the Lok

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Sabha, Parliament's approval to the withdrawal from

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the consolidated fund of the amounts so voted and the

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amount to meet the expenditure charged on the

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consolidated fund, is sought through the

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Appropriation Bill.

FINANCE BILL

• Under Article 110 (1)(a) of the Constitution, detailing

the imposition, abolition, remission, alteration or
regulation of taxes proposed in the Budget.

• A Finance Bill is a Money Bill as defined in Article 110

of the Constitution.

www.visionias.in Vision IAS 6

 TYPES OF BUDGETING

BALANCED BUDGET

• An ideal situation » When the estimated government

expenditure is equal to its estimated revenue in a
financial year.

• It is not viable for developing nations as it restricts the Revenue Spending

scope of government spending on public welfare

schemes.

SURPLUS BUDGET

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• Here the expected revenue surpasses the estimated

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expenditure in a financial year.(revenue more

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REVENUE
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• Such budget can be considered during inflation

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to reduce aggregate demand. EXPENDITURE

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• However, it is not appropriate in cases of

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deflation, economic slowdown and recession.

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DEFICIT BUDGET

• When the estimated expenditure exceeds the

estimated revenue of a government in a financial year.

• This budget is helpful in times of economic recession BUDG

ET

and also in boosting employment rate. EXPEN

SES

• Disadvantage » can lead to excessive expenditures by

the government or debt accumulation.

www.visionias.in Vision IAS 7

 TYPES OF DEFICITS
Type of Deficit Revenue Deficit
Definition • The difference
between total
revenue expenditure
to the total revenue
receipts.
Meaning • It indicates that the
government lacks
sufficient revenue for
the normal
functioning of the
government
departments.
• Happens when the
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government starts
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spending more than it
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earns.
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• It forces the govern-
ment to disinvest or
cover the shortage by
borrowing.
Remedial • Curtail government’s
Measures expenses.
• Increase tax and
non-tax receiptsby
introducing new
taxes.
• Increase the tax on
people in
higer-earning slabs.
www.visionias.in Vision IAS
Fiscal Deficit Primary Deficit
• Excess of total • Fiscal Deficit of the
expenditure over current year minus
total receipts interest payments
excluding on previous
borrowings. borrowings.
• It is a measure of • It shows the
how much the amount of govern-
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government needs ment borrowings
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to borrow from the specifically to meet
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market to meet its the expenses by
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expenditure when removing the
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its resources are interest payments.
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inadequate.
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• A zero Primary
Deficit means the
need for borrowing
to meet interest
payments.
• Reducing public • Similar measures as
expenditure like mentioned in the
subsidies, bonus, fiscal Deficit.
LTC, Leaves
encashment etc.
• Broaden tax base
and sale of shares
in public sector
units.
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 THE FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT
ACT (FRBM ACT), 2003

OBJECTIVES

Financial discipline to reduce Transparency in India's fiscal

fiscal deficit. management systems.

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Achieve fiscal stability and allow More equitable distribution of

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RBI to target inflation. India's debt over the years.

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KEY FEATURES OF ACT

• Mandatory for the government to place the following along with the Union
Budget documents in Parliament annually:
- Medium Term Fiscal Policy Statement.
- Macroeconomic Framework Statement.
- Fiscal Policy Strategy Statement.

• Proposed that Revenue deficit, Fiscal deficit, Tax revenue and the Total
Outstanding liabilities be projected as a percentage of GDP.

EXEMPTIONS

• On grounds of National Security, Calamity etc.

www.visionias.in Vision IAS 9

 N K SINGH COMMITTEE'S RECOMMENDATIONS

PROPOSAL
• Proposed to replace the FRBM Act, 2003 with a Debt Management
and Fiscal Responsibility Bill, 2017.

TARGETS

• Use debt as the primary target for fiscal policy.

• Debt to GDP ratio should be 38.7% for the central and 20% for the
state governments by the FY 2022-23.

• By FY 2022 - 23, the fiscal deficit should be 2.5% of GDP.

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FISCAL COUNCIL

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• Create an autonomous Fiscal Council with a chairperson and two
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members appointed by the Centre to:

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- Prepare multi-year fiscal forecasts.

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- Improve fiscal data quality.

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- Suggest changes to the fiscal strategy.

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- Advise the government on fiscal matters.

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DEVIATION

• Grounds for the government to deviate from the FRBM Act targets
should be clearly specified.

BORROWINGS

• The government must not borrow from the RBI, except when:
- The Centre has to meet a temporary shortfall in receipts.
- RBI subscribes to government securities to finance any
deviations.
- RBI purchases government securities from the secondary
market.

www.visionias.in Vision IAS 10

 FISCAL POLICY
DEFINITION

• According to IMF (International Monetroy Fund), Fiscal Policy is the use of

government spending and taxation to influence the economy.

OBJECTIVES IN INDIAN CONTEXT:

Economic Growth: Fiscal policy maintains the economy’s

growth rate so that economic goals are achieved.

Price stability: Controls the price level of the country so that

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• when the inflation is too high, prices can be regulated.

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Full employment: It aims to achieve full employment/near full

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employment, as a tool to recover from low economic activity.

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SIGNIFICANCE OF FISCAL POLICY IN INDIA

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• Plays a key role in elevating the rate of capital formation

both in the public and private sectors.

• Taxationhelps tomobilize resources for financing its social

and physical infrastructure
developmental projects.

• Provides providing stimulus to increase the savings rate.

• Gives adequate incentives to the private sector to expand its

activities.

• Aims to minimize the imbalance in the dispersal of income

and wealth.

www.visionias.in Vision IAS 11

 REVENUE

SOURCE OF REVENUE

• Taxation remains the major source of government’s revenue.

• There is a clear demarcation of the taxation powers of the Union and the states
in the Seventh Schedule of Constitution under Article 246.

• Article 292 empowers the GOI to borrow (internally or externally) upon the
security of the consolidated fund of India.

• The Finance Commission recommends allocation of central taxes to the states.

DEFICIT FINANCING

MEANING

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• Method of generating funds to finance the deficit which results from excess of
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expenditure over revenue.
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• It is by borrowing from the public by the sale of bonds or by printing new money.
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NEED
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• For developing countries, higher economic growth is indispensable.

• Growth requires expenditure. But often both the tax and non-tax revenues fail to
mobilize enough resources just through taxes.

IMPACT

• Raises aggregate expenditure » increases aggregate demand while supply

remains constant » inflation » rise of prices of goods and services.

• Inflation » Higher wage demand » Increase in cost of production » Lowers profits »

discourages investments.

FOR DETAILED ENQUIRY, PLEASE CALL:

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Vision IAS
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