Government Budgeting (India) — UPSC Economics Smart-Prep
GS III • Prelims • Indian Economy (Public Finance)
1. What is Government Budgeting?
A Government Budget is a detailed statement of the government’s estimated receipts and expenditures for the upcoming financial year. It reflects the government’s priorities, ideology, social commitments, and economic strategy.
The Union Budget is presented under Article 112 of the Constitution. It contains:
- Revenue Budget (Revenue Receipts + Revenue Expenditure)
- Capital Budget (Capital Receipts + Capital Expenditure)
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2. Structure of the Union Budget
The Union Budget has two main components: Receipts and Expenditure. These break down into Revenue vs Capital categories.
graph TD W[IASNOVA.COM]:::wm A[Union Budget]:::root --> B[Receipts]:::node A --> C[Expenditure]:::node B --> B1[Revenue Receipts]:::node2 B --> B2[Capital Receipts]:::node2 C --> C1[Revenue Expenditure]:::note C --> C2[Capital Expenditure]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef node2 fill:#FDEDEC,stroke:#B03A2E,color:#7B241C; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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3. Revenue Budget – Receipts & Expenditure
Revenue Budget includes the government’s current, recurring financial operations. No assets are created; no liabilities are reduced.
A. Revenue Receipts
- Tax Revenue – Direct taxes, Indirect taxes, GST share
- Non-tax Revenue – Dividends, interest, fees, fines
B. Revenue Expenditure
- Subsidies (food, fertilizer, LPG)
- Pensions, salaries
- Grants to states/UTs
- Interest payments
| Category | Examples | Effect on Assets |
|---|---|---|
| Revenue Receipts | Taxes, dividends | No change |
| Revenue Expenditure | Pensions, subsidies | No asset creation |
graph TB W[IASNOVA.COM]:::wm A[Revenue Budget]:::root --> B[Revenue Receipts]:::node A --> C[Revenue Expenditure]:::node B --> B1[Tax Income]:::node2 B --> B2[Non-Tax Income]:::node2 C --> C1[Salaries, subsidies, pensions]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef node2 fill:#FDEDEC,stroke:#B03A2E,color:#7B241C; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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4. Capital Budget – Receipts & Expenditure
Capital Budget involves changes in assets and liabilities of the government. Capital transactions either create assets or reduce liabilities.
A. Capital Receipts
- Market borrowings
- Loans from foreign governments
- Disinvestment proceeds
- Recovery of loans
B. Capital Expenditure
- Infrastructure creation
- Defence capital outlay
- Loans to states & CPSUs
- Repayment of borrowings
| Category | Examples | Effect |
|---|---|---|
| Capital Receipts | Borrowings, disinvestment | Increase liabilities or reduce assets |
| Capital Expenditure | Infrastructure, defence | Asset creation |
graph TD W[IASNOVA.COM]:::wm A[Capital Budget]:::root --> B[Capital Receipts]:::node A --> C[Capital Expenditure]:::node B --> B1[Borrowings, disinvestment]:::node2 C --> C1[Infrastructure, assets]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef node2 fill:#FDEDEC,stroke:#B03A2E,color:#7B241C; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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Government Budgeting (India) — Block 2
GS III • Public Finance • UPSC Smart-Prep
5. Deficits in Government Budgeting
Budget deficits explain the financial health of the government and are frequently asked in UPSC Prelims and Mains. The 3 major ones are: Fiscal Deficit, Revenue Deficit, and Primary Deficit.
Fiscal Deficit = Total Expenditure – Total Receipts (excluding borrowings)
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Primary Deficit = Fiscal Deficit – Interest Payments
graph TD W[IASNOVA.COM]:::wm A[Budget Deficits]:::root --> B[Fiscal Deficit]:::node A --> C[Revenue Deficit]:::node A --> D[Primary Deficit]:::node B --> B1[Borrowing needs of govt]:::note C --> C1[Revenue imbalance]:::note D --> D1[FD minus interest payments]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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6. Fiscal Deficit – Meaning, Causes & Implications
A. What is Fiscal Deficit?
It shows how much the government needs to borrow to meet its expenditure. A high fiscal deficit indicates expansionary fiscal policy but can also raise inflation and debt burden.
B. Causes of Fiscal Deficit
- High subsidies (food, fertilizer, fuel)
- Low tax revenue / tax evasion
- High interest payments
- Economic slowdown → low revenue generation
- Welfare schemes and social sector spending
C. Consequences
- Raises public debt
- “Crowding out” of private investment
- Inflationary pressure (if financed by RBI)
- Weakens fiscal stability
graph TB W[IASNOVA.COM]:::wm A[Fiscal Deficit]:::root --> B[Causes]:::node A --> C[Effects]:::node B --> B1[High subsidies, low taxes]:::note B --> B2[High interest payments]:::note C --> C1[Higher borrowings]:::note C --> C2[Inflation / crowding out]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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7. Revenue Deficit – Nature & Implications
Revenue deficit means the government’s current income is not enough to meet its current expenses. This is considered a structural weakness of the fiscal system.
Why is it harmful?
- No money left for capital formation
- Promotes borrowing for consumption
- Weakens fiscal discipline
graph TD W[IASNOVA.COM]:::wm A[Revenue Deficit]:::root --> B[Revenue Expenditure > Revenue Receipts]:::node A --> C[Consequences]:::node C --> C1[Borrowing for consumption]:::note C --> C2[Lower capital creation]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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8. Primary Deficit – Indicator of Fiscal Health
Primary Deficit measures how much of the fiscal deficit is due to past interest liabilities.
If primary deficit is small or zero, it means the current year’s fiscal stress is largely due to interest burden on past loans.
graph TB W[IASNOVA.COM]:::wm A[Primary Deficit]:::root --> B[FD – Interest]:::node A --> C[Shows current year's fiscal discipline]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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9. FRBM Act – Fiscal Responsibility & Budget Management
The FRBM Act, 2003 aims to institutionalise fiscal discipline, reduce deficits, and improve macroeconomic stability.
Key Targets (original)
- Reduce Fiscal Deficit to 3% of GDP
- Eliminate Revenue Deficit
Major Amendments
- FRBM Review Committee (N.K. Singh Committee)
- Shift to “Debt-to-GDP” framework
- Fiscal Council recommendation
graph TD W[IASNOVA.COM]:::wm A[FRBM Act, 2003]:::root --> B[Targets]:::node A --> C[Amendments]:::node B --> B1[FD = 3%]:::note B --> B2[Remove Revenue Deficit]:::note C --> C1[NK Singh Committee]:::note C --> C2[Debt Framework]:::note classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32; classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72; classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949; classDef wm fill:#FFFFFF,stroke:#FFFFFF,color:#FF0000,font-size:9px;
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10. Capital vs Revenue – UPSC Summary Table
| Category | Receipts | Expenditure |
|---|---|---|
| Revenue | Taxes, dividends | Salaries, pensions, subsidies |
| Capital | Borrowings, disinvestment | Assets, infrastructure, loans |
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