Fiscal Policy, Budget, Taxation and Public Debt

Budget basics

• Article 112 calls it the Annual Financial Statement. The Budget is presented on 1 February (since 2017), and the Railway Budget was merged into it in 2017.
• Funds:
  • the Consolidated Fund of India (Article 266(1)): all receipts and expenditure;
  • the Contingency Fund (Article 267): at the President's disposal;
  • the Public Account (Article 266(2)): money held in trust, such as provident funds.

Receipts and expenditure

	Revenue	Capital
Receipts	Tax (income tax, corporate tax, GST, customs) and non-tax (dividends, interest, fees)	Borrowings, recovery of loans, disinvestment
Expenditure	Salaries, interest, subsidies, pensions, grants (does not create assets)	Roads, railways, defence equipment, loans given (creates assets)

Deficits

• Revenue deficit = revenue expenditure − revenue receipts.
• Effective revenue deficit = revenue deficit − grants given for creating capital assets.
• Fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts). This equals the government's borrowing.
• Primary deficit = fiscal deficit − interest payments. It shows current fiscal behaviour.
• Monetised deficit = RBI lending to the government. It was ended by agreement in 1997.

Fiscal path:

• The fiscal deficit was 9.2% of GDP in 2020–21, during COVID.
• It came down to about 4.8% (2024–25) and 4.4% (2025–26 budget estimate).
• From 2026–27 the target is a debt-to-GDP anchor, about 50% ± 1 by 2031.

FRBM Act 2003:

• It set targets: fiscal deficit at 3% of GDP and revenue deficit eliminated.
• The N. K. Singh committee (2017) recommended debt anchors of 60% of GDP overall: 40% Centre and 20% states.

Types of budget:

• outcome budget and gender budget (from 2005–06);
• zero-based budgeting;
• green budget.

Taxation

• Direct taxes: income tax and corporate tax.
  • Since 2019, companies can opt for 22% (15% for new manufacturing units).
  • The new income-tax regime is the default; under it, income up to ₹12 lakh pays no tax in effect (Budget 2025–26).
  • The Income-tax Act, 2025 replaces the 1961 Act from 1 April 2026.
• Indirect taxes: GST, customs duty, and excise on petroleum and liquor.
• Progressive vs regressive: direct taxes with slabs are progressive; indirect taxes are usually regressive.
• Tax-to-GDP ratio: about 18% for the Centre and states combined, which is low compared with advanced economies.
• Cess and surcharge: not shared with the states, so the states object to them.

Goods and Services Tax

• Brought in by the 101st Amendment (2016). Launched on 1 July 2017.
• Destination-based tax, with CGST + SGST on sales inside a state and IGST on sales between states.
• It subsumed: central excise, service tax, VAT, entry tax, octroi and others.
• Outside GST: petroleum products (for now) and alcohol for human consumption.
• GST Council (Article 279A):
  • chaired by the Union Finance Minister;
  • the Centre has one-third of the vote and the states two-thirds;
  • decisions need three-fourths of the weighted vote.
• Compensation cess: states were compensated for revenue loss for 5 years (to June 2022). The cess was extended to repay COVID loans.
• "GST 2.0" (September 2025): most items moved to 5% or 18%, with a 40% rate on a few sin and luxury goods, from 22 September 2025.
• GSTN is the IT backbone; e-invoicing and e-way bills are part of it.

Centre–state fiscal relations

• Finance Commission (Article 280):
  • Vertical devolution: the states' share of the divisible pool.
  • Horizontal devolution: how the states' share is split between states.
  • The 15th FC (N. K. Singh) set the share at 41% for 2021–26.
  • Its horizontal criteria: income distance (45%), population 2011 (15%), area (15%), forest and ecology (10%), demographic performance (12.5%) and tax effort (2.5%).
  • The 16th FC (Arvind Panagariya) covers 2026–31.
• Bihar and Jharkhand:
  • Bihar gets the largest share after UP because of its low per capita income and large population: about 10% of the states' pool.
  • Jharkhand depends heavily on mining royalties and central transfers.
  • In 2024 the Supreme Court held (Mineral Area Development Authority) that states can tax mineral rights. This matters greatly to Jharkhand.

Public debt

• Central government debt is about 56–57% of GDP (2024–25). General government debt is about 80–82%.
• Most of it is internal, rupee-denominated and long-term, so the risk is lower.
• Interest payments take about a quarter of the Centre's revenue receipts, which leaves less room for other spending.
• Disinvestment and asset monetisation (the National Monetisation Pipeline, 2021) are used to raise non-debt resources.

Exam tip: Learn the deficit formulas until you can write them without thinking. Every year someone asks "which deficit shows the government's borrowing" (fiscal) or "which excludes interest" (primary).