Last reviewed 30 Sept 2026 · Facts as of 30 Sept 2026 · 12 min read
A note on figures. Tax rates, slabs, deficit targets and budget totals change with every Union Budget. The concepts and the constitutional provisions below are stable; use the latest Union Budget documents for numbers.
Public finance
Public finance deals with the income and expenditure of the government and their effects on the economy. Musgrave described three functions of the government's fiscal role: allocation (providing public goods), distribution (reducing inequality) and stabilisation (controlling inflation and unemployment).
- Fiscal policy = the government's use of taxation, spending and borrowing to influence the economy. Expansionary fiscal policy (raise spending, cut taxes) in a slowdown; contractionary to control inflation. Counter-cyclical policy. Keynes advocated government spending to raise demand.
- Public goods (defence, roads, street lights — non-rival and non-excludable), merit goods (education, health), private goods.
The Union Budget
- Article 112: the Annual Financial Statement (AFS) — the "Budget" is not mentioned by that word in the Constitution — is a statement of the estimated receipts and expenditure of the Government for a financial year (1 April to 31 March).
- Presented by the Union Finance Minister in the Lok Sabha; since 2017 on 1 February (earlier the last working day of February); the Railway Budget was merged with the General Budget in 2017 (the tradition of a separate Railway Budget, in existence since 1924, ended). The first Budget of independent India (1947) was presented by R. K. Shanmukham Chetty; Morarji Desai presented the most budgets (10), including on his birthday; Nirmala Sitharaman (the first full-time woman Finance Minister since 2019) presented the first paperless budget (2021) and has presented several consecutive budgets; Indira Gandhi presented the budget for 1970–71 as PM.
- Parts: Revenue Budget (revenue receipts and revenue expenditure) and Capital Budget (capital receipts and capital expenditure). The Budget documents also include the Finance Bill, Appropriation Bill, Demands for Grants, the Expenditure Budget, the Receipts Budget, the Medium Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, the Macro-economic Framework Statement, Outcome Budget, and the Gender and Child Budget statements. The Economic Survey (by the Chief Economic Adviser in the Department of Economic Affairs; a day before the Budget; first published in 1950–51) is not a part of the Budget.
The three funds
| Fund | Provision | Notes |
|---|---|---|
| Consolidated Fund of India | Article 266(1) | all revenues received, loans raised and repayments; expenditure from it needs Parliament's approval (an appropriation); the charged expenditure (salaries of the President, judges, CAG, the Speaker, the UPSC chairman, debt charges) is not voted but can be discussed |
| Public Account of India | Article 266(2) | funds held by the Government as a banker (provident funds, small savings, deposits); no parliamentary approval for expenditure |
| Contingency Fund of India | Article 267 | an advance fund of ₹500 crore (later raised to ₹30,000 crore) at the President's disposal for unforeseen expenditure; later approved by Parliament; the Finance Secretary holds it on behalf of the President |
Receipts
| Type | Components |
|---|---|
| Revenue receipts | tax revenue (direct and indirect taxes) + non-tax revenue (interest receipts, dividends and profits from PSUs, fees, grants, the RBI's surplus transfers) |
| Capital receipts | borrowings and other liabilities (market borrowing, external loans), recovery of loans, disinvestment proceeds (sale of PSU shares) |
Expenditure
| Type | Components |
|---|---|
| Revenue expenditure | day-to-day costs — salaries, interest payments, subsidies, pensions, defence (revenue), grants to states (which create no asset) |
| Capital expenditure | creating assets — roads, railways, defence equipment, loans to states |
| Plan vs non-plan | this classification ended in 2017; now revenue and capital expenditure |
Major items of expenditure: interest payments, states' share of taxes (devolution), defence, subsidies (food, fertiliser, petroleum), central schemes, pensions.
Deficits
| Term | Formula | Meaning |
|---|---|---|
| Revenue deficit | revenue expenditure − revenue receipts | the government is not even meeting its day-to-day expenses from revenues |
| Fiscal deficit | total expenditure − (revenue receipts + non-debt capital receipts) = borrowings | the total borrowing requirement — the key measure |
| Primary deficit | fiscal deficit − interest payments | the borrowing for current needs (excluding past debts' interest) |
| Effective revenue deficit | revenue deficit − grants for capital assets | |
| Budget deficit | (discontinued after 1997) | |
| Current account deficit (CAD) | imports − exports (goods, services, transfers) | part of the Balance of Payments, not the budget |
- Deficit financing: through borrowing (market borrowings, treasury bills) or printing money (the RBI's monetisation — stopped in 1997 with the ad hoc treasury bills abolished; the FRBM Act bars the RBI from subscribing to primary issues, except in special circumstances).
- Fiscal deficit as a percentage of GDP is the standard indicator; the Union Government has been reducing it after the COVID-19 spike (over 9 % in 2020–21) — the Government targets below 4.5 % of GDP by 2025–26, and now a debt-to-GDP anchor (check the current targets).
FRBM Act, 2003
The Fiscal Responsibility and Budget Management Act (2003; in force 2004) aims at fiscal discipline: the revenue deficit to be eliminated and the fiscal deficit limited to 3 % of GDP (the target was repeatedly deferred; the N. K. Singh Committee (2016) recommended a debt-to-GDP ratio as the anchor — 60 % for the general government, 40 % for the Centre and 20 % for states — and a Fiscal Council). The escape clause was used for the pandemic (2020–21). States have their own FRBM Acts.