Union Budget — Structure and Key Concepts
What is the Union Budget?
Union Budget (Annual Financial Statement — Article 112): Statement of estimated receipts and expenditure of Government of India for the upcoming financial year.
India's financial year: April 1 to March 31 Budget presentation: February 1 (changed from last day of February in 2017 by Arun Jaitley) Budget Day was previously presented at 5 PM — changed to 11 AM in 1999 by Yashwant Sinha.
Budget Structure
Revenue Budget:
| Component | Description |
|---|---|
| Revenue Receipts | Tax revenue + Non-tax revenue (recurring, no liability) |
| Revenue Expenditure | Salaries, pensions, subsidies, interest payments — no asset creation |
Capital Budget:
| Component | Description |
|---|---|
| Capital Receipts | Borrowings (loans from public, RBI, external), disinvestment, recovery of loans |
| Capital Expenditure | Infrastructure, defence capital, loans to states — creates assets or reduces liabilities |
Deficit Concepts
Revenue Deficit: = Revenue Expenditure − Revenue Receipts Indicates government borrowing for current expenses — problematic for fiscal health
Fiscal Deficit: = Total Expenditure − (Total Receipts − Borrowings) = Net Government Borrowing Most important deficit indicator; measures government's total borrowing need
Primary Deficit: = Fiscal Deficit − Interest Payments Shows current borrowing need excluding past debt servicing — true measure of fiscal stress
Effective Revenue Deficit: = Revenue Deficit − Grants for Capital Assets Introduced in 2011-12; excludes grants that create capital assets from states
Budget 2024-25 Targets:
| Indicator | FY24 Actual | FY25 Target | FY26 Target |
|---|---|---|---|
| Fiscal deficit | 5.6% GDP | 4.9% GDP | 4.5% GDP |
| Revenue deficit | 2.6% GDP | 2.0% GDP | — |
| Capital expenditure | ₹9.5 lakh crore | ₹11.1 lakh crore | — |
Government Revenue Sources
Tax Revenue
Direct Taxes (CBDT):
- Personal Income Tax: Tax on individual income — progressive slab rates
- New Tax Regime (default): 0% (≤₹3L), 5% (₹3–7L), 10% (₹7–10L), 15% (₹10–12L), 20% (₹12–15L), 30% (above ₹15L)
- Section 87A rebate: Zero tax on income up to ₹7 lakh (new regime, effective from FY24)
- Corporate Tax: 22% for domestic companies (reduced from 30% in 2019); 15% for new manufacturing companies (Atmanirbhar incentive)
- Capital Gains Tax: STCG (15%/20%); LTCG (10%/12.5% above ₹1 lakh) on equity/mutual funds
Indirect Taxes (CBIC):
- GST: Dominant indirect tax from 2017; major source of government revenue
- Customs Duty: Import and export duties; governed by Customs Act 1962
- Petroleum Excise Duty: Petroleum products outside GST — Centre earns significant revenue (₹2.3+ lakh crore/year)
Non-Tax Revenue
- Dividends from PSUs and RBI
- Interest on loans given to states and PSUs
- Fees, fines, and user charges
- External grants
Capital Receipts
- Disinvestment: Sale of government's stake in PSUs
- FY24 disinvestment target: ₹30,000 crore (missed — actual ~₹16,000 crore)
- Strategic disinvestment: Sale of majority stake + transfer of management (e.g., Air India sold to Tata in 2022)
- Market Borrowings: Government bonds (G-Secs) issued to RBI and market
Fiscal Responsibility and Budget Management (FRBM) Act
FRBM Act, 2003:
- Brought fiscal discipline — legally bound government to reduce deficits
- Required medium-term fiscal policy statement and macroeconomic framework
N.K. Singh Committee (2017) — FRBM Review:
- Recommended debt-to-GDP as the anchor (60% total public debt)
- Fiscal deficit: 2.5% by 2022-23 (revised)
- Recommended escape clause: 0.5% deviation in extraordinary circumstances
Escape Clauses (when targets can be breached):
- National security/war
- Natural calamity
- Agricultural distress
- Structural reforms causing revenue loss
- Financial sector collapse
- COVID-19 resulted in suspension (fiscal deficit hit 9.3% in FY21)
Public Debt in India:
- Central Government debt: ~58% of GDP (2024)
- States' debt: ~27% of GDP
- Combined: ~85% of GDP (above FRBM target of 60%)
Goods and Services Tax (GST)
Introduction and Structure
GST introduced July 1, 2017 — India's most significant tax reform since independence.
Replaced 17 taxes including: Central Excise, Service Tax, VAT, CST, Octroi, Entry Tax, Luxury Tax, Purchase Tax, etc.
Dual GST Structure:
| Transaction Type | Tax Applied |
|---|---|
| Intra-state (within one state) | CGST + SGST (split equally between Centre and State) |
| Inter-state (between states) | IGST (collected by Centre, then distributed) |
| Union Territories (no legislature) | CGST + UTGST |
GST Rates
| Slab | Items |
|---|---|
| 0% | Milk, eggs, curd, salt, fresh vegetables, grains, newspapers, bangles |
| 5% | Packaged food, domestic LPG, kerosene, medicines, railways (AC), telecom |
| 12% | Butter, cheese, ghee, Agarbatti, mobile phones, processed food |
| 18% | AC hotels, IT services, cameras, capital goods, financial services, most services |
| 28% | Luxury/sin goods: cars, tobacco, aerated drinks, pan masala, cement |
Compensation Cess: Over 28% — on luxury and demerit goods; revenue used to compensate states for revenue loss (for 5 years 2017–2022).
GST Council (Article 279A)
- Constitutional body (101st Constitutional Amendment 2016)
- Chairperson: Union Finance Minister
- Vice-Chairperson: State Finance Minister
- Members: Finance Ministers of all 31 states/UTs
- Decisions: 3/4 majority (Centre's vote = 1/3 of total; States' combined = 2/3)
GSTN (GST Network): IT backbone — non-profit company; handles all GST registrations, returns, payments, refunds.
Reserve Bank of India (RBI)
Structure and Governance
- Established: April 1, 1935 (under RBI Act 1934)
- Nationalised: January 1, 1949
- Headquarters: Mumbai
- Current Governor (2024): Sanjay Malhotra (26th Governor, from December 2023)
Monetary Policy Tools
Repo Rate: Rate at which RBI lends to commercial banks (short-term, against securities). Higher repo rate → credit expensive → inflation control. Current rate (2024): 6.5%
Reverse Repo Rate: Rate at which RBI borrows from commercial banks. Repo rate − 0.25% typically (corridor approach).
Cash Reserve Ratio (CRR): % of deposits banks must keep with RBI as cash (earning no interest). Higher CRR → less money for lending → money supply contracts. Current: 4%
Statutory Liquidity Ratio (SLR): % of deposits banks must keep in government securities (liquid assets). Higher SLR → less money for commercial lending. Current: 18%
Bank Rate: Rate at which RBI provides long-term refinance to banks. Penal rate for CRR/SLR violation.
Open Market Operations (OMOs): RBI buys/sells government securities in open market to inject/absorb liquidity.
Marginal Standing Facility (MSF): Emergency overnight borrowing by banks from RBI at repo + 0.25%; limit = 1% of NDTL.
Monetary Policy Committee (MPC)
Inflation targeting framework (amended RBI Act, 2016):
- Target: CPI inflation of 4% ± 2% (band: 2%–6%)
- 6-member MPC: 3 RBI officials (Governor chairs) + 3 external experts appointed by Centre
- Meets every 2 months; majority vote; in case of tie, Governor casts deciding vote
Inflation Targeting Performance:
- FY21: 6.2% (breached upper limit — COVID supply disruption)
- FY22: 5.5%
- FY23: 6.7% (breached — Russia-Ukraine war; RBI sent explanation letter to govt first time)
- FY24: 5.4%
Government Expenditure
Expenditure Categories
Capital vs Revenue Expenditure:
- Capital expenditure (Capex): Creates assets — roads, railways, defence hardware, digital infra
- Revenue expenditure: Wages, subsidies, interest payments, pensions — recurrent
Productive vs Unproductive:
- Productive: Education, health, infrastructure — creates economic capacity
- Unproductive: Interest payments (mandatory), some subsidies
Major Expenditure Items (Union Budget 2024-25)
| Category | Allocation | Notes |
|---|---|---|
| Interest payments | ₹11.6 lakh crore | Largest single item (~20% of total expenditure) |
| Defence | ₹6.2 lakh crore | Capital + revenue; ~13% of total |
| Transfers to states | ₹22.9 lakh crore | Tax devolution + grants |
| Agriculture & rural | ₹1.5+ lakh crore | PM-KISAN, MGNREGS, rural infra |
| Education | ₹1.25 lakh crore | ~2.9% of budget |
| Health | ₹90,000 crore | ~2% of budget |
| Infrastructure (Capex) | ₹11.1 lakh crore | 3.4% of GDP; FY25 target |
Subsidies
- Food subsidy: PM Garib Kalyan Anna Yojana — 5 kg free foodgrains to 80 crore people; largest food welfare programme globally
- Fertiliser subsidy: ₹1.6 lakh crore (FY24) — keeps fertiliser prices affordable for farmers
- Fuel subsidy: LPG subsidy under Ujjwala Yojana; Kerosene subsidy
- Total subsidy bill: ~₹3.8 lakh crore (FY24) = ~1.4% of GDP
Finance Commission
Finance Commission (Article 280):
- Quasi-judicial constitutional body
- Recommends: tax devolution between Centre and States; grants-in-aid
- Constituted every 5 years
16th Finance Commission:
- Chairman: Arvind Panagariya (former NITI Aayog Vice-Chairman)
- Period: 2026-27 to 2030-31
- Will recommend new formula for sharing taxes with states
15th Finance Commission (2021-26):
- Devolution to states: 41% of central tax pool (down from 42% of 14th FC — due to J&K bifurcation)
- Introduced performance grants linked to health, education, nutrition outcomes
- Special grants for conflict-affected states
Disinvestment and PSU Policy
Disinvestment types:
- Minority disinvestment: Government retains majority; partial stake sold
- Strategic disinvestment: Majority stake + management control transferred (privatisation)
- Complete disinvestment: 100% stake sold
Major disinvestments:
- Air India: Sold to Tata Sons (completed January 2022) — ₹18,000 crore; ended 70 years of state-run losses
- BPCL privatisation: Deferred multiple times
- LIC IPO (2022): India's largest IPO — government raised ~₹21,000 crore; diluted 3.5% stake
DIPAM: Department of Investment and Public Asset Management — nodal agency for disinvestment.
External Sector
Balance of Payments (BoP)
Current Account:
- Trade in goods (merchandise): Deficit usually (India imports more than exports)
- Trade in services: Surplus (IT/software, tourism, business services)
- Remittances: India = world's largest recipient ($125 billion, 2023)
- Investment income: Deficit (India pays more dividends abroad than receives)
Capital Account:
- FDI (Foreign Direct Investment): Long-term investment in businesses
- FII/FPI (Foreign Portfolio Investment): Short-term; stock market investments
- ECBs (External Commercial Borrowings): Loans from abroad
India's Key External Trade Data (2023-24):
- Total exports: ~$778 billion (goods + services)
- Total imports: ~$857 billion
- Trade deficit: ~$240 billion (goods); Services surplus ~$163 billion
- Current Account Deficit: ~1.0% of GDP (manageable)
- Foreign Exchange Reserves: ~$650 billion (2024) — provides ~10 months of import cover
India's Top Trading Partners: USA (largest export partner), China (largest import source), UAE, Saudi Arabia, Russia (oil), Germany
Board Exam Tips
- Budget date: February 1 (changed in 2017); Financial year: April 1–March 31
- Fiscal deficit: Total Expenditure − (Receipts excluding borrowings); India's target 4.5% (FY26)
- Primary deficit = Fiscal deficit − Interest payments
- FRBM Act 2003: Fiscal discipline; target fiscal deficit ≤ 3%; escape clause 0.5%
- GST: July 1, 2017; 4 slabs (5%, 12%, 18%, 28%); GST Council — Article 279A; GSTN = IT backbone
- RBI: Est. 1935; nationalised 1949; HQ Mumbai; inflation target 4%±2%
- Repo rate 6.5% (2024); CRR 4%; SLR 18%
- MPC: 6 members (3 RBI + 3 external); meets every 2 months
- Finance Commission: Article 280; constituted every 5 years; 15th FC — 41% devolution to states
- Air India sold to Tata (Jan 2022) — largest strategic disinvestment
- India: world's largest remittance recipient ($125 billion, 2023)
- Interest payments = largest single expenditure item in Union Budget (~20%)