Government budgeting

The first principle

A government spends before it earns, so every budget is a promise about where the money will come from and a choice about what it will buy. The most useful question about any budget is how much of the spending is paid for by income that need not be repaid, and whether the borrowing builds assets that raise future income or pays for this year's consumption. Each deficit in this note asks that question with a different boundary.

The core

The constitutional frame

• The budget is a statement. The word budget is not in the Constitution; Article 112 requires the President to lay an Annual Financial Statement of estimated receipts and expenditure before both Houses each year.
• Three funds hold the money. All revenue, borrowing and loan repayments received go into the Consolidated Fund of India (Article 266(1)), from which nothing can be spent without a law. Money held in trust, such as provident funds and small savings, goes into the Public Account (Article 266(2)), and the Contingency Fund (Article 267) is a small advance for urgent spending that Parliament approves later.
• Charged and voted spending. Interest on debt, the emoluments of the President and the salaries of Supreme Court judges and the Comptroller and Auditor General (CAG) are charged on the Consolidated Fund and are not voted; the rest comes as demands for grants (Article 113), which the Lok Sabha may pass, reduce or reject.
• Two laws close the cycle. The Appropriation Act (Article 114) authorises withdrawal of the voted and charged amounts, and the Finance Act gives effect to the tax proposals; both are money bills under Article 110, so the Rajya Sabha can only recommend changes within 14 days.

Revenue and capital accounts

• The revenue account records receipts that neither create a liability nor reduce an asset (taxes, dividends, fees) and spending that creates no asset for the Union (interest, salaries, subsidies, grants to States).
• The capital account records receipts that create a liability (borrowing) or reduce an asset (recovery of loans, disinvestment), and spending that creates assets or reduces liabilities, such as roads, defence equipment, loans to States and debt repayment. The test is the asset, not the size: a large subsidy is revenue spending, while a small loan to a State is capital spending because the Union can recover it.

The four deficits

• Revenue deficit = revenue expenditure − revenue receipts. It measures borrowing that pays for current consumption.
• Effective revenue deficit = revenue deficit − grants for creation of capital assets. It was introduced in the Budget of 2011-12 because many Union grants pay for assets that States and local bodies own, such as rural roads and houses.
• Fiscal deficit = total expenditure − (revenue receipts + non debt capital receipts), where non debt capital receipts are recoveries of loans and other receipts such as disinvestment. It equals the government's total borrowing need for the year.
• Primary deficit = fiscal deficit − interest payments. It shows whether the government is borrowing for today's programmes or only to pay interest on yesterday's debt.

Worked example: Budget 2026-27 (Budget estimates, Rs crore)

• Revenue receipts are 35,33,150 (net tax 28,66,922 plus non tax 6,66,228) and revenue expenditure is 41,25,494, so the revenue deficit is 41,25,494 − 35,33,150 = 5,92,344, about 1.5 per cent of gross domestic product (GDP).
• Grants for creation of capital assets are 4,92,702, so the effective revenue deficit is 5,92,344 − 4,92,702 = 99,642, about 0.3 per cent of GDP.
• Adding capital expenditure of 12,21,821 gives total expenditure of 53,47,315. Non debt capital receipts are 38,397 (loan recoveries) + 80,000 (other receipts) = 1,18,397, so the fiscal deficit is 53,47,315 − (35,33,150 + 1,18,397) = 16,95,768.
• On the assumed nominal GDP of 3,93,00,393 (10 per cent above the National Statistics Office's first advance estimate for 2025-26), that is 4.3 per cent. Subtracting interest of 14,03,972 leaves a primary deficit of 2,91,796, about 0.7 per cent of GDP.

Dimensions

• Economic. The fiscal deficit is the government's claim on national savings, so a high deficit can raise interest rates and crowd out private borrowing, while in a slump it supports demand.
• Constitutional. No money leaves the Consolidated Fund without a law, which is Parliament's oldest control over the executive, and the Public Accounts Committee, working on the CAG's audit reports, checks afterwards that money was spent as voted.
• Federal. About a third of the Union's gross tax revenue goes to States as their share, and grants shape what States spend; the fiscal federalism note covers these transfers.
• Social and intergenerational. Gender and outcome budgeting exist because spending alone does not show who benefits or what changed, and borrowing for consumption leaves later taxpayers the interest without any asset, which is why fiscal rules treat the revenue deficit more strictly than capital spending.

In practice

Process and documents

• Preparation begins around August or September with a budget circular from the Budget Division of the Department of Economic Affairs; ministries send estimates and the Department of Expenditure scrutinises them.
• Reforms since 2017. From 2017-18 the budget moved to 1 February so that it passes before the year begins on 1 April, the Railway Budget was merged into it, and the plan and non plan split was dropped.
• In Parliament, cut motions can reduce a demand to Re 1 (a policy cut), by a stated amount (an economy cut) or by Rs 100 (a token cut); demands left undiscussed are passed together under the guillotine.
• Key documents include the Annual Financial Statement, Demands for Grants, the Appropriation and Finance Bills, the Receipt Budget, the Budget at a Glance and the statements required by the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

The numbers for 2026-27 (Budget estimates, Ministry of Finance)

• Total expenditure is about Rs 53.5 lakh crore (13.6 per cent of GDP) and capital expenditure about Rs 12.2 lakh crore (3.1 per cent of GDP).
• Interest of about Rs 14 lakh crore takes about 40 paise of every rupee of revenue receipts.
• The fiscal deficit was 4.8 per cent of GDP in 2024-25 (actuals) and 4.4 per cent in 2025-26 (revised estimates), meeting the target of below 4.5 per cent by 2025-26 announced in 2021, and is budgeted at 4.3 per cent for 2026-27; from 2026-27 the stated anchor is the debt to GDP ratio, to be brought to about 50 per cent, plus or minus one, by 2030-31.

Outcome and gender budgeting

• Outcome budgeting. The first Outcome Budget, for 2005-06, linked money to results, and since 2017-18 major schemes report against an output and outcome framework monitored with NITI Aayog's Development Monitoring and Evaluation Office, so the measure becomes children immunised rather than vaccines bought.
• Gender budgeting. A Gender Budget Statement has been part of the Union Budget since 2005-06; it lists spending meant wholly for women (Part A), spending where 30 to 99 per cent benefits women (Part B) and spending where less than 30 per cent does (Part C). For 2026-27 it shows about Rs 5.01 lakh crore, 9.37 per cent of total Union expenditure, up from Rs 4.49 lakh crore budgeted for 2025-26 (Gender Budget Statement, Union Budget 2026-27).

Issues and way forward

• Interest crowds out other spending. The lasting cure is a falling debt ratio, which is why the 2017 FRBM Review Committee chaired by N K Singh recommended a debt anchor, now adopted.
• Estimates drift. In 2025-26 grants for capital assets fell from about Rs 4.27 lakh crore budgeted to Rs 3.08 lakh crore in the revised estimates, so the effective revenue deficit more than doubled; actuals, not budget estimates, give the true picture.
• Off budget borrowing. Loans taken by public bodies for the government, such as the Food Corporation of India's borrowing from the National Small Savings Fund, hid part of the deficit until the Budget of 2021-22 brought food subsidy fully on budget; full disclosure of any extra budgetary borrowing is the remedy.
• Weak scrutiny. Many demands pass under the guillotine without debate; an independent budget office would give Parliament its own analysis.
• Outcomes that are not measured. Outcome indicators are often outputs in disguise, and gender budget figures include large schemes counted at 30 per cent or more without evidence of who benefits; independent evaluation and sex disaggregated data for major schemes would make both tools real.

Common confusions

• Fiscal deficit and borrowing. They are the same number seen from two sides: the fiscal deficit is the gap between spending and non debt receipts, and borrowings and other liabilities is the money raised to fill it.
• Revenue and capital expenditure. A grant for a school building that a State will own is revenue expenditure for the Union, because the Union holds no asset; that is exactly why the effective revenue deficit was introduced.
• Consolidated Fund and Public Account. The Consolidated Fund holds the government's own money and needs Parliament's approval for every withdrawal, while the Public Account holds money the government only keeps in trust, so payments from it need no appropriation.
• Vote on account and interim budget. A vote on account is Parliament's permission to spend for part of the year, while an interim budget is the full statement of accounts presented by an outgoing government, which then seeks a vote on account.

For the exam

• Keyword bank: Annual Financial Statement (Article 112), Consolidated Fund of India, charged expenditure, Appropriation Act, Finance Act, vote on account, revenue deficit, effective revenue deficit, fiscal deficit, primary deficit, non debt capital receipts, crowding out, debt anchor, outcome budget, gender budget statement.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: The Union Budget for 2026-27 plans total spending of about Rs 53.5 lakh crore with a fiscal deficit of 4.3 per cent of GDP, and interest payments alone take about 40 per cent of revenue receipts (Budget at a Glance, 2026-27).
  • Introduction with a source: Article 112 of the Constitution calls the budget an Annual Financial Statement, and Article 114 forbids any withdrawal from the Consolidated Fund of India except under an Appropriation Act passed by Parliament.
  • Conclusion: The quality of a deficit matters as much as its size, so shifting borrowing from revenue to capital spending, while bringing debt down, is the path to growth without a future tax burden.
  • Conclusion: A budget is credible when its outcomes are measured and its liabilities fully disclosed, which makes outcome budgeting, gender budgeting and transparent accounts part of fiscal discipline, not an addition to it.