Union Budget and Fiscal Policy: Deficits, Articles and PYQs

The Union Budget is the government's statement of what it expects to earn and what it plans to spend in a financial year that runs from the first of April to the thirty-first of March. Examiners treat it as a bridge topic: the constitutional articles come from polity, the deficits and the FRBM Act from economics, and the budget firsts from static general knowledge. This note covers all three sides.

The budget in the Constitution

The Constitution never uses the word budget. Article 112 calls it the Annual Financial Statement and requires the President to have it laid before both Houses of Parliament for every financial year. Article 110 defines a Money Bill, Article 113 says that a demand for a grant can be made only on the recommendation of the President, and Article 114 provides for the Appropriation Bill, without which no money can be withdrawn from the Consolidated Fund of India. Article 265 lays down that no tax shall be levied or collected except by authority of law. The three government accounts are the Consolidated Fund of India under Article 266, the Public Account under the same article, and the Contingency Fund of India under Article 267, which is held at the disposal of the President for unforeseen expenditure and is later recouped.

How the budget is passed

The budget is introduced only in the Lok Sabha. The Rajya Sabha may discuss it but cannot vote on the demands for grants, and as a Money Bill the Finance Bill must be returned by the Rajya Sabha within fourteen days. The stages are presentation, general discussion, scrutiny of demands by the departmentally related standing committees, voting on demands for grants, passing of the Appropriation Bill and finally the Finance Bill, which gives legal force to the tax proposals. On the last allotted day the Speaker puts all outstanding demands to the vote at once, a device called the guillotine. Members may move three kinds of cut motions: a policy cut, which reduces the demand to one rupee and expresses disapproval of the policy itself; an economy cut, which reduces it by a stated amount; and a token cut, which reduces it by one hundred rupees to air a specific grievance. When the budget cannot be passed before the financial year begins, Article 116 allows a vote on account, an advance grant to carry on expenditure in the meantime.

Receipts, expenditure and deficits

Budget receipts are of two kinds. Revenue receipts, which neither create a liability nor reduce an asset, cover tax revenue and non-tax revenue such as interest, dividends and fees. Capital receipts either create a liability or reduce an asset, and include market borrowing, treasury bills, recovery of loans and disinvestment proceeds. Expenditure is similarly split into revenue expenditure, which is for the routine running of government, and capital expenditure, which creates assets or repays loans. The deficits follow from these definitions.

Fiscal discipline and the FRBM Act

The Fiscal Responsibility and Budget Management Act was passed in 2003 and came into force in 2004 to put statutory limits on deficits and to make fiscal management transparent. It requires the government to lay statements along with the budget, among them the Medium-Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement and the Macro-Economic Framework Statement. The Act contains an escape clause that allows the targets to be relaxed in defined situations such as national security, a collapse of agriculture or a sharp fall in output. The FRBM Review Committee headed by N. K. Singh, which reported in 2017, recommended that the debt to gross domestic product ratio should become the main anchor of fiscal policy rather than the deficit alone.

Fiscal policy and its tools

Fiscal policy is the use of government taxation, expenditure and borrowing to influence output, employment and prices. It is framed by the government through the Ministry of Finance, and must be distinguished from monetary policy, which the Reserve Bank of India conducts through the policy rate and liquidity. An expansionary fiscal policy raises spending or cuts taxes during a slowdown and accepts a larger deficit; a contractionary policy does the reverse when demand is overheating. Because it works against the swing of the business cycle, this is called counter-cyclical policy. A budget may be balanced, surplus or deficit; other forms used in India include the outcome budget, which reports results rather than outlays, gender budgeting, and zero-based budgeting, in which every item must be justified afresh instead of being carried over.

Budget firsts worth remembering

The first budget of independent India was presented by R. K. Shanmukham Chetty on 26 November 1947. Morarji Desai presented the largest number of union budgets, and is also the only finance minister to have presented budgets on his own birthday. The 1973-74 budget is remembered as the Black Budget for its very large deficit, the 1997-98 budget as the Dream Budget for its sweeping cut in tax rates, and the 1991 budget as the one that began liberalisation. From 2017 the budget has been presented on the first of February instead of the last working day of February, the separate railway budget was merged into the union budget, and the distinction between plan and non-plan expenditure was dropped.