The Union Budget and fiscal policy

The Union Budget is the government's annual financial statement. Article 112 of the Constitution requires the President to lay an Annual Financial Statement before Parliament, showing estimated receipts and expenditure for the coming year. The Budget speech, the Finance Bill that changes taxes, and the demands for grants that Parliament votes on are the instruments through which fiscal policy — the use of taxation and spending to influence the economy — is made. State budgets follow the same pattern under Article 202.

Fiscal policy has three broad aims: raising revenue, allocating it to priorities such as defence, infrastructure, health and welfare, and stabilising the economy across booms and busts. The key summary numbers are the revenue deficit, the gap between current receipts and current spending, and the fiscal deficit, the gap between total spending and total receipts excluding borrowing, which shows how much the government must borrow in the year. Persistent deficits add to public debt, and interest payments then consume a large share of revenue, limiting future choices.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was meant to discipline this process by setting deficit targets and requiring the government to explain deviations. Its targets have been revised and breached repeatedly — during the 2008 financial crisis, the pandemic, and at other stress points — which raises a genuine debate: should rules bind governments tightly, or should they bend when the economy needs support? The 2021 amendment path moved the framework toward a debt anchor rather than a single-year deficit number, but the tension between discipline and flexibility remains.

Two other features matter for civil studies. First, the Goods and Services Tax, launched on 1 July 2017, replaced a tangle of central and state indirect taxes with a single national framework, with a GST Council of the Centre and states deciding rates — a major experiment in shared tax sovereignty. Second, the Finance Commission, appointed every five years, recommends how central tax revenue is shared with states, which is the main channel of fiscal federalism. A budget, in short, is not only an accounts statement: it is where taxation, federalism and political priorities meet.