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Home / UPSC Editorials / The Union Budget Formulation

The Union Budget: Formulation & Implications - UPSC Editorials

Last Updated on Feb 06, 2025
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Context: The Union Budget for 2025-26 will be presented by Finance Minister Nirmala Sitharaman on 1st February, 2025.

Analysis based on 

Editorial published on the Union Budget: understanding its formulation and implications in The Hindu e-paper.

Topics for UPSC Prelims

Union Budget, Expenditure, Fiscal Deficit

Topics for UPSC Mains

Economic Implications of Government Policies, India's fiscal rules and their formulation by the N.K. Singh Committee

Components of the Union Budget

The Union Budget is the financial statement of the government which includes its expenditure, receipts, and deficit indicators.

  • Expenditure
    • Types
      • Capital Expenditure: It forms assets or reduces liabilities. It includes the construction of schools and hospitals.
      • Revenue Expenditure: All expenses have been incurred and no assets have been created in this context, such as wages, subsidy, etc.
  • Categories:
    • General Services
    • Economic Services: Transport, rural development, agriculture.
    • Social Services: Health, education.
    • Grants-in-Aid and Contributions.
  • Development Expenditure: Total expenditure on economic and social services.

Receipts

  • Revenue Receipts: Non-debt-creating, both tax and non-tax receipts.
  • Non-Debt Capital Receipts: Recovery of loans, disinvestment proceeds.
  • Debt-Creating Capital Receipts: Loans which add to the future liabilities.

Deficit Indicators

  • Fiscal Deficit: The excess of total expenditure over the sum of revenue receipts and non-debt receipts. Indicates the deficit that the government needs to raise through borrowing.
  • Primary Deficit: Fiscal deficit minus interest paid.
  • Revenue Deficit: Fiscal deficit adjusted by capital expenditure.

Read the article on the Plan and Non-Plan Expenditure!

Implications of the Union Budget on the Economy

Some of the major implications of the union budget on the Indian economy include the following:

  • Aggregate Demand
    • Spending Effect: Increases aggregate demand because of direct and indirect consumption spending by the government on various products and services.
    • Revenue Effect: Tax as well as nontax collections increase private as well as aggregate demand.
  • Policy Indicators:
    • Decrease in Expenditure-GDP Ratio: Shocks the fiscal contractionary effect.
    • Increase in Revenue-GDP Ratio: Signals attempt to check the demand effect.
  • Income Distribution: Government schemes and subsidies can directly affect income distribution:
    • Pro-Poor: Employment guarantees, food subsidies raise the income of the poorer sections.
    • Corporate Incentives: Tax cuts may enhance corporate sector incomes.
  • Economic Growth: Infrastructure, education, healthcare, and technology expenditure in the budget have long-term growth effects.

Read the article on the Gross Fiscal Deficit of India!

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Fiscal Rules and their Implications on Policy

Fiscal rules are policy instruments that establish targets for government finances to maintain fiscal discipline and support economic goals.

India's Fiscal Rules

India's fiscal rules are formulated by the N.K. Singh Committee with three main objectives:

  • Debt-to-GDP Ratio:
    • Central Government: Curtail to 38.7%.
    • State Governments: Curtail to 20%.
  • Fiscal Deficit-to-GDP Ratio: Curbed to 2.5%.
  • Revenue Deficit-to-GDP Ratio: Kept within the designated limits.

Key Suggestions

  • Self-governing Fiscal Council: Deliver fiscal forecasts, enhance the quality of statistics and take a view on all fiscal matters.
  • Extraordinary Deviations: Grant room during times of crisis.

Read the article on the Fiscal Discipline!

Impact of Fiscal Rules

Some of the most significant impacts of fiscal rules are the following:

  • Economic Stability: Targets ensure sound borrowing and avoid fiscal profligacy.
  • Policy Flexibility: Offers space for counter-cyclical fiscal measures during crises.
  • Investor Confidence: Fiscal discipline attracts investments into the economy.

The Union Budget is crucial in setting India's economic policy. The elements serve as immediate fiscal priorities as well as long-term policy signals. Fiscal discipline and development continue to be the inclusive growth and macroeconomic stability imperative.

Read the article on the Fiscal Responsibility and Budget Management Act!

UPSC Practice Question

Critically evaluate the argument that a fiscal deficit is a necessary evil for promoting economic growth. (Ink in 250 words)

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