Aspirant Academy

Economy

Key Points at a Glance

Public Finance: Union Budget, Revenue/Expenditure, Deficit, Public Debt, Fiscal Policy, Finance Commission

Paper I · Unit 2 Section 1 of 12 0 PYQs 29 min
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Key Points at a Glance

  1. Union Budget 2025-26

    • Presented on 1 February 2025
    • Total expenditure: Rs 50.65 lakh crore
    • Total receipts: Rs 34.96 lakh crore (excluding borrowings)
    • Fiscal deficit: Rs 15.69 lakh crore (4.4% of GDP)

  2. Revenue Receipts

    • Include tax revenue: income tax, GST, customs, excise
    • Include non-tax revenue: dividends, interest, fees
    • Total revenue receipts (2025-26 BE): Rs 34.20 lakh crore
    • Gross tax revenue: Rs 42.70 lakh crore after transfers to states

  3. Revenue Expenditure vs Capital Expenditure

    • Revenue expenditure (salaries, interest, subsidies, pensions) creates no assets: Rs 37.09 lakh crore (2025-26)
    • Capital expenditure (infrastructure, loans to states) creates assets: Rs 11.21 lakh crore (3.1% of GDP)
    • Continued high capex thrust reflects investment-led growth strategy

  4. Four Types of Deficit

    • (a) Revenue Deficit = Revenue Expenditure − Revenue Receipts
    • (b) Fiscal Deficit = Total Expenditure − Total Receipts (excluding borrowings) — most comprehensive measure
    • (c) Primary Deficit = Fiscal Deficit − Interest Payments
    • (d) Effective Revenue Deficit = Revenue Deficit − Grants for capital assets

  5. Fiscal Consolidation Path

    • Target: 4.4% of GDP (2025-26), then 4.1% (2026-27)
    • Budget 2024-25 actual fiscal deficit was 4.9% of GDP
    • FRBM Act 2003 original statutory target was 3% of GDP
    • Medium-term path aims to stay below 4.5%

  6. Public Debt

    • Total public debt (FY2023-24): approximately Rs 172 lakh crore (84.5% of GDP)
    • Internal debt: market borrowings, small savings, provident funds
    • External debt: multilateral loans, bilateral loans, NRI bonds
    • High domestic savings rate makes this level considered manageable

  7. Finance Commission (Art. 280)

    • Constitutional body appointed every 5 years
    • Recommends distribution of tax revenues between Centre and States
    • Also recommends grants-in-aid to states
    • 16th Finance Commission constituted December 2023 under Dr. Arvind Panagariya for award period 2026-31

  8. 15th Finance Commission

    • Period 2020-25, chaired by N.K. Singh
    • Recommended 41% devolution from divisible pool (14th FC was 42%, minus 1% for J&K-Ladakh reorganisation)
    • Introduced performance-based grants linked to states' own-tax effort
    • Also linked grants to health expenditure and nutrition outcomes

  9. FRBM Act 2003

    • Full name: Fiscal Responsibility and Budget Management Act
    • Mandates elimination of Revenue Deficit and capping of Fiscal Deficit
    • NK Singh Committee (2017): recommended replacing fixed target with a range (1.7–3.5% fiscal deficit)
    • Escape Clause: allows exceeding targets by 0.5% during national calamity, security threats, or structural reforms

  10. Fiscal Policy Tools

    • Expansionary: tax cuts + higher spending during recession
    • Contractionary: tax hike + spending cuts during inflation
    • India used expansionary policy post-COVID-19 with record capex and PLI schemes
    • Budget 2025-26 signals contractionary consolidation: deficit reduced from 9.2% (2020-21) to 4.4%

  11. GST — the Biggest Tax Reform

    • Implemented from 1 July 2017, subsuming 17 central and state indirect taxes
    • GST collections crossed Rs 2.10 lakh crore in April 2024 (highest monthly collection ever)
    • Average monthly GST for 2024-25: Rs 1.82 lakh crore

  12. Capital Expenditure Multiplier

    • Capex has a fiscal multiplier of 2.5–3x — Rs 1 of government capital spending generates Rs 2.5–3 of economic activity
    • India's capex grew from Rs 5.54 lakh crore (2022-23) to Rs 11.21 lakh crore (2025-26 BE)
    • Near doubling in three years underscores the infrastructure-first growth strategy