Union Budget - Structure and Deficits for UPSC

Budget Structure

The Constitution of India requires the government to lay an Annual Financial Statement before Parliament under Article 112. Commonly known as the Union Budget, this statement outlines expected receipts and planned expenditure for the upcoming financial year (April 1 to March 31). To make sense of the large numbers, the budget is organised along several classifications. Two key ways to organise it are by funds and by revenue versus capital.

Funds refer to the broad buckets in which public money is held. Nearly all receipts flow into the Consolidated Fund of India, the main account from which most expenditure is drawn with parliamentary approval. A small Contingency Fund serves as an imprest for emergencies and is later reimbursed, while the Public Account holds money received in trust, such as provident fund deposits; this money does not belong to government and withdrawals do not need a vote.

Within the Consolidated Fund, receipts and expenditure are classified as revenue or capital. Revenue transactions are recurring and do not alter the government’s assets or liabilities, whereas capital transactions either create debt or assets. An easy way to visualise this structure is to think of two columns: revenue receipts (taxes and non‑tax revenue) and capital receipts (borrowings, disinvestment and recovery of loans) on one side, matched with revenue expenditure (salaries, subsidies, interest and pensions) and capital expenditure (roads, railways, irrigation projects) on the other. The gap between receipts and expenditure gives rise to deficits.

Historically expenditure was also classified as plan and non‑plan, but this distinction was removed from 2017–18 because it distorted priorities. The budget now emphasises the quality of spending: capital expenditure creates lasting assets and is favoured over revenue expenditure. In Budget 2025–26, capital expenditure is estimated at about ₹11.21 lakh crore (effective capital expenditure including grants is around ₹15.48 lakh crore) while revenue expenditure is about ₹39.44 lakh crore. Understanding these categories is key to analysing deficits and fiscal policy.

Understanding these distinctions is crucial because they influence deficit indicators and fiscal policy. When revenue expenditure exceeds revenue receipts, the government incurs a revenue deficit. When total expenditure (revenue + capital) exceeds total receipts (excluding debt), there is a fiscal deficit. UPSC aspirants must be able to classify budget entries correctly, identify which receipts are debt creating and which expenditures lead to asset creation, and analyse the implications for economic growth and inter‑generational equity.

Receipts: Tax and Non‑Tax Sources

The government’s revenue comes from a mix of taxes, user charges, dividends and borrowings. Budget 2025–26 estimates total receipts (excluding borrowings) at about ₹34.96 lakh crore. The table below summarises the main receipt heads and their estimated contribution in Budget 2025–26. Figures are rounded for clarity.

As the table shows, the Union government relies primarily on tax revenue. Direct taxes like income tax and corporation tax are collected on income and profits, while indirect taxes such as Goods and Services Tax (GST), customs duties and excise duties are levied on production or sale of goods and services. In recent budgets, the Centre’s share of GST has become the single largest source of indirect tax. Together, tax receipts account for about 81 % of total non‑borrowing receipts.

Non‑tax revenue consists of miscellaneous income, including interest earned on loans given to states and public sector enterprises, dividends and profits from PSUs and the Reserve Bank of India, and various fees and user charges (licence fees, tolls, royalty from mineral resources, telecom spectrum auctions etc.). In 2025–26 non‑tax revenue is estimated at about ₹5.83 lakh crore — roughly one‑sixth of total receipts.

Non‑debt capital receipts cover receipts that reduce assets but do not create liabilities. The two major components are the recovery of earlier loans and disinvestment proceeds (sale of government equity in public enterprises). Although this head is small (about 2 % of receipts), it attracts attention because disinvestment involves transferring ownership to the private sector.

The largest gap between expenditure and receipts is financed through borrowings, which are debt‑creating capital receipts. For 2025–26 the government plans to borrow around ₹15.69 lakh crore from markets and other sources to finance the fiscal deficit.

Expenditure Patterns

Public expenditure reflects the government’s priorities and has significant macroeconomic effects. Budget 2025–26 projects total expenditure at around ₹50.65 lakh crore, an increase of 7.4 per cent over the revised estimate for 2024–25. The expenditure budget is broadly divided into revenue expenditure and capital expenditure. A summary is presented below:

Revenue expenditure forms the bulk of spending and covers salaries, pensions, subsidies, interest payments, maintenance of defence and civil administration and grants to states. Interest payments alone account for around one‑quarter of total expenditure, reflecting the burden of past debt. Subsidies (on food, fertiliser and fuel) and pensions for government employees together absorb several lakh crores. Large transfers are also made to states through tax devolution and grants.

Capital expenditure, though smaller in absolute terms, creates assets and spurs growth. It includes infrastructure projects such as highways, railways, metros, airports and irrigation works; defence modernisation; equity infusions into public sector banks and enterprises; and long‑term loans to states for projects like health, education and digitisation. To capture both direct capital outlays and grants to states for asset creation, the budget reports an effective capital expenditure measure.

Deficit Indicators

Deficits show how much the government is spending beyond its means. Different deficits highlight different aspects of fiscal imbalance. Understanding their definitions, formulas and recent values is crucial for UPSC examinations.

Revenue Deficit (RD)

The revenue deficit measures how much routine spending exceeds recurring income. It is calculated as Revenue Deficit = Revenue Expenditure − Revenue Receipts. When this deficit is high, the government has to use borrowings to pay for day‑to‑day expenses rather than invest in assets. In 2025–26, revenue receipts of about ₹34.20 lakh crore and revenue expenditure of ₹39.44 lakh crore produce a revenue deficit of roughly ₹5.24 lakh crore (around 1.5 % of GDP), lower than the previous year.

Effective Revenue Deficit (ERD)

To separate pure consumption spending from transfers that create assets, the government uses the effective revenue deficit. It is computed as Effective Revenue Deficit = Revenue Deficit − Grants for Creation of Capital Assets. Grants to states for building roads or other assets are deducted because they are productive. In 2025–26, grants for asset creation are about ₹4.27 lakh crore, so the effective revenue deficit drops to roughly ₹96,654 crore (0.3 % of GDP). This concept is now part of the FRBM rules.

Fiscal Deficit (FD)

The fiscal deficit reflects the overall borrowing requirement. It equals Fiscal Deficit = Total Expenditure − (Revenue Receipts + Non‑Debt Capital Receipts). For 2025–26, total expenditure of ₹50.65 lakh crore and receipts of ₹34.96 lakh crore produce a fiscal deficit of about ₹15.69 lakh crore (around 4.4 % of GDP). The government aims to reduce this ratio in coming years. Lower fiscal deficits free up resources for the private sector, moderate interest rates and help maintain debt sustainability.

Primary Deficit (PD)

The primary deficit removes interest payments from the fiscal deficit to show how much borrowing is funding current programmes. It is defined as Primary Deficit = Fiscal Deficit − Interest Payments. With interest payments of roughly ₹12.76 lakh crore and a fiscal deficit of ₹15.69 lakh crore, the primary deficit for 2025–26 is about ₹2.93 lakh crore (0.8 % of GDP). A small or negative primary deficit indicates that borrowing mainly finances interest obligations rather than fresh spending.

The following table summarises the key deficit indicators for Budget 2025–26 and their approximate ratio to GDP:

The fiscal deficit is financed mainly by issuing government securities (G‑Secs) to the market; small savings schemes, provident funds and multilateral loans provide additional resources. Direct borrowing from the Reserve Bank of India is limited to temporary cash management. A large deficit can push up interest rates and pressure the currency, so fiscal prudence supports macroeconomic stability.

Budget Process

The Union Budget is not prepared overnight; it follows a well‑defined budget cycle that encompasses formulation, presentation, parliamentary scrutiny, approval, execution and audit. The Budget Division of the Department of Economic Affairs in the Ministry of Finance coordinates the process.

Formulation and Preparation

The budget formulation starts about six months before the new financial year. The Finance Ministry consults ministries, state governments, industry groups and economists on expenditure priorities and tax policy. Departments prepare detailed demands for grants while the tax boards and the Department of Investment and Public Asset Management forecast collections and disinvestment receipts. These inputs feed into the Budget Division’s calculations of expenditure, receipts and the likely fiscal deficit. The proposed allocations are then cleared by the Finance Minister, the Prime Minister and the Cabinet. Secrecy is maintained to avoid market speculation until the Finance Minister’s speech.

Presentation in Parliament

Since 2017 the Finance Minister presents the Union Budget in the Lok Sabha on 1 February, allowing time for passage before the new financial year. The speech summarises the government’s priorities, schemes and tax proposals. The Economic Survey is tabled a day earlier to review the economy. When a full budget cannot be passed (for example before elections), Parliament passes a vote on account to authorise essential expenditure; supplementary budgets may be placed later in the year if additional funds are required.

Parliamentary Scrutiny

Once presented, the budget is examined by Parliament. Members first engage in a general debate on policies. Standing committees then study the detailed demands for grants of ministries and submit reports. The Lok Sabha votes on these demands; any defeat of a grant is treated as a vote of no confidence. The approved demands form the basis of the Appropriation Bill, which authorises withdrawals from the Consolidated Fund. Tax proposals are enacted through the Finance Bill, a Money Bill that must be passed within 75 days. If time runs short, the Speaker applies a guillotine to put remaining demands to vote in bulk. Once the appropriation and finance bills receive presidential assent, the budget becomes law.

Execution, Accounting and Audit

After the budget becomes law, ministries draw funds as authorised by Parliament. Expenditure is accounted for and audited by the Comptroller and Auditor General (CAG) to ensure compliance with rules and proper use of public money. The Public Accounts Committee reviews the CAG’s reports. A similar cycle applies in the states.

Remember the key dates: the Economic Survey is tabled around 31 January, the budget speech on 1 February, followed by debates, committee scrutiny, voting and enactment of the appropriation and finance bills before 1 April.

UPSC Notes: Prelims and Mains

Prelims Pointers

• The Union Budget, presented under Article 112 of the Constitution, is formally called the Annual Financial Statement.
• Receipts are classified as revenue (tax and non‑tax income) and capital (borrowings, disinvestment, recovery of loans). Revenue receipts do not create liabilities or reduce assets.
• Expenditure is classified as revenue (salaries, subsidies, pensions, interest payments) or capital (creation of assets or repayment of liabilities).
• For 2025–26, net tax revenue is estimated at about ₹28.37 lakh crore, non‑tax revenue at ₹5.83 lakh crore and total expenditure at ₹50.65 lakh crore.
• Key deficit indicators for 2025–26: fiscal deficit ≈ 4.4 % of GDP; revenue deficit ≈ 1.5 %; primary deficit ≈ 0.8 %; effective revenue deficit ≈ 0.3 %.
• Budget process: the Finance Minister presents the budget on 1 February; Parliament holds a general discussion, committees examine demands, the Lok Sabha votes, and appropriation and finance bills are passed before expenditure is incurred.

Mains Insights

For the General Studies Paper III (Indian Economy), candidates should be prepared to analyse deeper issues beyond definitions. Key dimensions to consider include:

• Fiscal consolidation vs growth: Candidates should examine the trade‑off between reducing deficits for stability and spending more to accelerate development. Is the glide path of bringing the fiscal deficit down to around 4 % appropriate when infrastructure needs are high?
• Revenue mobilisation and quality of expenditure: Discuss how to broaden the tax base and streamline GST while ensuring subsidies remain targeted and capital spending crowds in private investment. Consider the scope for reducing interest payments through prudent debt management.
• Deficit financing and transparency: Evaluate how high deficits affect inflation and interest rates, the coordination between fiscal and monetary authorities, and the importance of bringing off‑budget liabilities into the fiscal accounts to improve credibility.
• Centre–state fiscal relations: Analyse how tax devolution, grants and centrally sponsored schemes shape state finances and cooperative federalism. Mention the Fifteenth Finance Commission’s recommendations on shared revenues and borrowing limits.

Quick Facts

• Constitutional basis: The Union Budget is mandated by Article 112 of the Constitution.
• Presentation date: It is tabled on 1 February so that tax and expenditure measures take effect from the new financial year.
• Receipts vs expenditure: For 2025–26, total receipts (excluding borrowings) are estimated at about ₹34.96 lakh crore and total expenditure at ₹50.65 lakh crore.
• Fiscal deficit target: The fiscal deficit is projected at 4.4 % of GDP in 2025–26 with a glide path toward 4 %.
• Transfers to states: The Finance Commission’s recommendations guide tax devolution and borrowing limits for states, reinforcing cooperative federalism.

UPSC Previous Year Questions (Selected)

Reviewing past questions helps understand the type of information UPSC expects. Here are some representative questions related to budget receipts, expenditure and deficits:

1. Prelims 2019: Consider these statements: (1) Loans raised by the government on the security of public assets are capital receipts. (2) Dividends from public sector enterprises are non‑tax revenue. (3) Borrowings from the RBI are non‑debt capital receipts. Which statements are correct? Options: (a) 1 and 2 only (b) 2 only (c) 1 and 3 only (d) 1, 2 and 3. Answer: (a) Only statements 1 and 2 are correct.
2. Prelims 2021: Interest payments on market loans are classified as revenue expenditure, loans to public sector enterprises fall under capital expenditure, and dividends from PSUs are counted as non‑tax revenue. Which of these pairs are correctly matched? Answer: all of them.
3. Mains 2022 (GS III): Explain the importance of classifying receipts and expenditure into revenue and capital heads. How does this classification affect the assessment of fiscal deficit and the conduct of fiscal policy?
4. Mains 2023 (GS III): “A persistent primary deficit indicates that the government borrows not only to pay for past interest liabilities but also to fund current expenditure.” Discuss the macroeconomic implications of a high primary deficit and suggest measures to reduce it without compromising growth.
5. Mains 2024 (expected): Distinguish between effective revenue deficit and revenue deficit. Critically evaluate whether effective revenue deficit should replace revenue deficit as the key target in fiscal rules.

Practice MCQs

Test your understanding of the budget with the following multiple choice questions. Answers are given after the list; try to attempt them first.

1. Which of the following is not classified as a revenue receipt of the government?
   1. Goods and Services Tax collected by the centre
   2. Dividends received from public sector banks
   3. Proceeds from disinvestment of a public sector enterprise
   4. Interest received on loans given to state governments
2. Consider the following statements regarding capital expenditure:
   1. It results in the creation of assets or reduction of liabilities.
   2. Loans and advances to states for irrigation projects are categorised as capital expenditure.
   3. Salaries paid to central government employees are included in capital expenditure.
   Which of the statements given above are correct? (a) 1 and 2 only (b) 1 and 3 only (c) 2 and 3 only (d) 1, 2 and 3
3. In the context of the Union Budget, effective revenue deficit is calculated as:
   1. Revenue deficit minus grants for creation of capital assets
   2. Fiscal deficit minus interest payments
   3. Revenue deficit plus capital expenditure
   4. Fiscal deficit minus disinvestment proceeds
4. Which of the following items are considered when calculating the fiscal deficit (i.e., total expenditure minus revenue receipts and non‑debt capital receipts)?
   1. Borrowings from the market
   2. Recovery of loans and advances
   3. Interest payments
   4. Non‑tax revenue
   (a) 1 and 3 only (b) 1, 2 and 3 only (c) 2, 3 and 4 only (d) 1, 2, 3 and 4
5. Under the Union Budget process, which of the following has the exclusive privilege to vote on Demands for Grants?
   1. Lok Sabha
   2. Rajya Sabha
   3. Joint session of Parliament
   4. Finance Commission
6. Which statement about non‑debt capital receipts is correct?
   1. They include disinvestment proceeds and recovery of loans.
   2. They create liabilities for the government.
   3. They consist only of borrowings from the market.
   4. They are part of revenue receipts.

Answer Key: 1 (c), 2 (a), 3 (a), 4 (c), 5 (a), 6 (a).

Frequently Asked Questions

What is the difference between revenue receipts and capital receipts?

Revenue receipts are recurring incomes, such as taxes and dividends, that neither create liabilities nor reduce the government’s assets. Capital receipts either raise liabilities (borrowings) or reduce assets (for example, disinvestment), and they are essential to classify budget transactions and calculate deficits.

Why is a high fiscal deficit a cause for concern?

A high fiscal deficit forces the government to borrow large sums, leaving less credit for the private sector, pushing up interest rates and stoking inflation. Moderate deficits can be acceptable during downturns to support demand.

What does the primary deficit indicate?

The primary deficit removes interest payments from the fiscal deficit to show how much borrowing funds current programmes. A low or negative primary deficit means most borrowing is used to pay interest rather than new spending.

How does capital expenditure differ from revenue expenditure?

Capital expenditure leads to the creation of assets or reduction of liabilities (e.g., roads, machinery, equity investments), while revenue expenditure covers routine operations like salaries and subsidies and does not build assets.

What is the role of the Finance Bill in the budget process?

The Finance Bill is a Money Bill that enacts tax proposals. It must be passed by the Lok Sabha within 75 days; otherwise the new tax measures cannot take effect.

Why was the presentation date of the budget changed to 1 February?

Previously the budget was presented at the end of February, leaving little time for parliamentary approval. Moving the date to 1 February ensures the Finance and Appropriation Bills are passed before the new financial year.

What are non‑debt capital receipts?

These are receipts that reduce government assets without creating liabilities. They consist mainly of recovery of loans and disinvestment proceeds and are different from borrowings, which raise debt.

How are grants for creation of capital assets treated in the calculation of effective revenue deficit?

Grants to states for creating capital assets are booked as revenue expenditure. To calculate effective revenue deficit, these grants are subtracted from the revenue deficit so that only unproductive current spending is counted.