Union Budget, Fiscal Policy, FRBM, CAG & GST Council

Indian Economy questions on Budget, fiscal policy, and taxation are guaranteed in Kerala PSC papers (2-4 marks). This note covers the Budget process, key deficit concepts, FRBM, the role of CAG, Finance Commission, and GST Council.

1. Union Budget — Basics

Feature	Detail
Constitutional provision	Article 112 (Annual Financial Statement)
Presented by	Finance Minister
Presented to	Lok Sabha
Budget day	1 February (since 2017; earlier last working day of February)
Railway Budget merged	2017 (previously separate since 1924)
First Union Budget	1860, by James Wilson
First budget of independent India	R.K. Shanmukham Chetty (1947)
Longest-serving Finance Minister	Morarji Desai (presented 10 budgets)

2. Components of Budget

Component	Contains
Revenue Budget	Revenue receipts + Revenue expenditure
Capital Budget	Capital receipts + Capital expenditure

Revenue Receipts (Non-repayable)

Tax Revenue	Non-Tax Revenue
Income Tax	Profits of RBI/PSUs (dividends)
Corporate Tax	Interest receipts
GST (Centre’s share)	Fees, fines
Customs Duty	Spectrum auction proceeds
Excise Duty	External grants

Capital Receipts (Create liability or reduce assets)

Type	Examples
Borrowings	Market loans, external borrowings, treasury bills
Disinvestment	Sale of government shares in PSUs
Recovery of loans	Loans given to states/others returning

Revenue Expenditure (does not create assets)

• Salaries, pensions, interest payments, subsidies, grants to states, defence revenue spending

Capital Expenditure (creates assets or reduces liabilities)

• Construction of roads, bridges, buildings
• Loans given by Centre to states/UTs
• Defence capital purchases (aircraft, ships)

3. Key Deficit Concepts

Deficit	Formula	Meaning
Revenue Deficit	Revenue Expenditure - Revenue Receipts	Government spending more than earning on current account
Fiscal Deficit	Total Expenditure - Total Receipts (excluding borrowings)	Total borrowing requirement of government
Primary Deficit	Fiscal Deficit - Interest Payments	Fiscal deficit excluding legacy debt servicing
Effective Revenue Deficit	Revenue Deficit - Grants for creation of capital assets	Introduced in 2012-13

Key PSC fact: Fiscal Deficit = Total borrowings of the government in that year. It indicates how much the government needs to borrow.

4. FRBM Act (Fiscal Responsibility and Budget Management)

Feature	Detail
Enacted	2003 (came into effect 5 July 2004)
Objective	Fiscal discipline; reduce fiscal deficit, eliminate revenue deficit
Target (original)	Fiscal deficit to 3% of GDP; revenue deficit to 0%
N.K. Singh Committee (2017)	Recommended fiscal deficit path: 3% by 2020, debt-to-GDP 40% (Centre)
Escape clause	Government can exceed targets during national calamity, war, or structural reforms

5. Finance Commission

Feature	Detail
Constitutional provision	Article 280
Established by	President of India
Frequency	Every 5 years
First Finance Commission	1951, K.C. Neogy (Chairman)
16th Finance Commission	2024, Dr. Arvind Panagariya (Chairman)
15th Finance Commission	N.K. Singh (Chairman), period 2021-2026

Functions

• Recommend distribution of net proceeds of taxes between Centre and States (vertical devolution)
• Recommend allocation among states (horizontal devolution)
• Recommend grants-in-aid to states
• Measures to augment Consolidated Fund of states

15th FC recommendation: 41% of divisible tax pool to states (was 42% in 14th FC; reduced due to J&K reorganization as UT).

6. Comptroller and Auditor General (CAG)

Feature	Detail
Constitutional provision	Articles 148-151
Appointment	By President
Tenure	6 years OR age 65, whichever is earlier
Removal	Same as Supreme Court Judge (impeachment)
Reports to	President (Union) / Governor (State)
Reports tabled in	Parliament / State Legislature
First CAG	V. Narahari Rao (1948)
Called	Guardian of public purse

Functions of CAG

• Audits accounts of Union, States, and UTs
• Audits accounts of all bodies/authorities receiving government funding
• Reports on government financial irregularities
• CAG is the head of Indian Audit and Accounts Department

Key fact: CAG audits but does NOT prepare accounts. Accounts are prepared by the Controller General of Accounts (CGA) for Union, and by Accountant General for States.

7. GST (Goods and Services Tax)

Feature	Detail
Constitutional Amendment	101st Amendment Act, 2016
Implemented from	1 July 2017
Replaced	Central Excise, Service Tax, VAT, Entry Tax, Octroi, and 15+ indirect taxes
Article	Article 246A (power to levy GST)
One Nation One Tax	Unified indirect tax across India

Structure of GST

Type	Levied By	On
CGST	Central Government	Intra-state supply
SGST	State Government	Intra-state supply
IGST	Central Government	Inter-state supply
UTGST	UT Government	Intra-UT supply (without legislature)

GST Tax Slabs

Slab	Examples
0% (Exempt)	Fresh fruits, vegetables, milk, education, health
5%	Packed food items, transport, small restaurants
12%	Processed food, business class air tickets
18%	Most goods and services (default slab)
28%	Luxury goods, cars, tobacco, aerated drinks

GST Council

Feature	Detail
Constitutional provision	Article 279A
Chairman	Union Finance Minister
Members	Union Finance Minister + MoS Finance + Finance Ministers of all States/UTs
Voting	Centre has 1/3 weightage; States have 2/3 weightage
Quorum	50% of members
Decisions	Three-fourth majority of weighted votes
Functions	Recommend rates, exemptions, model laws, threshold limits

Key judgment: Union of India v. Mohit Minerals (2022) — SC held GST Council recommendations are not binding on Parliament/State legislatures, only persuasive.

8. Consolidated Fund, Contingency Fund, Public Account

Fund	Article	Details
Consolidated Fund of India	266(1)	All tax revenue, borrowings, loan recoveries deposited here. Withdrawal needs Parliamentary approval.
Contingency Fund of India	267(1)	At disposal of President for unforeseen emergencies. Currently Rs. 500 crore. Parliamentary approval sought later.
Public Account of India	266(2)	Provident funds, postal deposits, court deposits. Government acts as banker. No Parliamentary approval needed for withdrawal.

9. Important Budget-Related Terms

Term	Meaning
Vote on Account	Temporary budget approval (for 2-3 months) when full budget cannot be passed in time (election year)
Appropriation Bill	After budget discussion, authorizes government to withdraw from Consolidated Fund
Finance Bill	Implements tax proposals of the budget
Guillotine	Demands for Grants not discussed are put to vote together at end of allotted time
Cut Motions	Opposition moves to reduce demand (Policy Cut, Economy Cut, Token Cut)
Zero-based budgeting	Every item justified from zero each year (not just incremental)
Outcome Budget	Introduced 2005-06; measures outcomes, not just outlays

10. PSC Exam Quick-Fire Facts

• Article 112: Annual Financial Statement (Union Budget)
• Article 110: Money Bill (can be introduced only in Lok Sabha)
• Budget must be passed by Lok Sabha; Rajya Sabha can only recommend (14 days)
• No tax can be levied without authority of law (Article 265)
• Fiscal deficit indicates total government borrowing
• “Budget” word not in Constitution — called “Annual Financial Statement”
• Vote on Account is passed for 2 months during election year
• CAG does not audit private companies (unless they receive government funding)
• GST does not cover: Petroleum products (partially), alcohol for human consumption, electricity
• GST Network (GSTN): IT backbone for GST filing; Section 8 company