Indian and AP Economy — Mains Depth · Chapter 11

AP Budget, Debt and Local Finance

What to remember

A state budget is the annual statement of estimated receipts and expenditure (Article 202). It is divided into the Revenue Account and the Capital Account, and it must be passed by the State Legislature.
The state gets money from its own taxes, its share in central taxes, and grants from the Centre. It borrows within limits set by the Centre and by its own fiscal responsibility law.
Local bodies (Panchayats and Municipalities) depend mostly on grants. The State Finance Commission (Article 243-I and 243-Y) decides how state money is shared with them.

1. Structure of a state budget

The Constitution calls the budget the "annual financial statement" (Article 202). The Governor causes it to be laid before the State Legislature every year. The Finance Minister presents it.

Money in the budget is placed in three funds:

Consolidated Fund of the State (Article 266): all revenues, loans raised and repayments received. Money can be spent from it only after the Legislature approves.
Contingency Fund of the State (Article 267): a fund kept at the Governor's disposal for urgent, unforeseen needs. It is later repaid from the Consolidated Fund.
Public Account of the State (Article 266(2)): money held by the state as a banker, such as provident funds and deposits. Spending from it does not need a separate vote.

The budget has two accounts:

Revenue Account: day-to-day receipts and spending. It includes tax revenue, non-tax revenue, salaries, pensions, interest and subsidies.
Capital Account: loans, asset creation and repayment of debt. It includes roads, irrigation projects and buildings.

Spending is also split into two groups. Charged expenditure (for example the Governor's salary, High Court judges' salaries and debt charges) is not voted by the Legislature but can be discussed. Voted expenditure needs the approval of the Legislative Assembly through demands for grants.

Budget stages: presentation, general discussion, vote on demands for grants, Appropriation Bill, Finance Bill. A Vote on Account allows spending for a part of the year when the full budget is not yet passed. A Supplementary Demand covers extra needs during the year.

2. Revenue sources of the state

Source	Nature
State Goods and Services Tax (SGST)	Shared base with the Centre; the state keeps its own part
Stamps and registration, state excise, motor vehicle tax	Own tax revenue
Share in central taxes	Devolution recommended by the Union Finance Commission
Grants-in-aid from the Centre	Revenue-deficit grants, sector grants, special grants
Non-tax revenue	Royalty on minerals, user charges, interest receipts, forest and irrigation receipts
Centrally Sponsored Schemes funds	Central money for a scheme, with a state matching share

Key points:

Under GST, many older state taxes (such as VAT and entry tax) were merged. Petroleum and alcohol for human consumption are still outside GST for most taxes, so these remain important for states.
The share of the state in the divisible pool of central taxes is fixed by the Union Finance Commission. The Finance Commission is a constitutional body (Article 280) set up every five years.
After the 2014 reorganisation, AP lost a large part of its own tax base. The Reorganisation Act has provisions for support to the new state, and the Finance Commission gave special attention to its revenue gap. Details of any package should be checked in the latest official release.

3. Debt concepts

Revenue deficit: revenue expenditure minus revenue receipts. It shows the state is borrowing to meet day-to-day costs.
Fiscal deficit: total expenditure minus total receipts excluding borrowing. It shows the total borrowing need.
Primary deficit: fiscal deficit minus interest payments. It shows borrowing for present needs, after leaving out the cost of past debt.
Outstanding liabilities: public debt (market loans, loans from the Centre, small savings loans), public account liabilities, and similar items.
Contingent liability (guarantees): promises by the state to repay loans of its own companies and corporations if they default. They do not appear in the deficit but can become a burden.
Off-budget borrowing: loans taken by state companies for state purposes and serviced from the budget. It hides the real debt.
Debt sustainability: the state is safe when its growth is higher than the cost of borrowing, and when interest takes a modest share of revenue.

Market borrowing by states is done through State Development Loans (SDLs), auctioned through the Reserve Bank of India, which acts as the debt manager of states.

4. FRBM at the state level

The Fiscal Responsibility and Budget Management framework asks governments to reduce deficits in a rule-based way.

The Centre passed its FRBM Act in 2003. States were encouraged, with help from Twelfth Finance Commission advice, to pass their own fiscal responsibility laws.
Andhra Pradesh has its own law on fiscal responsibility and budget management. It sets targets for deficit and debt, and requires reports to the Legislature.
Under Article 293, a state needs the consent of the Centre to raise a loan if it owes money to the Centre. This gives the Centre a way to control state borrowing.
Borrowing limits are expressed as a percentage of the state's Gross State Domestic Product. The Centre may allow extra room for reforms or in special situations such as the pandemic. Check the latest order for the current limit.
Targets are often relaxed in emergencies. The "escape clause" allows deviation in times of national calamity or serious slowdown.

5. State Finance Commission and local finance

Articles 243-I (Panchayats) and 243-Y (Municipalities) came with the 73rd and 74th Constitutional Amendments (1992-93). The Governor sets up a State Finance Commission (SFC) within one year of the amendment and then every five years.

The SFC:

reviews the finances of Panchayats and Municipalities;
recommends how net state tax proceeds are shared between the state and local bodies, and among local bodies;
recommends which taxes, duties, tolls and fees local bodies may keep;
recommends grants-in-aid from the Consolidated Fund of the State.

The Union Finance Commission also recommends measures to supplement the Consolidated Fund of the State to support local bodies, based on SFC reports. The Centre gives "basic grants" and "performance grants" to local bodies through states.

Level	Own revenue sources
Gram Panchayat	House tax, water charges, fees, licence fees, market fees
Mandal and Zilla Parishad	Mostly transfers; limited own revenue
Municipality / Corporation	Property tax, water and sewerage charges, trade licence, advertisement fees

Local bodies in AP rely mostly on state transfers, central finance commission grants and scheme money. Property tax is the main own source in towns. Poor collection and no regular revision of tax rates weaken them.

6. Fiscal challenges for AP

Revenue gap after bifurcation: the state lost the main urban revenue base, while it had to build a new capital and institutions.
Rising committed spending: salaries, pensions and interest take a large part of revenue, leaving less for capital projects.
Welfare and subsidy commitments: direct benefit transfers and subsidies add recurring cost.
Guarantees and off-budget loans: loans of state corporations, backed by state guarantees, add hidden risk.
Dependence on central transfers: large part of income comes from shared taxes and grants. Changes in Finance Commission formulae affect the state.
Irrigation and power sector liabilities: big projects and power distribution companies carry heavy debts.
Weak local finances: local bodies cannot raise enough revenue, so they cannot deliver services without help.
Reforms often suggested: wider tax base, better GST compliance, pruning subsidies, using borrowing for capital assets, more transparency on guarantees and a regular SFC cycle.

Exam traps

Contingency Fund is Article 267; Consolidated Fund is Article 266(1); Public Account is Article 266(2).
Fiscal deficit is not the same as revenue deficit. Revenue deficit ignores capital items.
Primary deficit removes interest payments; fiscal deficit includes them.
The Union Finance Commission is under Article 280; State Finance Commission is under Articles 243-I and 243-Y.
The Governor, not the President, appoints the State Finance Commission.
Charged expenditure is not voted, but it is not "free from discussion".
A guarantee is a contingent liability, not an actual loan.
Article 293 deals with state borrowing; Article 292 deals with Union borrowing.

One-liners

1. The state budget is the "annual financial statement" under Article 202.
2. Money kept for urgent unforeseen needs is held in the Contingency Fund (Article 267).
3. Provident fund deposits sit in the Public Account of the State.
4. Revenue deficit shows borrowing for day-to-day spending.
5. Primary deficit equals fiscal deficit minus interest payments.
6. The Reserve Bank of India manages market loans of states.
7. State Development Loans are the market bonds of states.
8. The 73rd and 74th Amendments created the State Finance Commission framework.
9. A State Finance Commission is set up every five years.
10. Article 293 lets the Centre control state borrowing when the state owes the Centre money.
11. Property tax is the main own revenue source of urban local bodies.
12. Salaries of High Court judges are charged expenditure.

Practice questions

Under which Article is the annual financial statement (budget) of a state laid before the Legislature?
1. Article 265
2. Article 202
3. Article 112
4. Article 280
Answer
B. Article 202
Article 202 is the state counterpart of Article 112 for the Union.
The Contingency Fund of a State is created under which Article?
1. Article 202
2. Article 293
3. Article 267
4. Article 266(1)
Answer
C. Article 267
Article 267 provides for the Contingency Fund of the State.
Provident fund deposits held by a state government are kept in which fund?
1. Public Account of the State
2. Contingency Fund of the State
3. Charged Expenditure Fund
4. Consolidated Fund of the State
Answer
A. Public Account of the State
The state acts as a banker for such deposits, so they go to the Public Account (Article 266(2)).
Revenue deficit is equal to:
1. Total expenditure minus total receipts excluding borrowing
2. Revenue expenditure minus revenue receipts
3. Fiscal deficit minus interest payments
4. Capital expenditure minus capital receipts
Answer
B. Revenue expenditure minus revenue receipts
It shows that day-to-day spending is more than day-to-day income.
Primary deficit is obtained by:
1. Adding grants to the fiscal deficit
2. Adding interest payments to the revenue deficit
3. Subtracting interest payments from the fiscal deficit
4. Subtracting capital receipts from revenue deficit
Answer
C. Subtracting interest payments from the fiscal deficit
Primary deficit = fiscal deficit minus interest payments.
Who causes the annual financial statement to be laid before the State Legislature?
1. The Governor
2. The Comptroller and Auditor General
3. The Speaker
4. The Chief Justice of the High Court
Answer
A. The Governor
Article 202 says the Governor shall cause it to be laid.
The State Finance Commission is appointed by:
1. The Chief Minister
2. The President
3. The Finance Commission of India
4. The Governor
Answer
D. The Governor
Articles 243-I and 243-Y give the Governor this power.
The State Finance Commission is provided for in which pair of Articles?
1. 243-G and 243-W
2. 280 and 281
3. 275 and 282
4. 243-I and 243-Y
Answer
D. 243-I and 243-Y
243-I is for Panchayats and 243-Y is for Municipalities.
The Union Finance Commission is set up under which Article?
1. Article 280
2. Article 243-I
3. Article 266
4. Article 293
Answer
A. Article 280
It is a constitutional body appointed by the President every five years.
Which Article lets the Centre control fresh borrowing by a state that owes money to the Centre?
1. Article 267
2. Article 293
3. Article 292
4. Article 202
Answer
B. Article 293
Article 293 deals with state borrowing; Article 292 with Union borrowing.
Market bonds sold by state governments are called:
1. Kisan Vikas Patras
2. Savings Bonds
3. State Development Loans
4. Sovereign Gold Bonds
Answer
C. State Development Loans
SDLs are auctioned through the Reserve Bank of India.
The salaries of High Court judges are:
1. Paid from the Contingency Fund
2. Charged on the Consolidated Fund of the State
3. Voted every year by the Assembly
4. Paid from the Public Account
Answer
B. Charged on the Consolidated Fund of the State
Charged expenditure is not put to vote.
The term 'off-budget borrowing' refers to:
1. Money borrowed from the Public Account
2. Loans repaid in the same year
3. Loans taken by state companies for state purposes and repaid from the budget
4. Loans taken from the Reserve Bank for a day
Answer
C. Loans taken by state companies for state purposes and repaid from the budget
It hides the real level of state debt.
When a state guarantees the loan of its own corporation, the guarantee is a:
1. Contingent liability
2. Capital receipt
3. Revenue receipt
4. Primary surplus
Answer
A. Contingent liability
It becomes a real burden only if the corporation defaults.
Which institution acts as the debt manager of state governments for market loans?
1. NABARD
2. SEBI
3. Finance Commission
4. Reserve Bank of India
Answer
D. Reserve Bank of India
RBI conducts the auctions and servicing of state loans.
Which amendments gave constitutional status to State Finance Commissions?
1. 61st and 62nd Amendments
2. 86th and 91st Amendments
3. 73rd and 74th Amendments
4. 42nd and 44th Amendments
Answer
C. 73rd and 74th Amendments
These amendments created Panchayats and Municipalities as constitutional bodies.
A State Finance Commission recommends:
1. How net state tax proceeds are shared between the state and local bodies
2. The Minimum Support Price of crops
3. The rate of income tax
4. The share of the Centre in GST
Answer
A. How net state tax proceeds are shared between the state and local bodies
It also recommends grants-in-aid to local bodies.
The main own revenue source of urban local bodies is:
1. Income tax
2. Corporation tax
3. Customs duty
4. Property tax
Answer
D. Property tax
Water charges and licence fees are other own sources.
Which of the following is a non-tax revenue of a state?
1. State GST
2. Royalty on minerals
3. State excise
4. Stamp duty
Answer
B. Royalty on minerals
Royalty, user charges and interest receipts are non-tax revenue.
A state borrows mainly to pay salaries and pensions. Which indicator will show this most clearly?
1. Revenue deficit
2. Capital outlay
3. Primary surplus
4. Trade deficit
Answer
A. Revenue deficit
A large revenue deficit means borrowing is financing current spending.
A state has a fiscal deficit of 4 units and interest payments of 1.5 units. Its primary deficit is:
1. 1.5 units
2. 4 units
3. 2.5 units
4. 5.5 units
Answer
C. 2.5 units
4 minus 1.5 equals 2.5.
A state corporation fails to repay a loan that the state had guaranteed. The state then has to pay. This shows the risk of:
1. Charged expenditure
2. Contingent liabilities
3. Tax buoyancy
4. Primary surplus
Answer
B. Contingent liabilities
Guarantees do not appear in the deficit but can become actual debt.
Money can be spent out of the Consolidated Fund of a State only after:
1. An order of the High Court
2. Approval of the Chief Minister alone
3. A report of the Finance Commission
4. Appropriation by the State Legislature
Answer
D. Appropriation by the State Legislature
The Appropriation Act gives this authority.
The Contingency Fund of a State is placed at the disposal of:
1. The Finance Secretary
2. The Governor
3. The Chief Minister
4. The Speaker
Answer
B. The Governor
Advances are later recouped from the Consolidated Fund.
Which of the following is a charged expenditure on the Consolidated Fund of a State?
1. Emoluments of the Governor
2. Grants for school education
3. Subsidy for fertiliser
4. Salaries of ministers' staff
Answer
A. Emoluments of the Governor
Governor's emoluments and debt charges are charged items.
Consider the statements on state funds: 1. The Contingency Fund is at the disposal of the Governor. 2. Advances from the Contingency Fund are never recouped from the Consolidated Fund. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
Advances are recouped through a later supplementary appropriation, so only statement 1 is correct.
Consider the statements: 1. Fiscal deficit indicates the total borrowing requirement of the government. 2. Primary deficit includes interest payments on past debt. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
Primary deficit leaves out interest payments, so only statement 1 is correct.
Consider the statements: 1. A State Finance Commission is constituted every five years. 2. Its members are appointed by the President. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
The Governor appoints it. Only statement 1 is correct.
Consider the statements on Article 293: 1. A state that owes a loan to the Centre needs the Centre's consent for fresh borrowing. 2. A state needs the Centre's consent for every loan even if it owes nothing to the Centre. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
The consent condition applies only where a Central loan is outstanding.
Consider the statements: 1. Property tax is the main own source of revenue of town local bodies. 2. Gram Panchayats can levy house tax and fees. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
C. Both 1 and 2
Both statements are correct.
Consider the statements: 1. Charged expenditure is not put to vote in the Legislature. 2. Charged expenditure cannot be discussed in the Legislature at all. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
It can be discussed but not voted, so only statement 1 is correct.
Consider the statements: 1. A Vote on Account allows spending for part of the year before the full budget is passed. 2. A supplementary demand is used for extra needs during the year. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
C. Both 1 and 2
Both statements are correct.
Consider the statements: 1. State Development Loans are auctioned through the Reserve Bank of India. 2. States sell these loans directly to the public without involving any bank. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
The RBI conducts the auctions. Only statement 1 is correct.
Consider the statements: 1. The Centre enacted its fiscal responsibility law in 2003. 2. Andhra Pradesh has no fiscal responsibility law of its own. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
AP has its own law on fiscal responsibility and budget management. Only statement 1 is correct.
Consider the statements: 1. Salaries and interest payments are part of the Revenue Account. 2. Creation of assets such as roads and irrigation works falls in the Capital Account. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
C. Both 1 and 2
Both statements are correct.
Which of the following pairs is correctly matched?
1. Article 267 - Consolidated Fund
2. Article 202 - Contingency Fund
3. Article 293 - Union borrowing
4. Article 266(2) - Public Account of the State
Answer
D. Article 266(2) - Public Account of the State
Article 267 is the Contingency Fund; 293 relates to state borrowing.
Which of the following pairs of local body and own revenue source is correctly matched?
1. Zilla Parishad - customs duty
2. Gram Panchayat - house tax
3. Municipality - royalty on minerals
4. Gram Panchayat - corporation tax
Answer
B. Gram Panchayat - house tax
House tax is a basic Panchayat levy.
The 'escape clause' in a fiscal responsibility law allows:
1. Exemption of local bodies from audit
2. Borrowing without any legislative approval
3. Permanent removal of all deficit limits
4. Temporary departure from deficit targets in a calamity or serious slowdown
Answer
D. Temporary departure from deficit targets in a calamity or serious slowdown
It gives flexibility in emergencies.
Why are guarantees given by the state a concern for fiscal managers?
1. They reduce the revenue of the state at once
2. They are not counted in the deficit but may turn into debt
3. They are always repaid by the Centre
4. They are charged to the Public Account only
Answer
B. They are not counted in the deficit but may turn into debt
Hidden liabilities can strain future budgets.
After 2014, a key fiscal challenge for residuary Andhra Pradesh was:
1. No need for borrowing
2. Excess surplus in the revenue account
3. Absence of any expenditure commitments
4. Loss of the main urban revenue base while building a new capital
Answer
D. Loss of the main urban revenue base while building a new capital
The state had to meet new capital and institution costs with a smaller tax base.
Which step would best strengthen the finances of local bodies?
1. Stopping the audit of local bodies
2. Timely State Finance Commission reports and regular revision of property tax
3. Abolition of Panchayat elections
4. Removing all grants to Panchayats
Answer
B. Timely State Finance Commission reports and regular revision of property tax
Better own revenue and predictable transfers help local bodies.
Which item is held in the Public Account of a State?
1. Stamp duty receipts
2. Land revenue
3. Fees from state universities
4. Deposits and provident funds
Answer
D. Deposits and provident funds
Land revenue and stamp duty go to the Consolidated Fund.
The Union Finance Commission recommends measures to supplement the state's Consolidated Fund for local bodies based on:
1. Reports of the Planning Commission only
2. Reports of the Lok Sabha Speaker
3. Orders of the Supreme Court
4. State Finance Commission reports
Answer
D. State Finance Commission reports
This links the two commissions under Article 280.
A state budget is divided into which two accounts?
1. Tax Account and Debt Account
2. Voted Account and Public Account
3. Revenue Account and Capital Account
4. Union Account and State Account
Answer
C. Revenue Account and Capital Account
The Revenue and Capital Accounts are the main divisions.

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1.Which financial institution was established by the 74th Constitutional Amendment, 1992, to review the finances of Urban Local Government Bodies? (RRB NTPC Graduate Level CBT-I (21/06/2025) Shift 2)
2.Which is not a component of the finance budget? (RRB NTPC CBT-I (07/03/2021) Shift 2)
3.In the address regarding the Union Budget 2024, the Finance Minister highlighted key areas of focus for the upcoming year. Which of the following sectors was emphasised? (RRB ALP CBT-I 2024 (25/11/2024) Shift 3)
4.In the Union Budget 2025-26, the finance minister announced the facilitation of "Greenfield airports" in which of the following states to enhance aviation infrastructure?
5.When was the Union Budget 2025–26 presented in Parliament by Finance Minister Nirmala Sitharaman?
6.Which is India's apex bank for providing housing finance regulation?
7.SIDBI mainly provides finance to which sector?
8.Who presents the Union Budget of India?
9.The Defence Budget for the Financial Year 2024-25 constitutes what percentage of the total Union Budget? (RRB Technician Grade III (24/12/2024) Shift 1)
10.Who headed the Committee of Ministers on the Augmentation of Financial Resources of Urban Local Bodies, formed in India in 1963? (RRB NTPC Tier I (09/04/2016) Shift 3)

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