Indian and AP Economy — Mains Depth · Chapter 6

Union Budget and Federal Finance

What to remember

The Budget is the "Annual Financial Statement" (Article 112). Money moves out of the Consolidated Fund only after Parliament passes the Appropriation Act (Articles 114 and 266).
Three deficits measure different things: Revenue deficit = revenue spending minus revenue receipts; Fiscal deficit = total spending minus all receipts except borrowing (so it equals borrowing); Primary deficit = Fiscal deficit minus interest payments.
Taxes are shared through the Finance Commission (Article 280) and GST is run by the GST Council (Article 279A), where states hold two-thirds of the voting weight.

Budget documents and process

The Constitution does not use the word "budget". Article 112 asks the President to lay an Annual Financial Statement before Parliament every year. It shows estimated receipts and spending, and it separates expenditure "charged" on the Consolidated Fund (such as salaries of the President, Judges and the Comptroller and Auditor General) from other expenditure. Charged items are discussed but not voted.

The government keeps three kinds of funds.

Fund	Article	Key point
Consolidated Fund of India	266(1)	All revenues, loans and repayments; money leaves it only by an Appropriation Act
Public Account of India	266(2)	Provident funds, small savings and deposits; government acts as a banker
Contingency Fund of India	267	Advance for urgent, unforeseen needs; held by the Finance Secretary on behalf of the President; later refunded

Important budget papers are the Annual Financial Statement, Demands for Grants, the Appropriation Bill, the Finance Bill, the Receipts Budget, the Expenditure Budget, and the policy statements required under the FRBM Act (Medium-term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro-economic Framework Statement). The Economic Survey is not a budget paper. It is prepared by the Chief Economic Adviser and is tabled just before the Budget.

Stages in Parliament:

1. Presentation and the Finance Minister's speech in the Lok Sabha.
2. General discussion (no voting).
3. Departmental committees examine the Demands for Grants.
4. Voting on Demands for Grants. Only the Lok Sabha votes on them. The Rajya Sabha only discusses.
5. Cut motions: policy cut (disapproves the policy), economy cut (asks for savings) and token cut (a small cut to raise a specific grievance).
6. Guillotine: at the end of the time, all remaining demands are put to vote together.
7. Appropriation Bill, then Finance Bill. A Finance Bill containing only tax proposals is a Money Bill.

The Budget is a Money Bill matter under Article 110. The Speaker certifies a Money Bill. The Rajya Sabha can only return it with recommendations within 14 days, and the Lok Sabha may accept or reject them. A Vote on Account (Article 116) allows spending for a part of the year when the full Budget cannot be passed in time, as in an election year. Supplementary grants and excess grants are other ways to authorise extra spending.

Deficits and the FRBM framework

Measure	What it shows	Simple formula
Revenue deficit	Day-to-day spending is more than regular income	Revenue expenditure minus revenue receipts
Effective revenue deficit	Revenue deficit after removing grants used to create assets	Revenue deficit minus grants for capital assets
Fiscal deficit	Total borrowing need	Total expenditure minus (revenue receipts + non-debt capital receipts)
Primary deficit	Borrowing need apart from interest	Fiscal deficit minus interest payments

A revenue deficit means the government borrows to meet consumption, which is seen as harmful. A fiscal deficit funded by borrowing for capital assets is seen as less harmful. If the primary deficit is zero, borrowing is only enough to pay interest.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 sought to bring discipline: reduce the revenue deficit, limit the fiscal deficit, stop the Reserve Bank from directly buying government securities in the primary market, and ask for transparent policy statements. The Act was changed after the N.K. Singh Committee (2016-17). The new approach gave priority to the debt-to-GDP ratio as the main anchor, along with the fiscal deficit target. It also allows "escape clauses" for national security, war, calamity and serious economic shocks. States have their own fiscal responsibility laws, and the Centre links extra borrowing room to reforms.

GST and the GST Council

The 101st Constitutional Amendment (2016) introduced GST. It added Article 246A (power for both Parliament and state legislatures to make GST laws), Article 269A (IGST on inter-state supply) and Article 279A (GST Council).

GST is a dual tax on supply of goods and services. Centre charges CGST; states charge SGST (UTGST in Union Territories without legislature); inter-state supply attracts IGST, which the Centre collects and then shares.
It is destination-based: the state where goods are consumed gets the tax.
Input tax credit flows through the chain, which reduces cascading (tax on tax).
Some petroleum products, alcohol for human consumption and electricity are outside GST. Some states kept special taxes on them. Check the latest official position before an exam.
States were promised compensation for loss of revenue for five years, funded by a compensation cess. That promise has a time limit.

GST Council: chaired by the Union Finance Minister. Members are the Union Minister of State for Revenue or Finance and the finance (or other) ministers of every state. The Centre has one-third of the voting weight, all states together have two-thirds, and a decision needs a three-fourths majority of weighted votes. This is why GST is called an example of cooperative federalism.

Finance Commission and centre-state fiscal relations

The Finance Commission is a quasi-judicial body formed by the President under Article 280 at the end of every five years (or earlier). It has a Chairman and four members. It recommends:

Vertical devolution: the share of the Centre's divisible tax pool that goes to states.
Horizontal devolution: how that share is divided among states, using criteria such as population, area, income distance, forest cover and demographic performance.
Grants-in-aid to states under Article 275 (general, sector-specific and for local bodies).
Measures to support state Consolidated Funds for Panchayats and Municipalities.
Any other matter the President refers.

Its recommendations are advisory; the government lays them before Parliament with an Action Taken Report. Cesses and surcharges are not part of the divisible pool, so a rising share of cess weakens the effect of devolution on states.

Source	Provision	Meaning
Taxes levied by Centre, collected and kept by states	Article 268	Stamp duties on financial documents (the main item after GST)
Taxes levied and collected by Centre, shared	Article 270	Divisible pool
Grants-in-aid	Article 275	Statutory grants, recommended by Finance Commission
Discretionary grants	Article 282	Used for centrally sponsored and other schemes
Borrowing by Union	Article 292	Within limits Parliament fixes
Borrowing by states	Article 293	Inside India; Centre's consent needed if a loan to the state is outstanding

The Planning Commission, which once gave plan grants, was replaced by NITI Aayog in 2015. Plan and non-plan classification ended, and most transfers now flow through Finance Commission devolution and centrally sponsored schemes. The Sarkaria Commission (1983) and the Punchhi Commission (2007) studied centre-state relations. Inter-State Council and the National Development Council are other forums. The Constitution lets the Centre deal with tax matters under the Union List, while states have limited tax powers, which causes a "vertical fiscal imbalance". Equalisation through transfers corrects it.

AP angle: After bifurcation in 2014 the state faced a gap in revenue. The Fourteenth Finance Commission gave a larger tax share to states and grants to meet revenue deficits of some states, including AP, for a period. Central assistance under the Reorganisation Act is discussed in Chapter 10.

Exam traps

1. Appropriation Bill vs Finance Bill: the first authorises spending, the second gives effect to tax proposals.
2. Charged vs voted expenditure: charged items are discussed but not voted.
3. Rajya Sabha does not vote on Demands for Grants and cannot reject a Money Bill.
4. Fiscal deficit equals borrowing, but primary deficit removes interest payments.
5. Public Account is not voted by Parliament and is not part of Consolidated Fund.
6. Contingency Fund is held by the President (operated by the Finance Secretary); the Consolidated Fund needs Parliamentary approval.
7. Economic Survey is not a constitutional requirement and is not voted upon.
8. Cut motions do not remove the grant; they signal disapproval or a grievance.
9. GST Council can recommend; it does not by itself amend the Constitution.

One-liners

1. Article 112 provides for the Annual Financial Statement.
2. Article 110 defines Money Bill.
3. Article 266 creates Consolidated Fund and Public Account.
4. Article 267 creates the Contingency Fund.
5. Article 280 provides for the Finance Commission.
6. Article 279A provides for the GST Council.
7. Vote on Account comes under Article 116.
8. Revenue deficit = revenue spending minus revenue receipts.
9. Fiscal deficit equals the Government's net borrowing requirement.
10. FRBM Act was passed in 2003.
11. GST came through the 101st Amendment.
12. Centre has one-third voting weight in the GST Council.

Practice questions

Which Article of the Constitution requires the President to lay the Annual Financial Statement before Parliament?
1. Article 116
2. Article 114
3. Article 112
4. Article 110
Answer
C. Article 112
Article 112 provides for the Annual Financial Statement, commonly called the Budget.
Money can be withdrawn from the Consolidated Fund of India only after passage of which law?
1. Money Order Act
2. Contingency Act
3. Finance Act
4. Appropriation Act
Answer
D. Appropriation Act
Article 114 says no money leaves the Consolidated Fund except under an Appropriation Act.
The Contingency Fund of India is created under which Article?
1. Article 265
2. Article 268
3. Article 266
4. Article 267
Answer
D. Article 267
Article 267 creates the Contingency Fund for urgent unforeseen expenditure.
The Public Account of India is described in
1. Article 267
2. Article 275
3. Article 266(2)
4. Article 282
Answer
C. Article 266(2)
Article 266(2) covers public money such as provident funds and deposits held by government.
Fiscal deficit is best defined as
1. Revenue expenditure minus revenue receipts
2. Capital expenditure minus capital receipts
3. Total expenditure minus total receipts excluding borrowings
4. Fiscal deficit minus interest payments
Answer
C. Total expenditure minus total receipts excluding borrowings
Fiscal deficit equals the net borrowing requirement of the government.
Primary deficit is obtained by
1. Adding capital receipts to revenue deficit
2. Adding interest payments to fiscal deficit
3. Subtracting revenue deficit from fiscal deficit
4. Subtracting interest payments from fiscal deficit
Answer
D. Subtracting interest payments from fiscal deficit
Primary deficit = fiscal deficit minus interest payments.
Revenue deficit arises when
1. Borrowing exceeds repayment
2. Revenue receipts exceed revenue expenditure
3. Capital expenditure exceeds capital receipts
4. Revenue expenditure exceeds revenue receipts
Answer
D. Revenue expenditure exceeds revenue receipts
Revenue deficit = revenue expenditure minus revenue receipts.
If the primary deficit of a government is zero, then
1. Borrowing is only enough to pay interest
2. The government has no borrowing
3. The revenue deficit is zero
4. The government has a surplus
Answer
A. Borrowing is only enough to pay interest
Fiscal deficit then equals the interest payment, so new borrowing only meets interest.
The effective revenue deficit is
1. Fiscal deficit minus interest
2. Revenue deficit plus capital expenditure
3. Revenue deficit minus grants for creation of capital assets
4. Primary deficit minus grants
Answer
C. Revenue deficit minus grants for creation of capital assets
It removes from the revenue deficit those grants that are used to build assets.
Which of the following is NOT a document required under the FRBM framework?
1. Fiscal Policy Strategy Statement
2. Macro-economic Framework Statement
3. Annual Economic Survey of States
4. Medium-term Fiscal Policy Statement
Answer
C. Annual Economic Survey of States
The three policy statements are tied to the FRBM Act; there is no such Survey statement.
Which committee recommended a revised FRBM framework with debt-to-GDP as the main anchor?
1. Kelkar Committee
2. Rangarajan Committee
3. Chelliah Committee
4. N.K. Singh Committee
Answer
D. N.K. Singh Committee
The N.K. Singh Committee on FRBM review gave this recommendation.
The FRBM Act was originally enacted in
1. 2003
2. 1999
3. 2010
4. 1991
Answer
A. 2003
The Fiscal Responsibility and Budget Management Act was passed in 2003.
The 101st Constitutional Amendment introduced
1. National Judicial Commission
2. Anti-defection law
3. GST
4. Panchayati Raj
Answer
C. GST
The 101st Amendment (2016) created the GST framework.
Which Article created the GST Council?
1. Article 280
2. Article 279A
3. Article 269A
4. Article 246A
Answer
B. Article 279A
Article 279A provides for the Goods and Services Tax Council.
The GST Council is chaired by
1. The Prime Minister
2. The Revenue Secretary
3. The Chairman of NITI Aayog
4. The Union Finance Minister
Answer
D. The Union Finance Minister
The Union Finance Minister is the Chairperson of the Council.
In the GST Council, a decision requires a majority of
1. Two-thirds of weighted votes
2. One-half of weighted votes
3. Simple majority of members present
4. Three-fourths of weighted votes
Answer
D. Three-fourths of weighted votes
Decisions need three-fourths of the weighted votes of members present and voting.
What is the voting weight of the Centre in the GST Council?
1. One-third
2. One-fourth
3. One-half
4. Two-thirds
Answer
A. One-third
The Centre has one-third weight; all states together have two-thirds.
IGST is levied on
1. Intra-state supply of goods
2. Only exports
3. Only imports of petroleum
4. Inter-state supply of goods and services
Answer
D. Inter-state supply of goods and services
IGST is charged on inter-state supply and is collected by the Centre and shared.
GST is called a destination-based tax because
1. Tax revenue goes to the state where goods or services are consumed
2. It is collected at the factory gate
3. It is levied only on exports
4. It is paid by the importer's home state
Answer
A. Tax revenue goes to the state where goods or services are consumed
In a destination-based tax, the consuming state gets the revenue.
Which Article empowers both Parliament and State Legislatures to make laws on GST?
1. Article 254
2. Article 246A
3. Article 249
4. Article 252
Answer
B. Article 246A
Article 246A was inserted by the 101st Amendment for this purpose.
The Finance Commission is constituted by the President under
1. Article 282
2. Article 293
3. Article 280
4. Article 275
Answer
C. Article 280
Article 280 provides for the Finance Commission every five years.
The Finance Commission consists of a Chairman and how many other members?
1. Two
2. Four
3. Three
4. Five
Answer
B. Four
The Chairman and four other members constitute the Commission.
Grants-in-aid to needy states on the recommendation of the Finance Commission are given under
1. Article 270
2. Article 268
3. Article 275
4. Article 292
Answer
C. Article 275
Article 275 provides statutory grants-in-aid.
Which Article deals with discretionary grants by the Union to states?
1. Article 266
2. Article 282
3. Article 280
4. Article 275
Answer
B. Article 282
Article 282 lets the Union and states make grants for any public purpose.
Horizontal devolution refers to
1. Share of the Centre in state taxes
2. Transfers from states to local bodies only
3. Distribution of the states' share among individual states
4. Division of tax between Centre and Union Territories
Answer
C. Distribution of the states' share among individual states
Vertical devolution splits between Centre and states; horizontal splits among states.
Which body replaced the Planning Commission?
1. NITI Aayog
2. Finance Commission
3. Inter-State Council
4. National Development Council
Answer
A. NITI Aayog
NITI Aayog replaced the Planning Commission in 2015.
Which commission examined centre-state relations and reported in 1988?
1. Punchhi Commission
2. Administrative Reforms Commission
3. Rajamannar Committee
4. Sarkaria Commission
Answer
D. Sarkaria Commission
The Sarkaria Commission was set up in 1983 and gave its report in 1988.
Cut motions can be moved against
1. The Appropriation Bill only in Rajya Sabha
2. Demands for Grants in the Lok Sabha
3. Charged expenditure
4. The Economic Survey
Answer
B. Demands for Grants in the Lok Sabha
Cut motions apply to Demands for Grants and are moved in the Lok Sabha.
A token cut motion seeks to reduce a demand by
1. Rs 1 crore
2. Ten per cent
3. Rs 100
4. One-half
Answer
C. Rs 100
A token cut reduces the demand by Rs 100 to raise a specific grievance.
The 'guillotine' in budget discussion means
1. Cutting a tax rate
2. Removing charged expenditure
3. Rejecting the Budget
4. Putting all remaining demands to vote at the end of the allotted time
Answer
D. Putting all remaining demands to vote at the end of the allotted time
Pending demands are voted without discussion once time ends.
The Vote on Account is provided for in
1. Article 116
2. Article 117
3. Article 112
4. Article 123
Answer
A. Article 116
Article 116 allows Lok Sabha to grant a part of the money in advance.
Within how many days must the Rajya Sabha return a Money Bill with recommendations?
1. 14 days
2. 7 days
3. 10 days
4. 30 days
Answer
A. 14 days
Rajya Sabha has 14 days to return a Money Bill.
Who certifies whether a Bill is a Money Bill?
1. Finance Minister
2. Chairman of Rajya Sabha
3. President
4. Speaker of Lok Sabha
Answer
D. Speaker of Lok Sabha
The Speaker's certificate is final under Article 110.
Consider the statements: 1. The Rajya Sabha votes on Demands for Grants. 2. Charged expenditure is not voted by Parliament. Which is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
Only the Lok Sabha votes on grants; charged items are discussed but not voted.
Consider the statements: 1. The Contingency Fund is held at the disposal of the President. 2. The Public Account requires an Appropriation Act for every withdrawal. Which is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
Public Account withdrawals do not need an Appropriation Act, as these are mostly government's banker transactions.
Consider the statements: 1. Fiscal deficit equals net borrowing requirement. 2. Primary deficit is always greater than fiscal deficit when interest payments are positive. Which 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 = fiscal deficit minus interest, so it is smaller.
Consider the statements: 1. GST Council has only central representation. 2. GST is a dual tax levied by both the Centre and states. Which is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
The Council has both Union and state ministers; CGST and SGST are the dual levies.
Consider the statements: 1. Finance Commission recommendations are binding on the Government. 2. The Commission recommends the distribution of the divisible tax pool. Which is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
Recommendations are advisory; sharing the divisible pool is a core task.
Consider the statements: 1. Cesses and surcharges form part of the divisible pool of taxes. 2. A larger share of cess in revenue can reduce the effective share of states. Which is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
Cess and surcharge are kept outside the divisible pool, so they weaken devolution.
Match the Article with its subject: 1. Article 266 - (i) Contingency Fund 2. Article 267 - (ii) Consolidated Fund and Public Account 3. Article 279A - (iii) GST Council Which is the correct match?
1. 1-i, 2-ii, 3-iii
2. 1-ii, 2-iii, 3-i
3. 1-ii, 2-i, 3-iii
4. 1-iii, 2-i, 3-ii
Answer
C. 1-ii, 2-i, 3-iii
Article 266 covers Consolidated Fund and Public Account; 267 Contingency Fund; 279A GST Council.
Match the item with its feature: 1. Policy cut - (i) Seeks to save money 2. Economy cut - (ii) Disapproves the policy 3. Token cut - (iii) Raises a specific grievance Which match is correct?
1. 1-ii, 2-iii, 3-i
2. 1-iii, 2-ii, 3-i
3. 1-ii, 2-i, 3-iii
4. 1-i, 2-ii, 3-iii
Answer
C. 1-ii, 2-i, 3-iii
Policy cut disapproves policy, economy cut asks for savings, token cut ventilates a grievance.
A government finds that its revenue deficit is large. This most directly suggests that
1. Its tax collection is nil
2. It is borrowing only for capital assets
3. It has a primary surplus
4. It is borrowing mainly to meet current spending
Answer
D. It is borrowing mainly to meet current spending
A revenue deficit means current expenses exceed current income, so borrowing funds consumption.
A country has a fiscal deficit of 6 and interest payments of 2 (in the same unit). Its primary deficit is
1. 8
2. 12
3. 4
4. 3
Answer
C. 4
Primary deficit = 6 - 2 = 4.
Which would best be called an example of cooperative federalism in fiscal matters?
1. Union List taxes only
2. Vote on Account
3. Charged expenditure on judges
4. Decision making in the GST Council by Centre and states
Answer
D. Decision making in the GST Council by Centre and states
The GST Council brings Centre and states together with weighted voting.
The Economic Survey is presented
1. Just before the Budget, prepared under the Chief Economic Adviser
2. After the Budget by the Prime Minister
3. Only in Rajya Sabha
4. By the Finance Commission
Answer
A. Just before the Budget, prepared under the Chief Economic Adviser
It is a review of the economy tabled before the Budget and is not voted upon.

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1.Which is not a component of the finance budget? (RRB NTPC CBT-I (07/03/2021) Shift 2)
2.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)
3.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?
4.When was the Union Budget 2025–26 presented in Parliament by Finance Minister Nirmala Sitharaman?
5.Which is India's apex bank for providing housing finance regulation?
6.SIDBI mainly provides finance to which sector?
7.Who presents the Union Budget of India?
8.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)
9.Who is the Chairman of the 14th Finance Commission? (RPF SI 2018 (19/12/2018) Shift 3)
10.The 2026 Budget introduced a multilingual AI tool for farmers. What is it called?

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