Union Budget & Fiscal Policy

The Union Budget and Fiscal Policy are foundational topics in the JAIIB Indian Economy module. The Union Budget is the annual financial statement of the government, while fiscal policy refers to the government's use of spending and taxation to influence the economy. For banking professionals, understanding budget structure, deficit concepts, taxation, and fiscal management is essential as these directly impact interest rates, government borrowing, and banking operations.

Fiscal Policy is the use of government spending and revenue collection to influence the economy. It refers to the overall effect of the budget outcome on economic activity.

Taxes affect the economy through multiple channels:

Primary Objectives:

• Promoting economic growth
• Maintaining price stability

Additional Objectives:

• Mobilising resources
• Promoting allocative efficiency
• Reducing inequality in income and wealth
• Promoting private sector investment

The annual budget of India is called the Union Budget. It consists of three major concepts: Revenue, Expenditure, and Deficit.

Revenue Receipts

Tax Revenue (Gross):

• Corporation Tax
• Income Tax
• Other Taxes and Duties
• Customs
• Union Excise Duties
• Service Tax
• Taxes of the Union Territories

Net Tax Revenue = Gross Tax Revenue (-) NCCD transferred to National Calamity Contingency Fund (-) States' share

Non-Tax Revenue:

• Interest Receipts
• Dividend and Profits
• External Grants
• Other Non-Tax Revenue
• Receipts of Union Territories

Total Revenue Receipts = Net Tax Revenue + Total Non-Tax Revenue

Capital Receipts

Non-Debt Receipts:

• Recoveries of Loans and Advances
• Miscellaneous Capital Receipts

Debt Receipts:

• Market Loans
• Short-Term Borrowings
• External Assistance (Net)
• Securities Issued Against Small Savings
• State Provident Funds (Net)
• Other Receipts (Net)

Total Capital Receipts = Non-Debt Receipts + Debt Receipts

Non-Plan Expenditure

Revenue Non-Plan Expenditure:

• Interest Payments and Prepayment Premium
• Defence
• Subsidies
• Grants to State and UT Governments
• Pension
• Police
• Assistance of States from National Calamity Contingency Fund
• Economic Services (Agriculture, Industry, Power, Transport, Technology)
• Social Services (Education, Health, Broadcasting)
• Postal Deficit
• Grants to Foreign Governments

Capital Non-Plan Expenditure:

• Defence
• Other Non-Plan Capital Outlay
• Loans to Public Enterprises
• Loans to State and UT Governments
• Loans to Foreign Governments

Plan Expenditure

Plan Expenditure = Revenue Expenditure + Capital Expenditure

Total Expenditure = Total Non-Plan Expenditure + Total Plan Expenditure

Effective Revenue Deficit captures the revenue deficit net of grants provided for creating capital assets, as such grants are productive even though they are revenue expenditure.

The Fiscal Responsibility and Budget Management Act was enacted in 2003, based on the recommendations of the Dr. E.A.S. Sharma Committee (January 2000).

1. Achieve long-term macro-economic stability with budget surpluses
2. Introduce prudential debt management
3. Transparent fiscal management systems
4. Remove fiscal impediments and provide medium-term framework
5. Reduce dependence on borrowings in a phased manner

Key recommendations for FRBM review:

Fiscal Council roles: Multi-year forecasts, fiscal strategy changes, data quality, deviation advice, corrective action.

Permissible deviation conditions: National security/war/calamities, structural reforms with fiscal impact, real output decline of 3%+ below previous four-quarter average.

• 3 fiscal stimulus packages totalling Rs. 1.86 lakh crore (3.5% of GDP)
• RBI injected Rs. 5.6 lakh crore (~9% of GDP)
• Economy recovered but at the cost of larger fiscal deficit beyond FRBM limits
• Fiscal stimulus was never phased out
• Current account deficit (CAD) increased

• GST (Goods and Services Tax)
• IBC (Insolvency and Bankruptcy Code)
• Corporate tax cuts
• Demonetisation
• Average annual growth (2008-09 to 2019-20): 6.5% (base year 2011-12 prices)

A lease transaction is a deemed sale under the law and GST is levied on lease rentals.

1. Union Budget has three concepts: Revenue, Expenditure, and Deficit
2. Revenue Deficit = Revenue Expenditure - Revenue Receipts
3. Gross Fiscal Deficit = Total Expenditure - Revenue Receipts - Non-Debt Receipts
4. Effective Revenue Deficit = Revenue Deficit - Grants for Capital Assets
5. Net Primary Deficit = Net Fiscal Deficit - Net Interest Payments
6. Financing of Fiscal Deficit = Debt Receipts + Draw-down of Cash Balance
7. FRBM Act 2003: Fiscal deficit target 3% of GDP; Centre cannot borrow from RBI
8. N.K. Singh Committee (2017): Debt-to-GDP target 60% (Centre 40%, States 20%) by 2023
9. Fiscal Council: Autonomous body recommended by N.K. Singh Committee
10. Maximum deviation: 0.5% of GDP per year under specific conditions
11. Post-2008 fiscal stimulus: Rs. 1.86 lakh crore (3.5% of GDP); RBI injected Rs. 5.6 lakh crore
12. Operating lease = off-balance sheet; Finance lease = increases debt-equity ratio
13. Net Tax Revenue = Gross Tax Revenue - NCCD transfers - States' share