Government budgeting

NITI Aayog's Fiscal Health Index, first released in January 2025, ranks 18 major States on a composite of five sub-indices, turning scattered fiscal data into one comparable scorecard.

FHI as a tool for assessing State finances

• Design: five sub-indices — quality of expenditure, revenue mobilisation, fiscal prudence, debt index and debt sustainability — capture both annual flows and the stock of accumulated debt.
• Diagnosis, not just a score: each sub-index shows a State's weak spot — high committed spending on salaries, pensions and interest, low own-tax effort, or debt growing faster than revenue — so reform can be targeted.
• Benchmarking: the 2025 edition ranked Odisha first (67.8), followed by Chhattisgarh and Goa; a second edition followed in 2026, allowing States to be tracked over time.
• Comparability: a common yardstick lets the Union, the Finance Commission, lenders and citizens read State finances the same way.

How it encourages prudent, sustainable policy

• Peer pressure: public rankings create competitive federalism and a reputational stake; rating agencies and bond markets read the signal, which can affect borrowing costs.
• Policy leverage: it can inform Finance Commission and Union decisions on performance-linked grants and additional borrowing space tied to reforms.
• Nudges the right choices: capital expenditure over populist transfers, better tax and non-tax collection, and disclosure of off-budget borrowings and contingent liabilities such as guarantees.
• Limits: data lags, uniform weights across very different States, special-category constraints and dependence on Union transfers; it must not become a stick to squeeze welfare or an excuse for pro-cyclical cuts.

Used as a mirror rather than a stick, the FHI can institutionalise fiscal responsibility at the level of government that spends most of India's public money — and make sustainable finances a matter of State pride.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

India's fiscal constitution gives the Centre the more buoyant taxes and the States the larger spending responsibilities, so transfers sit at the heart of its federalism. The planning era shaped those transfers; recent reforms have reshaped them.

The planning-era pattern

• Two channels: the Finance Commission (Article 280) recommended statutory tax devolution and grants, while the Planning Commission — an executive body — allocated plan assistance, from 1969 by the Gadgil formula.
• Discretion grew: Article 282 grants and a multiplying set of centrally sponsored schemes tied State budgets to central priorities and conditions.
• Dependence: States relied on plan loans and grants, and the 'plan' and 'non-plan' split distorted spending priorities.

Recent reforms

• Institutional: NITI Aayog replaced the Planning Commission in 2015, ending plan grants; transfers now flow through the Finance Commission or schemes.
• Devolution: the 14th Finance Commission raised the States' share of the divisible pool to 42%; the 15th kept it at 41% after J&K's reorganisation.
• GST (101st Amendment, 2016): the GST Council pooled Union and State sovereignty over indirect taxes; States gave up VAT and entry taxes; the guaranteed compensation ended in 2022.
• Support: 50-year interest-free capital-expenditure loans to States, performance-linked grants, and rationalisation of schemes.

How far fiscal federalism has changed

• Gains: higher untied devolution, cooperative decision-making in the GST Council, and more transparency in transfers.
• Losses: cesses and surcharges outside the divisible pool have grown, shrinking what 41% applies to; Union control over State borrowing, including off-budget debt, provoked Kerala's suit in the Supreme Court; the GST Council's consensus culture has frayed and States have lost tax autonomy.
• Net: cooperative in form, centralising in substance.

Way forward

• Cap or share cesses, build a predictable compensation logic for revenue shocks, make the GST Council's dispute mechanism work, and let the Sixteenth Finance Commission's award set rule-bound, formula-based transfers.

Recent reforms have deepened fiscal cooperation and centralisation at once; rule-bound, trust-based transfers — not discretion — are the test of genuine fiscal federalism.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

Article 112 requires the Annual Financial Statement to show revenue expenditure separately from other expenditure, which is why the Union Budget is presented as a Revenue Budget and a Capital Budget.

The distinction

• The Revenue Budget covers recurring receipts and spending that neither create an asset nor reduce a liability; the Capital Budget covers transactions that change the government's assets or liabilities.
• A loan raised is a capital receipt because it adds a liability; a salary paid is revenue expenditure because nothing durable remains.
• Revenue deficit (revenue expenditure minus revenue receipts) shows how far borrowing is funding current consumption.

Revenue Budget: components

• Revenue receipts: tax revenue (income tax, corporation tax, GST, customs, Union excise) and non-tax revenue such as interest, dividends and profits, fees and grants.
• Revenue expenditure: salaries, pensions, interest payments, subsidies and the running of departments; all grants to States count here even when they create assets.

Capital Budget: components

• Capital receipts: market loans, Treasury Bills, external loans and other borrowings (debt receipts), plus recovery of loans and disinvestment (non-debt receipts).
• Capital expenditure: acquisition of land, buildings, machinery and equipment; investment in shares; and loans and advances to States, Union Territories and public enterprises.

A sound budget keeps the revenue account near balance so that borrowing finances capital formation rather than day-to-day spending.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

GST subsumed most of the states' own indirect taxes. To secure their consent, Section 18 of the Constitution (101st Amendment) Act, 2016 required Parliament to compensate states for revenue loss for five years, which the GST (Compensation to States) Act, 2017 gave effect to.

Rationale for the Act

• Loss of autonomy: states surrendered much of their power to tax and feared losses, especially manufacturing states, since GST accrues to the state of consumption.
• Assurance: for five years from July 2017, each state's revenue is protected at 14% annual growth over its 2015-16 base; any shortfall is paid from a compensation cess on luxury and demerit goods credited to a dedicated fund.
• Trust: the guarantee was the price of cooperative federalism, letting states accept a common tax without fear.

COVID-19 and the fund

• Already strained: the 2019-20 slowdown left cess collections short of the 14% promise, and payments were delayed.
• Collapse: the 2020 lockdown crashed GST and cess receipts in 2020-21 while protected revenue kept growing at 14%, so the shortfall far exceeded the cess pool.

New federal tensions

• The Centre called the pandemic an 'Act of God', argued that it was not bound to fill a gap the cess could not cover, and offered states two borrowing options; states, led by opposition-ruled ones, replied that the guarantee was unconditional and that the Centre, which borrows cheaper, should borrow.
• Resolution: the Centre set up a special borrowing window in October 2020, borrowed Rs 1.10 lakh crore on behalf of the states and passed it on as back-to-back loans in lieu of cess releases.
• Deeper issues: states' loss of tax autonomy, the Centre's one-third vote weight in the GST Council (Article 279A), where decisions need a three-fourths majority, and a trust deficit over delayed dues.

GST compensation was the price of cooperative federalism; a lasting fix needs a predictable revenue guarantee, more buoyant state revenues and consensus in the Council rather than numbers.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

GST, in force from 1 July 2017, replaced many central and state levies with one destination-based tax on the supply of goods and services.

Taxes subsumed

• Central: central excise duty and additional excise duties, service tax, additional customs duty (CVD), special additional duty (SAD), and central surcharges and cesses on goods and services.
• State: VAT, central sales tax, purchase tax, luxury tax, entry tax in all forms, entertainment tax (except where levied by local bodies), taxes on advertisements, lotteries, betting and gambling, and state cesses and surcharges.
• Still outside: basic customs duty, alcohol for human consumption, stamp and electricity duties; petroleum products stay out until the GST Council decides.

Revenue implications

• Wider net: registration, input-tax credit chains and e-way bills widened the base and improved compliance, so collections rose over time despite uneven monthly receipts in the first two years.
• Rate erosion: repeated rate cuts and exemptions pulled the effective rate below the design assumption, and the 2019 slowdown weakened collections further.
• States: a guaranteed 14 per cent yearly growth over 2015-16 revenue for five years, funded by a compensation cess, protected state budgets, but delayed payments strained Centre-State trust.
• Autonomy: a shared base means neither level can change rates alone, narrowing the States' fiscal room.

GST has unified the market and widened the base; steady revenue now needs fewer slabs, tighter compliance and a settled arrangement with the States.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

Since 1991 the budget's task has changed from expanding the State to disciplining it: each Union Budget must fund development and welfare while holding the deficit, with revenue that has often grown less than projected.

Why expenditure management is hard

• Rigid commitments: interest payments, salaries, pensions, defence and subsidies absorb a large committed share of revenue, leaving little discretionary room for capital and social spending.
• Deficit discipline: the FRBM Act, 2003 sets deficit and debt targets, but shocks, escape clauses and revenue shortfalls have repeatedly pushed consolidation back.
• Subsidy pressure: food, fertiliser and fuel subsidies swell with world prices and electoral politics, while leakages persist despite targeting.
• Quality: revenue spending crowds out capital outlay; projects overrun cost and time; schemes overlap; outputs are counted more than outcomes.
• Transparency: off-budget borrowing, such as FCI's food-subsidy dues financed by loans from small savings, has understated the true deficit, and audit gaps weaken accountability.
• Federal squeeze: the Fourteenth Finance Commission's 42 per cent devolution, GST compensation and rising social-sector expectations narrow the Centre's fiscal room.

Reforms that address the challenge

• Merger of the Plan and non-plan classification in 2017-18, with outcome budgets that tie allocations to results.
• Direct benefit transfers and Aadhaar-linked payments to cut leakage; the Public Financial Management System to track releases to the last rupee.
• The N. K. Singh committee's debt-to-GDP anchor to give consolidation a stable, medium-term path.

Public expenditure management is hard because commitments are rigid, revenue is uncertain and outcomes are hard to see; sharper targeting, transparent accounts and outcome-based budgeting can make each rupee count.

Written by Minimalist IAS from facts checked at source (how we verify). UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

Until Budget 2018-19, long-term capital gains on listed equity were exempt from tax, and equity-oriented mutual funds paid no tax on the income they distributed. The Budget ended both exemptions.

Changes introduced

• LTCG: gains above ₹1 lakh a year on listed equity shares and units of equity-oriented funds held for more than a year are taxed at 10 per cent, without indexation; short-term gains stay at 15 per cent.
• Grandfathering: gains accrued up to 31 January 2018 are protected, so only appreciation after that date is taxed.
• DDT: a 10 per cent tax on income distributed by equity-oriented mutual funds, paid at the fund level, so that dividend and growth options are treated alike.

Rationale

• Exempt long-term gains had reached about ₹3.67 lakh crore in assessment year 2017-18; the exemption favoured financial assets over manufacturing and narrowed the tax base while markets were buoyant.
• The Budget expected about ₹20,000 crore of extra revenue in the first year.

Comment

• Merits: fairer treatment across asset classes, a wider base, and grandfathering that spared past gains from retrospective taxation.
• Concerns: markets fell on the announcement, small investors' post-tax returns dipped, the fund-level tax reduces payouts, and frequent changes unsettle long-term saving.

The reform aligned equity with other assets and raised revenue; stable rules and simple compliance will decide whether small investors stay invested.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

The Union Budget 2017-18, presented on 1 February with the Railway Budget merged into it, grouped its proposals under a ten-theme agenda summed up as 'Transform, Energise and Clean India' (TEC India).

Transform: farmers, villages, the poor

• Agricultural credit target raised to a record Rs 10 lakh crore, with special effort for under-served eastern States; a dedicated micro-irrigation fund with NABARD.
• MGNREGA allocation raised to Rs 48,000 crore, its highest ever, alongside larger outlays for rural roads and housing.
• Mission Antyodaya to bring one crore households out of poverty and make 50,000 gram panchayats poverty-free by 2019.
• Youth and the poor: new skill centres, education reform and higher outlays on health and sanitation.

Energise: infrastructure and enterprise

• Record capital outlay for roads, ports and railways; a Rashtriya Rail Sanraksha Kosh of Rs 1 lakh crore over five years for passenger safety.
• Affordable housing given infrastructure status, opening cheaper long-term finance for low-cost homes.
• Foreign Investment Promotion Board abolished, since over 90 per cent of FDI already came through the automatic route; incentives for BHIM-based digital payments.

Clean: black money and political funding

• No cash transaction above Rs 3 lakh, as the Special Investigation Team on black money advised; cash donations to charitable trusts capped at Rs 2,000.
• Cash donations to political parties limited to Rs 2,000 per donor, donations by cheque or digital mode, and electoral bonds announced.

Prudent finance and assessment

• Fiscal deficit pegged at 3.2 per cent of GDP for 2017-18 with 3 per cent promised for the next year; the advanced Budget date lets spending start on 1 April.
• The measures aim squarely at rural demand, jobs and transparency, but outcomes hinge on the quality of MGNREGA assets, States' capacity to spend, credit reaching small rather than large farmers, and revenue buoyancy in the year GST was rolled out.
• Electoral bonds curb cash but keep donors anonymous, so the claim to 'clean' politics depends on how the scheme is designed.

The Budget married welfare, infrastructure and clean-economy measures within a credible fiscal frame; whether it transformed, energised and cleaned India rests on delivery, not on allocations.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.

Gender budgeting is not a separate budget for women; it applies a gender lens to the whole budget to check whether public spending reaches women as fairly as men.

Why empowerment needs it

• Women carry unpaid care work, earn less and use public services less, so gender-neutral spending often serves men more; deliberate allocations in health, education, safety and livelihoods correct this.
• It turns the constitutional promise of equality and special provision for women (Articles 14 and 15(3)) into measurable spending and outcomes.

Requirements

• Sex-disaggregated data and gender analysis of every scheme before money is allocated.
• Clear allocations tied to outcome indicators, gender audits and evaluation after spending.
• Trained officials and working gender budgeting cells in ministries and States.
• Women's participation in planning, especially through panchayats and gram sabhas.
• A gender lens on revenue too: taxes, user charges and subsidies affect women differently.

Status in India

• A Gender Budget Statement has accompanied the Union Budget since 2005-06: Part A lists schemes with 100 per cent provision for women, Part B those where women receive at least 30 per cent.
• The Ministry of Women and Child Development coordinates it; ministries have gender budgeting cells and several States publish their own statements (since then, coverage has widened to 49 ministries and departments in 2025-26).
• Gaps: the statement is a small share of total expenditure, reports allocations rather than outcomes, and many departments treat it as a formality; local bodies remain largely outside it.

Way forward

• Link the statement to outcomes and audits, extend it to all ministries and local bodies, and publish sex-disaggregated data.

Gender budgeting matters for what it changes in women's lives, not for the size of the statement; outcome tracking and audits will make it a real instrument of empowerment.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.