1. The government budget; Union and State budgets
- Meaning: the annual statement of a government's estimated receipts and expenditure for the coming financial year, which runs from 1 April to 31 March. The Constitution calls it the annual financial statement (Article 112 for the Union, Article 202 for the States).
- Features: prepared in advance, so its figures are estimates; must be approved by the legislature; shows how any gap will be financed.
- Union budget: presented by the Union government in Parliament; Union subjects such as defence and railways.
- State budget: presented by a State government in its legislature; State subjects such as police and State roads.
- Types: compare receipts other than borrowing with expenditure: balanced (equal), surplus (receipts larger), deficit (expenditure larger, gap borrowed).
| Union budget | State budget | |
|---|---|---|
| Prepared by | Union government | Each State government |
| Presented in | Parliament | State legislature |
| Constitution calls it | Annual financial statement (Article 112) | Annual financial statement (Article 202) |
| Covers | Union subjects such as defence and railways | State subjects such as police and State roads |
| Feature | What it means |
|---|---|
| Annual | Covers one financial year, 1 April to 31 March |
| Estimates | Figures are forecasts made before the year begins |
| Approved by the legislature | No tax collected or money spent without approval |
| Shows the gap | States how any shortfall will be financed |
| Imagined government | Receipts other than borrowing (₹ crore) | Expenditure (₹ crore) | Budget |
|---|---|---|---|
| Tungapur | 5,200 | 4,900 | surplus |
| Malini | 3,600 | 3,600 | balanced |
| Dhaulagiri | 2,750 | 3,100 | deficit |
Key terms
- Government budget
An annual statement of estimated receipts and expenditure for the coming financial year.
- Deficit budget
A budget in which estimated expenditure exceeds estimated receipts other than borrowing.
2. Revenue receipts
- Test: a revenue receipt neither creates a liability nor reduces an asset.
- Tax revenue: income tax, corporation tax, the goods and services tax, customs duties: compulsory and never repaid.
- Non-tax revenue: fees and fines, interest received on loans given, dividends and profits of public enterprises, and grants received from other governments.
- Note: interest received is revenue, but the recovery of the loan itself is capital.
| Kind | Examples | Why revenue |
|---|---|---|
| Tax revenue | Income tax, corporation tax, GST, customs duty | Compulsory; never repaid |
| Non-tax revenue | Fees, fines, interest received, dividends, grants received | No liability created, no asset reduced |
| Receipt of Hemkunt (imagined) | Head | Reason |
|---|---|---|
| Stamp duty on property sales | Revenue (tax) | Compulsory; no liability |
| Fines from traffic police | Revenue (non-tax) | No liability, no asset reduced |
| Bonds sold to the public | Capital | Liability to repay |
| Loan repaid by a city council | Capital | Asset reduced |
| Dividend from a state dairy company | Revenue (non-tax) | No liability, no asset reduced |
| Sale of shares in a state hotel company | Capital | Asset reduced |
Key terms
- Revenue receipt
A receipt that neither creates a liability nor reduces an asset of the government.
- Non-tax revenue
Revenue receipts other than taxes, such as fees, fines, interest and dividends.
3. Capital receipts
- Test: a capital receipt either creates a liability or reduces an asset.
- Borrowings (market loans, loans from banks and abroad): create a liability.
- Recovery of loans given earlier: reduces an asset (the claim).
- Disinvestment, the sale of shares in public-sector enterprises: reduces an asset.
- Recovery of loans and disinvestment are non-debt capital receipts: they bring in money without creating debt, which matters for the fiscal deficit.
| Capital receipt | Test it passes |
|---|---|
| Borrowing from the public, banks or abroad | Creates a liability |
| Recovery of loans given earlier | Reduces an asset |
| Disinvestment (sale of shares in public companies) | Reduces an asset |
Key terms
- Capital receipt
A receipt that creates a liability or reduces an asset of the government.
- Disinvestment
Sale by the government of part or all of its shares in public-sector enterprises.
4. Revenue and capital expenditure
- Revenue expenditure neither creates an asset nor reduces a liability: salaries, pensions, interest paid, subsidies, and grants given to other governments (even if the receiver builds assets with them).
- Capital expenditure either creates an asset or reduces a liability: building roads, dams and hospitals; buying shares; giving loans; repaying loans.
- The same loan can appear four ways: borrowing it (capital receipt), paying interest on it (revenue expenditure), repaying it (capital expenditure), and, for the lender, receiving interest (revenue receipt).
| Revenue expenditure | Why |
|---|---|
| Salaries and pensions | No asset created |
| Interest on public debt | No asset created, no liability reduced |
| Subsidies | No asset created |
| Grants given to other governments | No asset for the giver |
| Capital expenditure | Why |
|---|---|
| Building roads, dams, hospitals | Creates a physical asset |
| Buying shares or giving loans | Creates a financial asset |
| Repaying borrowed money | Reduces a liability |
| Spending of Hemavati (imagined) | Head | Reason |
|---|---|---|
| Wages of forest guards | Revenue expenditure | No asset |
| A new metro line | Capital expenditure | Asset created |
| Loan to a farmers' cooperative bank | Capital expenditure | Financial asset |
| Food subsidy | Revenue expenditure | No asset |
| Repayment of old bonds | Capital expenditure | Liability reduced |
| Interest on old bonds | Revenue expenditure | No asset, no liability reduced |
Key terms
- Revenue expenditure
Spending that neither creates an asset nor reduces a liability.
- Capital expenditure
Spending that creates an asset or reduces a liability.
5. Measures of deficit and how to calculate them
- Revenue deficit = revenue expenditure − revenue receipts.
- Fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts). It equals the year's borrowing.
- Primary deficit = fiscal deficit − interest payments.
- Imagined Hemavati (₹ crore): revenue deficit 700; fiscal deficit 1,400; primary deficit 500.
- Imagined Neelachal: a revenue surplus of 150 but a fiscal deficit of 400, because capital spending exceeds the surplus and non-debt receipts.
- Imagined Kanakdesh: fiscal deficit 520 and interest 520, so the primary deficit is zero.
| Deficit | Formula | What it shows |
|---|---|---|
| Revenue deficit | Revenue expenditure − revenue receipts | Borrowing for current spending |
| Fiscal deficit | Total expenditure − (revenue receipts + non-debt capital receipts) | Total borrowing requirement |
| Primary deficit | Fiscal deficit − interest payments | Borrowing for present programmes |
| Step | ₹ crore |
|---|---|
| Revenue receipts | 2,400 + 600 = 3,000 |
| Revenue deficit | 3,700 − 3,000 = 700 |
| Total expenditure | 3,700 + 1,100 = 4,800 |
| Non-debt receipts | 3,000 + 150 + 250 = 3,400 |
| Fiscal deficit | 4,800 − 3,400 = 1,400 |
| Primary deficit | 1,400 − 900 = 500 |
| Neelachal (imagined), ₹ crore | Amount |
|---|---|
| Revenue receipts | 1,850 |
| Revenue expenditure | 1,700 |
| Revenue surplus | 150 |
| Non-debt capital receipts | 100 |
| Capital expenditure | 650 |
| Fiscal deficit | 400 |
| Primary deficit | 100 |
Key terms
- Fiscal deficit
Total expenditure minus revenue receipts and non-debt capital receipts; the borrowing requirement.
- Primary deficit
Fiscal deficit minus interest payments.
6. Implications of deficits
- Revenue deficit: the government dissaves, using borrowing or asset sales for current needs; debt grows without creating assets, and future interest rises.
- Fiscal deficit: shows total borrowing; if persistent, debt and interest pile up, leading towards a debt trap; if met by borrowing from the central bank, it can cause inflation.
- Primary deficit: shows borrowing for present programmes; a fiscal deficit close to the interest bill means old debt is driving new borrowing.
- Quality of borrowing: imagined Saraswatipur uses 50 per cent of its borrowing for the revenue gap; imagined Neelachal uses none. Borrowing that builds assets, or that lifts demand in a slump, is far less harmful.
| Imagined government | Fiscal deficit | Interest | Primary deficit |
|---|---|---|---|
| Hemavati | 1,400 | 900 | 500 |
| Kanakdesh | 520 | 520 | 0 |
| Revapur | 960 | 750 | 210 |
Key terms
- Debt trap
A situation in which a government has to borrow just to pay interest on earlier debt.
- Dissaving by the government
Current spending above current income, met by borrowing or selling assets.
Exam tips
Common mistakes
- Counting borrowing as a receipt when calculating the fiscal deficit.
- Leaving recovery of loans or disinvestment out of non-debt capital receipts.
- Calling interest paid capital expenditure, or repayment of a loan revenue expenditure.
- Classifying a grant given by the Union as capital expenditure because the receiver builds assets.
- Adding interest to get the primary deficit: it is subtracted.
How marks are usually awarded
- 1 mark: a correct option, a classification or a one-step calculation.
- 2 marks: two points, or a head with its reason.
- 3 marks: three points, or three calculations shown step by step.
- 5 marks (and ISC 4- and 8-mark questions): parts answered separately, formulas written out, and a reasoned comment on what the deficits show.
All governments and figures in SOYL practice are imagined; no actual budget figures are used.