Public Finance: Budget, Taxation and the Role of Government
This domain tests the structure of a government budget, the meaning of the deficits, direct versus indirect taxes, and the constitutional machinery of centre-state finance.
The budget
A budget is the annual statement of estimated receipts and expenditure; the Union budget is presented under Article 112 as the Annual Financial Statement. The revenue account covers tax and non-tax revenue and revenue expenditure (salaries, interest); the capital account covers borrowings, disinvestment and loans, and capital expenditure (roads, dams, machines).
Deficits
- Revenue deficit = revenue expenditure − revenue receipts.
- Fiscal deficit = total expenditure − total receipts excluding borrowings.
- Primary deficit = fiscal deficit − interest payments.
Taxes
Direct taxes (income tax, corporate tax) fall on the same person and can be progressive; indirect taxes (GST, customs) are shifted to the consumer and tend to be regressive. GST was introduced on 1 July 2017. The Finance Commission (Article 280) decides the sharing of central taxes with states; the 15th Commission covered 2020-25 and the 16th, chaired by Arvind Panagariya, gives its award for 2026-31.
Role of government
Allocation (public goods such as defence and roads), distribution (subsidies, progressive taxes) and stabilisation (fiscal policy in booms and slumps).
Worked example
Total expenditure is ₹50 lakh crore, revenue receipts ₹24 lakh crore and non-debt capital receipts ₹6 lakh crore; interest payments are ₹8 lakh crore. Fiscal deficit = 50 − (24 + 6) = ₹20 lakh crore. Primary deficit = 20 − 8 = ₹12 lakh crore. Reasoning: borrowings are excluded from receipts because they finance, rather than reduce, the gap; the primary deficit shows the current year's gap before servicing old debt.
Traps that cost marks
Counting borrowings as receipts in the fiscal deficit; confusing revenue deficit with fiscal deficit; calling GST a direct tax; ignoring that Bihar depends heavily on central transfers.