Fiscal Policy & the Union Budget — The Government's Balance Sheet

1. Fiscal Policy — Definition, Objectives & Instruments

Fiscal policy is the use of government taxation, public expenditure and borrowing to influence the level of economic activity, redistribute income, and stabilise prices & employment. It is the counter-part of monetary policy (which works through interest rates and money supply).

1.1 Classical Definitions

• Arthur Smithies: “Fiscal policy is a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on national income, production and employment.”
• Otto Eckstein: “Changes in taxes and expenditure which aim at short-run goals of full employment, price-level stability and economic growth.”
• Musgrave (1959): three functions — Allocation (public goods), Distribution (equity), Stabilisation (counter-cyclical).

1.2 Objectives in the Indian Context

• Growth: public capex on infrastructure (PM Gati Shakti, NIP) crowds in private investment. Capex outlay raised to ₹11.21 lakh crore in BE 2025-26 (~3.1% of GDP). check for latest update or data
• Equity & redistribution: progressive direct taxes, targeted subsidies, MGNREGA, PMAY, PM-KISAN.
• Price stability: surplus budgeting in inflationary years, deficit financing in recessions (Keynesian).
• External balance: import duty adjustments, export incentives (RoDTEP, SEZ tax holidays).
• Resource mobilisation: tax-to-GDP ratio target of ~12% (Centre) and ~18% (combined) over the medium term.

1.3 Instruments of Fiscal Policy

1.4 Types of Fiscal Policy

• Expansionary (deficit) fiscal policy: tax cuts and/or higher spending to boost demand — used during recessions (Covid-19 Atmanirbhar packages, 2020-21).
• Contractionary (surplus) fiscal policy: tax hikes and/or spending cuts to cool an overheated economy — rare in India.
• Neutral fiscal policy: revenues match spending; the budget has no net effect on demand.
• Discretionary vs Automatic: discretionary requires Parliament approval (tax-rate changes); automatic stabilisers work without legislation (progressive taxes, unemployment-linked transfers).

1.5 The Fiscal Multiplier

RBI Working Paper 7/2019 estimates India's capex multiplier at 2.45 (every ₹1 of capex generates ₹2.45 of output over 4 quarters), versus the revenue-expenditure multiplier at just 0.45. This is the analytical basis for the Centre's post-2021 capex push.

2. The Union Budget — Constitutional Framework

The Indian Constitution does not use the word “budget”. The document Parliament receives every year is the Annual Financial Statement (AFS) under Article 112. It is the central instrument that gives effect to the entire architecture of Part XII (“Finance, Property, Contracts and Suits”) and Part XIII of the Constitution.

2.1 Key Constitutional Articles

2.2 The Three Funds

2.3 Charged vs Voted Expenditure

• Charged on the CFI (Art 112(3)) — cannot be voted by Parliament, only discussed. Includes salary & allowances of President, Speaker, Judges of SC & HC, CAG, debt charges, court decrees.
• Voted — all other expenditure; subject to Demand for Grants, Cut Motions, Guillotine.

2.4 Budget Documents (14 documents tabled)

• Annual Financial Statement (Art 112)
• Demands for Grants (Art 113)
• Appropriation Bill (Art 114)
• Finance Bill (Art 110/117) — carries the tax proposals; must be passed within 75 days.
• FRBM statements: Macro-economic Framework Statement, Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, Medium-Term Expenditure Framework.
• Expenditure Profile, Receipts Budget, Customs & Excise Notifications, Output-Outcome Framework, Implementation of Budget Announcements, Statement on Government Guarantees, Statement on Liabilities.

2.5 The Budget Cycle

• 1 Feb: Budget presented (advanced from end-Feb in 2017; Railway Budget merged the same year).
• Mid-Feb to mid-March: General Discussion & recess; Department-Related Standing Committees examine demands.
• Mid-March to early April: Demands for Grants voted; Appropriation Bill passed; Finance Bill passed (within 75 days of introduction).
• 1 April: Financial year begins. If Budget is not passed in time, Vote on Account (Art 116) authorises spending for two months (six months in election years).

3. Components of the Budget — Revenue vs Capital

The Budget has two halves, each with receipts and expenditure:

3.1 The simple decision rule

• If it creates a physical or financial asset OR reduces a financial liability ⇒ Capital.
• If it is recurring and does not create an asset ⇒ Revenue.
• Examples: building a road = capital; repairing a road = revenue. Loan repayment principal = capital expenditure; interest on that loan = revenue expenditure.

3.2 The Plan / Non-Plan Distinction — ABOLISHED

Until 2017, the Budget was also split into Plan (Five-Year Plan schemes) and Non-Plan expenditure. Following the wind-up of the Planning Commission (2014) and on the recommendation of the Rangarajan Committee on Plan/Non-Plan classification, this split was scrapped from BE 2017-18. The Budget is now classified only as Revenue vs Capital (and Scheme vs Non-Scheme).

3.3 Gender Budgeting & Outcome Budgeting

• Gender Budget Statement — introduced 2005-06; lists Part-A (100% women-targeted) and Part-B (≥30% women-targeted) schemes. The Gender Budget rose to ~6.5% of total Union Budget in BE 2025-26. check for latest update or data
• Child Budget Statement — tracks expenditure on children-specific schemes.
• Output-Outcome Framework — introduced 2017-18 to make every department report measurable outputs (e.g., km of road built) and outcomes (e.g., reduction in travel time).
• Climate Budget Tagging — under work, following CoP-26 commitments.

3.4 Other Classifications

• Centrally Sponsored Schemes (CSS) — funded jointly by Centre & States in a fixed ratio (e.g., 60:40 normal States, 90:10 NE/Hill States). Rationalised to 28 umbrella CSS by Subramanian Committee (2018).
• Central Sector Schemes (CSec) — fully funded by Centre and run by central agencies (e.g., MGNREGA wage compensation, PM-KISAN).
• Finance Commission Grants — statutory transfers under Art 275.

4. Receipts — Tax, Non-Tax & Capital

4.1 Revenue Receipts

4.2 Capital Receipts

Three categories — only the first two are debt-creating:

• Market borrowings (G-Secs, T-bills): the largest source — gross borrowing of ₹14.01 lakh crore in BE 2025-26. check for latest update or data
• External borrowings: from multilateral bodies (World Bank, ADB, AIIB) and bilateral (Japan JICA).
• Small savings & provident funds (NSSF): household savings routed via post offices.
• Recoveries of loans from States & PSUs — non-debt capital receipt.
• Disinvestment / strategic sale proceeds — non-debt capital receipt.

4.3 Composition of Centre's Receipts (BE 2025-26 illustrative)

4.4 Cess vs Surcharge vs Cess

5. Expenditure — Revenue & Capital

5.1 Revenue Expenditure

Recurring outflows that do not create assets:

• Interest payments — the single largest item, ~24% of total expenditure and ~40% of revenue receipts.
• Subsidies — food (NFSA), fertiliser (urea + nutrient-based), petroleum (LPG residual).
• Defence revenue — salaries, pensions, stores, maintenance.
• Pensions — CGHS, OROP, central civil pensions.
• Grants-in-aid to States — FC grants, CSS releases (revenue portion).
• Salaries, establishment & office expenses.

5.2 Capital Expenditure

Outlays that create assets or reduce liabilities:

• Roads, railways, ports, airports, urban infrastructure — Ministries of Road Transport, Railways, Urban Affairs.
• Defence capital — ships, aircraft, missiles, modernisation (₹1.80 lakh crore in BE 2025-26). check for latest update or data
• Loans & advances to States — including the 50-year interest-free Special Assistance for capex (launched FY21).
• Equity infusion in PSUs & PSBs.
• Repayment of principal on past borrowings — the largest hidden capex item.

5.3 Composition of Centre's Expenditure (BE 2025-26 illustrative)

5.4 Quality of Expenditure — Capex Push

The post-pandemic strategy has been to raise the share of capex in total spending — from ~12% (FY20) to ~22% (BE26). Reasons:

• Capex multiplier (2.45) is 5× the revenue-expenditure multiplier (0.45).
• Capex creates durable infrastructure with positive externalities.
• Crowds in private investment — counters the post-NPA balance-sheet hesitancy.
• Better quality of fiscal deficit — deficit financing of assets is sustainable; deficit financing of subsidies is not.

5.5 Committed vs Discretionary Expenditure

• Committed (~55-60% of revenue spending): interest, salaries, pensions, statutory transfers — cannot be cut in the short run.
• Discretionary: subsidies, scheme outlays, defence capital — the part where fiscal consolidation actually happens.
• This explains why deficit reduction is so difficult: only 40% of the budget is “cuttable”.

6. The Four Deficits

A deficit is a shortfall of receipts against expenditure. Indian budgetary practice tracks four deficits, each measuring a different dimension of fiscal stress.

6.1 Definitions & Formulae

6.2 Budget Numbers — the Glide Path

6.3 How Deficits are Financed

• Internal debt: dated G-Secs, T-bills, NSSF, special securities (~93% of total).
• External debt: multilateral & bilateral loans (~5%).
• Public Account drawdown: small savings & PF surplus (~2%).
• Monetisation: direct RBI subscription to G-Secs — ended in 1997 following the Sukhamoy Chakravarty Committee & the 1994/1997 RBI-Government agreements that replaced ad hoc T-bills with the Ways & Means Advances (WMA) facility.

6.4 The Golden Rule

An old fiscal-discipline principle holds that the government should borrow only to finance capital expenditure, never revenue expenditure. Implication: revenue deficit should be zero (or surplus). The FRBM Act's original 2003 framework targeted this; the 2018 amendment shifted to a debt-anchor approach but retained zero RD as a directional goal.

7. FRBM Act 2003 & the NK Singh Recalibration

The Fiscal Responsibility and Budget Management Act, 2003 was enacted to enforce fiscal discipline through statutory targets, transparency requirements and Parliamentary oversight. It was the first law of its kind in India.

7.1 Original Architecture (2003)

• Eliminate revenue deficit by 31 March 2008.
• Reduce fiscal deficit to 3% of GDP by 31 March 2008.
• RBI prohibited from directly subscribing to primary issues of central government securities (Section 5) — ended monetisation; with an exception clause activated only during Covid (May 2020).
• Annual statements: Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, Macroeconomic Framework Statement (and from 2012, the MTEF Statement).
• Mid-year and quarterly reviews to be laid before Parliament.

7.2 Targets repeatedly missed

Targets were postponed in 2008-09 (Lehman crisis), 2012-13 (Kelkar Committee re-cast), 2015-16, and most dramatically in FY21 (Covid — deficit hit 9.2%). The original Act lacked an enforcement mechanism — only a tabled statement of reasons.

7.3 NK Singh FRBM Review Committee (2017)

Chaired by N.K. Singh with members Urjit Patel, Arvind Subramanian, Sumit Bose, Rathin Roy. Submitted four-volume report “Responsible Growth: A Debt and Fiscal Framework for 21^st Century India.” Key recommendations:

• Debt anchor of 60% of GDP for combined Centre+States by FY23 — 40% Centre, 20% States — replacing the earlier deficit-only approach.
• Fiscal deficit as operational target — glide path to 2.5% of GDP by FY23.
• Revenue deficit to be eliminated by FY23.
• Fiscal Council — an independent body to monitor compliance, vet forecasts, publish multi-year scenarios. (Recommended but not yet established.)
• Escape clause — deviation up to 0.5% of GDP allowed for: (a) over-riding national security/national calamity considerations, (b) structural reforms with unanticipated fiscal implications, (c) a sharp decline in real output growth of ≥3pp below the four-quarter average.
• Buoyancy clause — if real GDP exceeds the trend by 3pp+, fiscal targets tighten by 0.25%.

7.4 FRBM Amendment, 2018

Through the Finance Act 2018, the FRBM Act was amended to incorporate parts of NK Singh:

• Adopted the debt-to-GDP target of 40% for Centre and 60% combined.
• Fiscal deficit ceiling 3% of GDP — revised glide-path.
• Effective Revenue Deficit removed from the Act's targets (but retained as a Budget disclosure).
• Codified the escape clause.
• RBI prohibition under Section 5 retained with the same exception window.

7.5 Post-Covid Recalibration (Budget 2021)

The Finance Minister announced in Budget 2021-22 that the government would break the glide path: fiscal deficit at 6.8% in FY22, with a target to bring it below 4.5% by FY26. The amended FRBM trajectory was tabled. Beyond FY26, the framework will move from a fiscal-deficit-anchor to a debt-to-GDP anchor — Centre's central-govt debt is to glide down progressively from ~57% (FY25) towards 50% by FY31. check for latest update or data

7.6 Achievements vs gaps

• Wins: ended automatic monetisation; institutionalised forward-looking fiscal statements; raised quality of expenditure data; provided a recognised escape mechanism.
• Gaps: Fiscal Council never established; targets routinely revised; off-budget borrowings (oil bonds 2007-08, FCI loans till 2020) bypassed the headline number; cess proliferation reduces the divisible pool.

8. Public Debt & Debt Management

Public debt in the Indian Budget sense refers to liabilities under the Consolidated Fund (Art 292 for Centre, Art 293 for States). The broader concept — total liabilities — also includes Public Account liabilities (PF, small savings, reserve funds).

8.1 Classification

8.2 Stock of Public Debt

• Centre's total liabilities: ~57% of GDP (FY25 RE), down from a peak of ~62% in FY21.
• Combined Centre + States: ~81% of GDP, well above the FRBM-anchor of 60%.
• External debt is just ~3% of total — one of the lowest in the developing world — insulating India from currency-risk.
• Average maturity of G-Sec stock: ~12 years — one of the longest globally, lowering rollover risk. check for latest update or data

8.3 Domar Stability Condition

India has enjoyed this favourable arithmetic for most of the past decade (g ~ 7%, r ~ 5%). The 16th FC will probably anchor the long-run debt path on this principle.

8.4 Public Debt Management

• RBI is the Centre's debt manager under Section 21 of the RBI Act and the (separate) agreements with the Centre — conducts auctions, manages WMA, supervises Primary Dealers.
• Public Debt Management Cell (PDMC) was set up in 2016 under the Department of Economic Affairs as a transition arrangement towards a fully independent Public Debt Management Agency (PDMA). The PDMA Bill is pending; until then RBI continues to be debt manager.
• Why a separate PDMA? — to eliminate the conflict of interest between RBI as monetary policy maker (wants high rates to fight inflation) and as debt manager (wants low yields to lower govt borrowing cost).

8.5 Debt Sustainability Indicators

8.6 Off-Budget Borrowings — Cleaned Up

Until FY21, the Centre routinely financed FCI (food subsidy), oil PSUs and fertiliser dues through borrowings outside the Budget. Following CAG strictures and the FRBM transparency standards, all such items were brought on-budget from FY22, raising the headline fiscal deficit but improving transparency. The legacy National Small Savings Fund (NSSF) loans to FCI were fully cleared by FY23.

9. Tax System — Direct, Indirect & GST

India's tax architecture rests on the constitutional distribution of taxation powers (Seventh Schedule, Union List entries 82-92C; State List entries 45-63; Concurrent List nil) and on Article 265 (“no tax without law”).

9.1 Direct vs Indirect — the basic distinction

9.2 Tax-to-GDP Ratio & Direct-to-Indirect Mix

• Centre's gross tax-to-GDP: ~11.7% (BE 2025-26). check for latest update or data
• Combined (Centre + State) tax-to-GDP: ~17-18%; OECD average is ~33%.
• Direct-to-Indirect ratio: moved from ~38:62 (FY10) to ~56:44 (FY24) — a structural shift towards a more progressive mix.
• Corporate-to-Income-tax ratio: personal income tax overtook corporation tax in FY24 for the first time — reflecting widening of tax base via PAN-Aadhaar seeding, AIS, TDS expansion.

9.3 Direct Taxes — Recent Reforms

• New Personal Income Tax Regime (2020): simpler slabs without exemptions. From FY24 made the default regime with rebate up to ₹7 lakh income; Budget 2025-26 raised the rebate threshold further. check for latest update or data
• Concessional Corporate Tax Rate (2019): 22% for domestic companies (without exemptions); 15% for new manufacturing units (Section 115BAB). Surcharge + cess on top.
• Faceless Assessment & Faceless Appeals (2020): eliminated physical interface between taxpayer and officer; dynamic jurisdiction.
• Vivad-se-Vishwas Scheme — one-time settlement of pending tax disputes; relaunched in Budget 2024.
• Direct Tax Code (DTC) 2025 — a draft consolidated Income-tax law to replace the 1961 Act is under public consultation; aims to be ~50% shorter, with simpler residency rules and consolidated capital-gains framework. check for latest update or data

9.4 Indirect Taxes

• GST — the dominant indirect tax (covered separately below).
• Customs duties — BCD, SWS (10% of BCD), IGST on imports, Anti-Dumping & Safeguard Duties. India's average tariff ~ 18% — rising for “Make-in-India”.
• Union Excise & State VAT — survive only on the five petroleum products (crude, petrol, diesel, ATF, natural gas) and tobacco/alcohol. These remain outside GST.

9.5 GST — The 101st Constitutional Amendment Act, 2016

GST subsumed 17 central + state indirect taxes (excise, service tax, VAT, entry tax, octroi, luxury tax, entertainment tax, purchase tax, etc.) into a single nation-wide destination-based consumption tax. Live from 1 July 2017.

9.5.1 Constitutional Architecture

9.5.2 GST Council (Art 279A)

• Chair: Union Finance Minister
• Members: Union MoS (Finance) + Finance Minister of every State/UT with legislature
• Voting: Centre 1/3 weight; all States together 2/3; decisions require 3/4 majority — effectively giving Centre a veto and Sates a collective veto
• Recent SC ruling (Mohit Minerals, May 2022): GST Council recommendations are not binding — only persuasive. Both Centre and States retain sovereign legislative powers under Art 246A.

9.5.3 GST Slabs

• 0%, 5%, 12%, 18%, 28% — the five standard slabs.
• Special rates: 0.25% (rough diamonds), 1.5% (cut diamonds), 3% (gold & silver), 28% + Compensation Cess on sin goods & SUVs.
• GST Rate Rationalisation — a GoM (chaired by Bihar Dy CM) is reviewing slab merger (5/12 → one rate; 12/18 merger). Decision pending. check for latest update or data

9.5.4 GST Collection & Compensation

• Monthly GST collection regularly exceeds ₹1.7-1.8 lakh crore; record ₹2.10 lakh crore in April 2024. check for latest update or data
• GST Compensation to States for 14% YoY growth guarantee ended on 30 June 2022. Compensation Cess continues till March 2026 to repay back-to-back loans taken during Covid.
• Inverted Duty Structure — input tax higher than output tax (textiles, fertiliser) creates refund stress; under correction.

9.6 Tax Buoyancy & Elasticity

India's overall tax buoyancy has averaged ~1.4 in the post-pandemic period — meaning a 1% rise in nominal GDP yields a 1.4% rise in tax revenue. The direct-tax buoyancy is even higher (~2.1) — thanks to PAN-Aadhaar linkage, AIS, expanded TDS coverage and faceless assessment. check for latest update or data

10. Subsidies, DBT & Targeted Welfare

A subsidy is a transfer payment that reduces the price (price subsidy) or the income gap (income subsidy) of a target beneficiary. They are recorded as revenue expenditure (Major Subsidies) in the Union Budget.

10.1 The Three Major Subsidies

10.2 The DBT Revolution — JAM Trinity

Direct Benefit Transfer (DBT) was launched on 1 January 2013 to transfer subsidies and welfare payments directly to beneficiary bank accounts, eliminating intermediaries. It rides on the JAM Trinity:

• J — Jan Dhan (PMJDY, Aug 2014): 53+ crore basic savings accounts. check for latest update or data
• A — Aadhaar (UIDAI Act 2016): biometric ID for authentication.
• M — Mobile: 119 crore subscribers; OTP verification & mobile banking.

Cumulative DBT savings till date are estimated at ~₹3.48 lakh crore through removal of ghost beneficiaries, reduction in leakage, and lower administrative costs (DBT Mission, Cabinet Secretariat). check for latest update or data

10.3 Key Subsidy Reforms

• LPG PAHAL (2013): world's largest cash-transfer programme by participants; removed ghost LPG connections.
• PM-KISAN (2019): ₹6,000/year in three tranches to all landholding farmers via DBT; ~9.5 crore beneficiaries.
• One Nation One Ration Card (2019): portability of NFSA entitlement across States.
• Direct fertiliser DBT (delayed): currently subsidy is paid to manufacturer; pilot of farmer-DBT for nutrients underway.
• Kerosene phase-out: central kerosene allocation reduced to near-zero; replaced by Ujjwala LPG.

10.4 Subsidy Reform Debates

• Quasi-Universal Basic Income (Q-UBI): Economic Survey 2016-17 floated a partial UBI funded by rationalising centrally-sponsored schemes. Re-examined in ES 2022-23 with fiscal cost estimates.
• Cash vs Kind: cash transfers preserve choice but may be diverted (alcohol concern); kind transfers ensure nutrition but suffer leakage.
• Targeting errors: Type-I (exclusion of poor) vs Type-II (inclusion of non-poor). SECC-2011 data & the upcoming 2024-25 caste-cum-poverty census will recalibrate beneficiary lists.
• Implicit subsidies: the Economic Survey distinguishes between explicit budgetary subsidies and implicit subsidies (under-recovery on irrigation, electricity, fertiliser pricing, free water).

10.5 Welfare Architecture & Major Schemes

11. Centre-State Fiscal Relations & the Finance Commission

The Indian Constitution creates a deliberate vertical fiscal imbalance — the Centre raises the bulk of buoyant taxes (income, corporation, customs, IGST share) while States carry the heavier expenditure responsibility (health, education, agriculture, law & order). The mechanism that corrects this imbalance is the Finance Commission (FC) under Article 280.

11.1 The Finance Commission — Article 280

• Constituted by the President every 5 years (or earlier if needed). First FC: 1951 (Chair: K.C. Neogy).
• Composition: Chairperson + 4 members; qualifications laid down in FC (Miscellaneous Provisions) Act, 1951.
• Terms of Reference: include vertical & horizontal devolution, grants-in-aid (Art 275), measures to augment Consolidated Fund of States to supplement panchayats & municipalities (74th & 73rd CAA additions, Art 280(3)(bb) and (c)).
• Recommendations are not binding but historically always accepted in full or substantially.

11.2 Channels of Centre-to-State Transfers

11.3 15th Finance Commission (Chair: N.K. Singh)

Constituted Nov 2017; submitted two reports — interim for FY21 and final for FY22-26.

• Vertical share: States' share of the divisible pool fixed at 41% (down from 42% by 14th FC) — the 1pp reduction accommodated the carving out of J&K as a UT (no longer a State for devolution).
• Horizontal formula: 6 criteria — Income Distance (45%), Population 2011 (15%), Area (15%), Forest & Ecology (10%), Demographic Performance (12.5%), Tax & Fiscal Effort (2.5%).
• Use of 2011 census for population: triggered protests from southern States; offset partly by adding “Demographic Performance” criterion that rewards States with lower TFR.
• Major grants: post-devolution revenue-deficit grants, local-body grants, disaster management grants, sector-specific grants (health, agriculture, higher education).
• Recommended a Modernisation Fund for Defence & Internal Security (MFDIS) outside the divisible pool.

11.4 16th Finance Commission (Chair: Dr Arvind Panagariya)

• Constituted on 31 December 2023 by the President; Dr Arvind Panagariya (former Vice-Chairman, NITI Aayog) is Chair. Other members: Annie George Mathew, Manoj Panda, Niranjan Rajadhyaksha, Soumya Kanti Ghosh (part-time).
• Period: award for five-year window beginning 1 April 2026 to 31 March 2031.
• Deadline: to submit report by 31 October 2025.
• Key Terms of Reference: vertical & horizontal devolution; principles governing grants-in-aid; measures to augment State funds for local bodies; review of disaster financing.
• Expected contentious issues: cess & surcharge share in gross tax revenue, 2011 vs new census for population, treatment of GST compensation cess, role of Demographic Performance criterion, treatment of climate/sustainability as a horizontal criterion.

11.5 GST Council vs Finance Commission

11.6 Other Federal Institutions

• NITI Aayog (2015, replaced Planning Commission): Governing Council of all Chief Ministers; no fund-allocation powers; primarily a policy-think-tank and cooperative-competitive federalism platform.
• Inter-State Council (Art 263): recommendatory body for centre-state & inter-state issues.
• Zonal Councils: 5 statutory + NE Council; chaired by Union Home Minister.
• FRBM (State FRLs): binds States to 3% GSDP deficit ceiling; Centre's consent under Art 293(3) for borrowing.

11.7 Issues in Indian Fiscal Federalism

• Cess & surcharge proliferation shrinks the divisible pool that the FC apportions.
• Centrally sponsored schemes impose matching-grant burden on States & reduce State flexibility.
• GST Compensation end (June 2022): some States have permanent revenue gaps.
• Use of 2011 census: penalises southern States that achieved demographic transition early.
• Off-budget “contingent liabilities” at the State level (DISCOM dues, PSU losses) bypass FRL.
• Direct transfers (PM-KISAN, PMAY-G) reduce the role of States in delivery — the “by-passing federalism” concern.

12. Current Affairs Anchor (2024-26)

• Union Budget 2025-26 (1 Feb 2025): fiscal deficit 4.4% of GDP; capex outlay ₹11.21 lakh crore (~3.1% of GDP); shift to a debt-anchor framework from FY27. check for latest update or data
• New tax regime as default: rebate threshold raised to ₹12 lakh under Section 87A in Budget 2025-26 with revised slabs; standard deduction at ₹75,000. check for latest update or data
• Direct Tax Code 2025: draft consolidated I-T law under consultation; aims to halve the length of the IT Act 1961 and simplify residency & capital-gains rules.
• 16th Finance Commission: constituted 31 Dec 2023 (Chair: Dr Arvind Panagariya); reports by 31 Oct 2025 for the period FY27-31.
• GST collections crossed ₹2 lakh crore for the first time in Apr 2024; monthly averages remain in the ₹1.7-1.9 lakh crore band.
• GST Compensation Cess continues till March 2026 to service back-to-back loans taken during Covid; GoM on rate rationalisation pending decision.
• RBI Surplus Transfer: record ₹2.69 lakh crore for FY25 (paid May 2025), the largest-ever dividend — aided fiscal consolidation by ~0.4% of GDP. check for latest update or data
• PMGKAY extension for 5 years till 2028 — ~₹11.8 lakh crore cumulative fiscal cost; merged with NFSA distribution.
• 50-year interest-free capex loan to States — outlay raised to ₹1.5 lakh crore in BE26; conditionalities on power-sector reform, urban infra & land registry digitisation.
• NPS-Vatsalya & Unified Pension Scheme (UPS): UPS approved Aug 2024 — assured 50% of last-12-month average salary as pension for central employees with 25 yr service; cost ~₹6,250 crore in first year.
• State borrowing tightening: Centre extended the conditional 0.5% extra-borrowing window to FY26 linked to DISCOM reforms & urban property-tax compliance.
• Off-budget clean-up completed: all FCI food-subsidy arrears cleared on-budget; oil-bond legacy fully redeemed by FY26. check for latest update or data

13. Prelims PYQs (2014-2026)

14. Mains PYQs (2014-2025)

15. Revision Box — 15-Point Crisp Recap