Public Finance, Fiscal Policy, and Banking/Taxation Systems

Introduction

Public finance concerns government revenue, expenditure, borrowing, and debt. Fiscal policy uses taxation and spending to influence growth, stability, and distribution. Monetary policy, conducted through the RBI’s framework, influences liquidity, interest rates, and inflation.

1. Budgetary Architecture

Under Article 112, the President causes the Annual Financial Statement to be laid before Parliament. India’s financial year runs from 1 April to 31 March.

Principal Public Funds

Charged expenditure, including specified constitutional-office expenses and debt charges, is not voted upon, although Parliament may discuss it. Voted expenditure requires Lok Sabha approval. Both require lawful appropriation from the Consolidated Fund.

Revenue receipts neither create liabilities nor reduce assets; examples include taxes, interest, and dividends. Capital receipts create liabilities or reduce assets, including borrowings, loan recoveries, and disinvestment proceeds.

Revenue expenditure includes salaries, subsidies, and interest. Capital expenditure includes asset creation, loans, and debt repayment. Revenue-classified grants can also finance assets created by recipient institutions.

2. Deficits and Fiscal Discipline

Major Deficit Measures

The FRBM Act, 2003 establishes fiscal-responsibility requirements. The N.K. Singh review committee, constituted in 2016, recommended greater emphasis on debt sustainability. Its recommendations must be distinguished from subsequent statutory provisions and budget targets.

The 2026–27 Budget Estimate places the fiscal deficit at 4.3% of GDP, alongside a central debt objective of 50±1% by 2030–31.

Public capital expenditure can stimulate demand and improve productive capacity. Its multiplier and ability to attract private investment depend on implementation and economic conditions.

3. Taxation and GST

Direct taxes, such as personal and corporate income taxes, are imposed directly on taxpayers. Indirect taxes, including GST, apply to supplies and may be passed through prices.

Tax buoyancy measures percentage growth in tax revenue relative to percentage growth in GDP.

The 101st Constitutional Amendment, 2016, enabled GST; implementation began on 1 July 2017. GST is destination-based and uses input-tax credits to reduce cascading.

Article 246A distributes GST legislative authority; Parliament has exclusive power over inter-State supplies. Article 269A governs inter-State GST, while the GST Council under Article 279A recommends rates and related arrangements.

Alcoholic liquor for human consumption is constitutionally excluded. Specified petroleum products await GST commencement, while electrical energy is exempt—three different legal positions.

4. Fiscal Federalism

The Finance Commission under Article 280 recommends Union–State tax sharing, distribution among States, grants, and measures supporting local-body finances.

Vertical devolution concerns the Union–State division; horizontal distribution concerns allocation among States. Specified-purpose Union cesses and surcharges lie outside the divisible pool. Article 293 regulates State borrowing and requires Union consent in specified circumstances involving outstanding Union loans or guarantees.

5. Banking and Monetary Policy

Bank nationalisation covered 14 banks in 1969 and six in 1980. Subsequent reforms strengthened competition, prudential regulation, and capital adequacy. NABARD supports rural finance, SIDBI supports smaller enterprises, and the IBC provides insolvency-resolution mechanisms.

Selected Monetary Instruments

Flexible inflation targeting centres on 4% CPI inflation, with a 2–6% tolerance band.

Conclusion

Fiscal and monetary institutions pursue stability through distinct instruments.