Public Finance In India & Finance Commission

Public finance is a

Study of the financial aspects of Government

• It is a branch of economics which deals with government revenue and government expenditure

Arthashastra by Kautilya (Chanakya)

is considered the earliest reference to public finance in India

The first budget of independent India was presented by

R.K. Shanmukham Chetty

• The first Finance Minister
• On November 26, 1947

The first budget presented in India overall was by

James Wilson

• on April 7, 1860

Why india have two types of budget?

India is a Federal Economy that's why

Two Budget of India

• Union Budget - Article 112
  • State Budget - Article 202

On the basis of expenditure on revenue account and other accounts, a budget can be presented in two ways

• Revenue Budget
  • Capital Budget

Revenue Budget

It consists of revenue receipts and revenue expenditure

Capital Budget

It consists of capital receipts and capital expenditure

Revenue Receipts

Receipts that government don't have to pay back

• non-redeemable
• Divided into tax and non-tax revenue

Revenue Receipts Tax revenue

• Direct taxes - Personal income tax, Corporation tax, wealth tax, gift tax, etc
  • Indirect taxes - customs duties, GST, etc.

Revenue Receipts Non-Tax revenue

Mainly consists of interest receipts on account of loans by the central government

• dividends and profits on investments made by the government
• fees and other receipts for services rendered by the government
• Cash grants-in-aid from foreign countries

Revenue Expenditure

Not for the creation of assets but rather functioning of the government

• salaries, pensions, interest payments, subsidies

Capital Receipts

All those receipts of the government which create liability or reduce financial assets are termed as capital receipts

• Provident fund (PF), Postal Deposits, various small saving schemes and the government bonds sold to the public

Capital Expenditures Two Types

• Plan capital expenditure
  • Non-plan capital expenditure

Plan capital expenditure

like its revenue counterpart, relates to central plan and central assistance for state and union territory plans

Non-plan capital expenditure

covers various general, social and economic services provided by the government

Balanced Budget

Spending an amount equal to the revenue it collects

• Government’s estimated Revenue = Government’s proposed Expenditure

Surplus Budget

Estimated revenues of the year are greater than anticipated expenditures

• Government Estimated revenue > Estimated Government Expenditure

Deficit Budget

Expenditure is more than expected revenue

• Government estimated Revenue < Government proposed Expenditure

The budget deficit is of four major types

• Revenue Deficit
  • Budget Deficit
  • Fiscal Deficit
  • Primary Deficit

Revenue deficit

Revenue expenditure – Revenue receipts

Budget Deficit

Total Expenditure – Total Revenue

Fiscal Deficit

Total Expenditure - Total Receipts (excluding borrowings)

Primary Deficit (PD)

Fiscal deficit (FD) - Interest Payment (IP)

Fiscal policy

government's use of taxes and spending to influence the economy

• popularized by John Maynard Keynes

Fiscal instruments

also called fiscal tools

• Government expenditure, taxation and borrowing are the fiscal tools

Finance Commission

Finance commission is a quasi-judicial body set up under Article 280

• Established in 1951
• To define the fiscal relationship framework between the Centre and the state

Finance Commission is set up once in every

5 years

• to reduce the fiscal imbalances between the centre and the states and also between the states
• It promotes inclusiveness

Chairman of Finance Commission

1st Finance Commission - K.C. Neogy (1952-57)
16th Finance Commission - Arvind Panagariya (2026-31)