S RAFI AHMED/SHUJATULLAH

SANKALP (BATCH-2)

APPSC Group I - Mains Answer Writing Program – 2025

PAPER – IV
20-03-2025

ECONOMY AND DEVELOPMENT OF INDIA AND ANDHRA PRADESH

Unit 4: Government Budgeting: Structure of Government budget and its components –

Budgeting process and recent changes - of - Types of budget – types of deficits, their impact
and management – Highlights of current year’s union budget and its analysis - GST and
related issues – Central assistance to states - Issues of federal finance in India –
Recommendations of the latest finance commission

Unit – 4
1. Critically analyse the social sector spending in India as per the Union
Budget 2025-26
2. Discuss the types of budgets and their significance in economic
management.
3. Explain the various types of deficits and the proposed targets for each as
per the Budget 2025-2026. Also, briefly discuss the need to measure
different types of deficits.
4. GST, as a major taxation reform, offers several benefits but also has its
shortcomings. Discuss.
5. Examine the key challenges in India's fiscal federalism and suggest
measures to ensure a balanced and equitable financial relationship
between the Centre and the States.

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1. Critically analyse the social sector spending in India as per the Union
Budget 2025-26
Introduction:
The social sector encompasses key areas such as education, healthcare, water
and sanitation, nutrition, social security, food security, rural development, skill
development, and poverty alleviation. The Union Budget 2025-26 presents a
mixed picture of government commitment towards these sectors, with some
areas witnessing increased allocations while others face stagnation or decline.
Body:
Social sector spending in India (Budget 2025-26)
1. Declining Share in Total Expenditure: While the government’s total
expenditure increased by 7% from ₹47.16 lakh crore in 2024-25 to ₹50.65
lakh crore in 2025-26, this rise has not translated into a proportional
increase in social sector spending. The sector's share in total government
expenditure remains lower than in previous years.
2. Stagnation over the Past Decade: From 2014-15 to 2019-20, social sector
spending averaged 21% of total government expenditure and 2.8% of GDP.
This trend persisted from 2019-20 to 2024-25, with the share remaining at
21% and GDP allocation at 3.3%. Temporary fluctuations occurred due to
pandemic-related expenditures, but no significant long-term increase has
been observed.
3. Decline in Expenditure on Employment Schemes: During the COVID-19
pandemic (2020-21), expansions in schemes like the Pradhan Mantri Garib
Kalyan Anna Yojana and MGNREGS led to a peak in social sector spending
at 30% of total expenditure (5.3% of GDP). However, this share has declined
consistently, falling to 19% in 2023-24 (2.8% of GDP), which is even lower
than in 2014-15.
Sector-Wise Allocations
1. Food & Health
• Food subsidies and civil supplies remain the largest expenditure
category, accounting for 35% of total social sector spending.
• However, health expenditure has declined, averaging only 10% of social
sector allocations, raising concerns about healthcare accessibility and
infrastructure development.

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2. Education & Rural Development

• Education spending has reduced to 12% of total social sector
expenditure.
• Rural development’s share has also declined to 20%, which could impact
rural livelihoods and infrastructure.
3. Housing & Urban Development
• Investments in schemes like the Jal Jeevan Mission and PM Awaas
Yojana have increased, pushing this sector’s share from 12% (2014-15 to
2019-20) to 15% (2019-20 to 2024-25).
• While these schemes support infrastructure development, the focus on
urban areas may have implications for balanced regional growth.
Conclusion:
Social sector spending has grown at a slower pace in recent years, reflecting
shifting policy priorities. While it increased at an annual average rate of 8%
between 2014-15 and 2019-20, this slowed to 4% between 2019-20 and 2024-
25. The sector’s share of total government expenditure hit a decade-low of 17%
in 2024-25 and is projected to be 19% in 2025-26. This signals the need for
renewed focus on ensuring equitable and sustainable social development.

2. Discuss the types of budgets and their significance in economic

management.
Introduction:
The term "budget" originates from the French word "bougette" (meaning a
small bag). Under Article 112 of the Indian Constitution, presenting an annual
budget is not just necessary but a constitutional obligation. It includes a
statement of receipts and payments for the financial year, covering the
Consolidated Fund, Contingency Fund, and Public Account of India.
Body
Types of budgets and their significance in economic management.
1. Balanced Budget
A balanced budget is when government revenue equals expenditure. It is
typically presented in economies with low inequality, minimal poverty,
and stable economic conditions. A balanced budget promotes fiscal

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consolidation, ensures the government lives within its means, and

prevents extravagant spending.
2. Deficit Budget
A deficit budget occurs when government expenditure exceeds revenue. It
is a common feature of developing and underdeveloped economies, which
often face low investment levels, low per capita income, and widespread
poverty. In the 2025 Budget, the fiscal deficit is estimated at 4.4% of
GDP, reflecting government borrowing to finance growth and welfare
programs.
3. Surplus Budget
A surplus budget is when revenue exceeds expenditure, indicating a
financially strong economy with high per capita income, skilled
workforce, and developed infrastructure. This type of budget is usually
implemented during inflationary periods to reduce aggregate demand. It
allows governments to invest in advanced research, innovation, and
applied sciences.
4. Traditional Budgeting
Traditional budgeting is based on previous budgets, where balances are
carried forward and expenses are adjusted incrementally. It is easy to
prepare and ensures continuity in funding. However, it limits flexibility
and may perpetuate wasteful expenditures.
5. Outcome Budget
Introduced in 1969 as a form of performance budgeting, the outcome
budget was formally introduced in 2005-06 by Finance Minister P.
Chidambaram. It links financial outlays to measurable outcomes, serving
as a progress card for government spending. The outcome budget helps
in rationalizing schemes and improving financial efficiency.
6. Zero-Based Budgeting (ZBB)
India adopted ZBB in 1983 through the Department of Science and
Technology. Unlike traditional budgeting, ZBB starts from zero each
year, requiring a fresh justification for every expense. It ensures efficient
allocation of resources, eliminates unnecessary expenditures, and
increases financial accountability.
7. Gender Budgeting
Introduced in the 2001 Union Budget, gender budgeting aims to address
gender inequality in India. Since 2005, the government has released the
Gender Budgeting Statement, divided into:
• Women-specific schemes (100% allocation for women).

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• Pro-women schemes (at least 30% allocation for women).

In FY 2025-26, the Gender Budget allocation increased to 8.86% of the
total Union Budget, up from 6.8% in FY 2024-25 (Press Information
Bureau).
Conclusion
Budgetary decisions are guided by economic values, policy priorities, and
cost-benefit analysis. Efficiency in budgeting ensures optimal resource
utilization and sustainable economic growth. As Harold Lasswell(Economist
and Political scientist) aptly stated, "Who gets what, when, and how"—
budgeting is ultimately about strategic resource allocation to meet national
objectives.

3. Explain the various types of deficits and the proposed targets for each as
per the Budget 2025-2026. Also, briefly discuss the need to measure
different types of deficits.
Introduction
Deficits represent the shortfall between required amounts or expenditures. The
term is often related to the budget-making process of countries. Understanding
different types of deficits is crucial for assessing the financial health and
economic stability of a nation.
Body
Types of Deficits and Budget 2025-26 Targets:
1) Fiscal Deficit
o Definition: Fiscal deficit is the gap between the government's total
expenditure and its total revenue (excluding borrowings).
o Fiscal deficit in 2025-26 is targeted at 4.4% of GDP, lower than
the revised estimate of 4.8% of GDP in 2024-25.
2) Revenue Deficit
• Definition: Revenue deficit represents the excess of revenue
expenditure over revenue receipts.
• Revenue deficit in 2025-26 is targeted at 1.5% of GDP. This is lower
than the revised estimate of 1.9% in 2024-25

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3) Effective Revenue Deficit

• Definition: Effective revenue deficit is the difference between the
revenue deficit and grants-in-aid for the creation of capital assets.
• The ERD, calculated by subtracting grants-in-aid for creation of
capital assets from the revenue deficit, is significantly reduced to
₹96,654 crore (0.3% of GDP) in BE 2025-26, a substantial decrease
from ₹3,10,207 crore (1.0% of GDP) in RE 2024-25.
4) Primary Deficit
• Definition: Primary deficit is the fiscal deficit minus interest
payments on previous borrowings.
• The PD, which is the fiscal deficit less interest payments, is estimated
at ₹2,92,598 crore (0.8% of GDP) in BE 2025-26. This is a reduction
from ₹4,31,587 crore (1.3% of GDP) in RE 2024-25.
Need to Measure Different Types of Deficits:
i. Fiscal Deficit: The fiscal deficit is a crucial indicator of the government's
financial health. A high fiscal deficit can affect economic growth, price
stability, and inflation, potentially harming a country's credit rating.
However, it can also stimulate economic activity by boosting public
spending.
ii. Revenue Deficit: A high revenue deficit can negatively impact the
government's credit rating and lead to reductions in capital and welfare
expenditures, slowing economic growth. Additionally, using capital
earnings to cover revenue shortfalls can raise inflation and increase the
debt burden.
iii. Effective Revenue Deficit: Introduced in the 2012 Budget, the effective
revenue deficit provides a clearer picture of capital investment by
excluding grants for capital asset creation from the revenue deficit. This
measure helps assess the government's true capital spending.
iv. Primary Deficit: The primary deficit reflects the government's
borrowings needed to meet interest payments. A decreasing primary
deficit signals improved fiscal health, indicating less reliance on
borrowing to service existing debt.

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Conclusion
Different types of deficits provide varied perspectives on public finance
management, including resource allocation, per capita debt burden, economic
stability, bond yields, and investment dynamics. Understanding and managing
these deficits is crucial for maintaining a healthy and sustainable economy.

4. GST, as a major taxation reform, offers several benefits but also has its
shortcomings. Discuss.
Introduction:
GST is a single tax on the supply of goods and services, applied from the
manufacturer to the consumer. It is a unified indirect tax introduced to replace
the previous system, where taxes were levied separately at each stage by the
Union government and the States at varying rates, based on the full value
of the goods.
Body:
Benefits of GST:
• Simplified Tax Structure: GST consolidated various indirect taxes,
reducing complexity and creating a uniform tax regime across the
country.
• Elimination of Cascading Effect: GST taxes only the value added at
each stage of production, eliminating the tax-on-tax effect that was
present in the previous system.
• Boost to Interstate Trade: By removing entry taxes and checkpoints,
GST has significantly improved logistics, enabling smoother interstate
movement of goods and boosting trade efficiency.
• Increased Revenue Transparency: GST promotes better tax
compliance, resulting in improved government revenue through more
efficient collection mechanisms.
• Encouragement of Formal Economy: Informal businesses have been
brought into the tax net, leading to a more transparent and formalized
economy.
• Export Competitiveness: More efficient tax neutralization under GST
has made Indian exports more competitive internationally.

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• Simplified Procedures: GST has automated processes like registration,

returns, and refunds, reducing the compliance burden for businesses.
• GSTN Portal: All taxpayer interactions are conducted through the GSTN
portal, minimizing the need for direct interaction with tax authorities and
reducing the chances of corruption.
• Timely Procedures: GST ensures that important activities like
registration and refunds are conducted within specified timelines,
increasing operational efficiency.
Shortcomings of GST:
• Complex Filing System: Frequent returns and filings, especially for small
businesses, have increased the compliance burden, complicating navigation
of the system.
• Multiple tax slabs: Multiple tax slabs(0%, 5%, 12%, 18%, and 28%) and
frequent rate changes have led to confusion among businesses and
consumers. (Former Finance Minister Arun Jaitley had proposed merging
the 12% and 18% slabs, but it remains unimplemented.)
• Technical issues: The GST Network (GSTN) has faced glitches, affecting
return filing and input tax credit (ITC) claims.
• Exclusion of Key Sectors: The exclusion of sectors like petroleum products
and alcohol from GST creates gaps and prevents uniform tax application.
• Open Data: The government should make GSTN data publicly available to
facilitate research by universities and think tanks, and to support the
government’s efforts.
• Tax Evasion: Evasion remains an issue, particularly with incorrect credit
claims and fake documents.
• GST Tribunal: The GST Tribunal needs to start functioning quickly, with
expedited member selection and office establishment.
• Manpower: As of December 2024, nearly one-third of the sanctioned posts
in the two tax bodies—the Central Board of Direct Taxes (CBDT) and the
Central Board of Indirect Taxes and Customs (CBIC)—remain vacant,
according to a parliamentary panel report.
• Compensation to States: Compensation to states is a major concern. The
government should address this issue amicably and promote cooperative
federalism.

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Conclusion:
Since its implementation in 2017, GST collections have shown a consistent
upward trend, reflecting improved compliance and economic expansion. While
GST may not have a direct financial impact on lower-income groups, the
increased revenue strengthens the government’s ability to fund crucial social
welfare and poverty alleviation programs.

Additional information:

5. Examine the key challenges in India's fiscal federalism and suggest

measures to ensure a balanced and equitable financial relationship
between the Centre and the States.
Introduction:
India has over 55 years of experience with fiscal federalism within a
parliamentary democracy and a planned economic framework. However,
concerns about the increasing centralization of financial powers have persisted.
While protests against this imbalance have been raised, they have often been
overshadowed by the political dominance of the same party at both the Centre
and the States.

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Body:
Key challenges in India's fiscal federalism:
1. Excessive Financial Dependence on the Centre:
o The Centre controls a larger and more elastic revenue base, while
States bear the responsibility of funding key development sectors.
This imbalance has led to increasing demands for greater financial
autonomy.
2. Resource Shortages and Expenditure Priorities:
o The expenditure patterns of both the Centre and States leave
limited fiscal space for much-needed investments in social and
physical infrastructure.
3. Regional Disparities and Conflicting Interests:
o Significant economic and social disparities exist both between and
within States, leading to conflicts in resource allocation. Low-
income States require greater financial support, but their demands
often clash with those of more developed regions.
4. Advisory Nature of the Finance Commission (FC):
o The Finance Commission, meant to ensure fiscal balance, has
limited authority since its recommendations are advisory, leaving
room for the Centre’s discretion in fund allocation.
5. Vertical Imbalance in Fiscal Powers:
o The Indian Constitution concentrates more financial power in the
Centre, a common feature in many federations but one that has
caused friction in India’s federal structure.
6. Discretionary Transfers by the Centre:
o Around one-fifth of total financial transfers to States occur at the
Centre’s discretion, often leading to concerns about favoritism and
inequitable distribution.
7. Issues with GST Compensation and Revenue Sharing:
o The principle of compensation and revenue-sharing under GST has
not always been honored, causing tensions between the Centre
and States. The delay in GST compensation payments has
particularly strained State finances.

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Measures to Ensure a Balanced and Equitable Fiscal Relationship:

1. Comprehensive Review of Fiscal Federalism:
o A systematic evaluation of fiscal relations in independent India is
necessary to address long-standing imbalances and ensure
equitable financial devolution.
2. Accelerated Economic Growth and Expenditure Restructuring:
o Strengthening the economy through sustainable growth and
rationalizing expenditure at both levels of government will create
more fiscal space.
3. Consensus-Based Decision Making:
o Major political parties must build a broad consensus on fiscal
devolution, ensuring that financial decisions are made through
dialogue and collaboration rather than unilateral imposition,
thereby promoting equitable participation of States in economic
planning.
4. Equitable Distribution of Financial Powers:
o A well-balanced delegation of financial authority between the
Centre and States should align with broader economic planning
and investment objectives.
5. Prioritizing the Needs of Less-Developed States:
o Special attention should be given to underdeveloped States in any
resource devolution framework to ensure balanced growth across
the country.
Conclusion:
A harmonious, cooperative, and balanced approach to fiscal federalism is
essential for India’s economic stability. The relationship between the Union and
States should be built on trust, collaboration, and mutual accommodation.
Sound fiscal management is the key to ensuring effective resource allocation,
keeping in mind that resources belong to the nation as a whole and should be
utilized where they are most needed.

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