Introduction
Budget documents of both the Union and State governments are often bulky and presented in a manner which is not easy to understand to a common man. Citizens are interested in knowing the implications of the budget on their welfare and where the money is raised from and where the governments spend money. They are also interested in knowing how much of the money allocated to a sector is actually spent and whether public spending on a sector has gone up or down. In addition, there are also concerns about the deficits and the levels of debt.
States are assigned more subjects and functional responsibilities under the Constitution, which touch upon the lives of the citizen. Thus, the citizen in India is more affected by the policies and programmes being implemented at the state level. States in India collect 38 per cent of taxes, spend 60 per cent of the government expenditure and are responsible for more than 70 per cent of spending on health and education. States are also the key drivers of public infrastructure spending. Therefore, it is important for a citizen to understand the State Budgets separately from the Union Budget.
For an understanding of the State Budget, we need to start with a few budgetary terms and their definitions.
State Budget presentation is an annual exercise. The Annual Budget is basically a statement of resources and expenditure of a State for a financial year starting from April and ending in March of the following year. Unlike a company budget, the budget of a State has a much wider scope and implications for the entire population.
The scope of activities undertaken by a State has expanded vastly over the years and today government activities are intended to serve a number of objectives, which include promoting growth, redressing regional inequalities in the distribution of income, poverty alleviation and human resource development. The increasing role of States has to be seen in the context of a number of important subjects assigned to them in the Constitution of India.
The subjects assigned to States include, among others, maintenance of law and order, administration of justice, agriculture, irrigation, power, education, health, and social welfare. The budget is the most important instrument of the government to spell out its policies and in carrying out them.
The State Budget has several purposes. The important ones among these are summarized below.
- It serves as a report on the status of government finances.
- It provides an indication of the government policies.
- It is a document that provides citizens an idea of the benefits that are likely to accrue to them and the burden they have to bear in the form of taxes and levies.
- It provides an expression of sectoral policies and allocations.
- It provides an action plan for the departments of the government.
- It provides a signal to the market about the incentives and the borrowing requirements of the government.
The purposes of the State and Union Budgets are similar. However the expenditure responsibilities of the two are different.
Actuals, Revised Estimates, and Budget Estimates
The budget presents estimates of different kinds for different years.
The “Actual” figures presented in the Budget are the accounts prepared by the Accounted General and audited by the by the Comptroller and Auditor General of India. These are presented with a lag. For instance, the actual figures for 2021-22 are presented in the 2023-24 Budget.
The Revised Estimates are based on the pre-actual figures for the months they are available and the estimates for the remaining months of a particular year.
Budget Estimates are prepared based broadly on previous year’s trends and policy changes to be introduced in respect of revenue generation and expenditure priorities in the coming financial year.
Generally, Budget Estimates are later found to fall short of the actuals because of the tendency to overestimate both receipts and expenditure. Therefore, the budgetary outcomes need to be evaluated based on the actual audited figures.
Constitutional Provisions
The presentation of the Annual Financial Statements, commonly referred to as Budgets, are governed by the provisions of the Constitution. These are covered under the Union Budget Primer. Article 202 (1) of the Constitution makes it mandatory in respect of every financial year to lay before the House or Houses of the Legislature of the State, a statement of the estimated receipts and expenditure of the State for the year, referred to as the ‘Annual Financial Statement’. Clause (2) of the Article stipulates that the expenditure embodied in the Annual Financial Statement, commonly referred to as the Budget, shall show separately (a) the sums required to meet expenditure charged upon the Consolidated Fund of the State and the sums required to meet other expenditure proposed to be met from the Consolidated Fund of the State. It is relevant at this stage to briefly explain the terms, ‘Consolidated Fund of the State’ and ‘Charged expenditure’.
In accordance with the provisions of Article 266 of the Constitution, all revenues received by the Government of a State, all loans raised by that government by the issue of treasury bills, loans or ways and means advances and all moneys received by that government in repayment of loans comprise the Consolidated Fund of the State. Under Article 202, a) the emoluments and allowances of the Governor and other expenditure relating to his office; b) the salaries and allowances of the Speaker and the Deputy Speaker of the Legislative Assembly. the Chairman and the Deputy Chairman of the Legislative Council; (c) debt charges for which the State is liable including interest, d) expenditure in respect of the salaries and allowances of Judges of any High Court; and e) any sums required to satisfy any judgment, decree or award of any court or arbitral tribunal shall be charged to the Consolidated Fund of a State and the approval of the Legislature is not required. Expenditure on all other items of expenditure cannot be incurred without the approval of the State Legislature.
Structure of the State Budget
The structure of a State Budget follows the provisions contained in Articles 266 and 267 of the Constitution of India. This is similar to that of the Union Budget,
In accordance with these provisions, all the moneys received and disbursed by the government are organized into three parts, in State Budgets.
These are
Part I : Consolidated Fund of the State
Part II : Contingency Fund of the State
Part III: Public Account of the State
Consolidated Funds of the State
The transactions relating to receipts and expenditure out of the Consolidated Fund are maintained in three accounts. These are:
- Revenue Account
- Capital Account
- Loan Account
Revenue Account
The Revenue Account of Budget comprises revenue receipts and revenue expenditure.
I. Revenue Receipts
Revenue receipts are in the nature of the current income of the government. Revenue receipts are broadly classified into tax revenue, non-tax revenue and grants-in-aid and contributions.
i) Tax Revenue: Revenue accruing to the government from the levy of taxes and duties and the devolution of tax revenue from the Central government is shown under the head ‘Tax Revenue’. The important sources of State’s own tax revenue are sales tax/VAT, State GST, excise duties, stamps and registration, taxes on motor vehicles, taxes and duties on electricity..
ii) Non-tax Revenue: Revenue derived from interest receipts, dividends on capital investments, fees for services rendered, receipts from the sale of forest produce, royalty on mines and minerals, fines and user charges levied by various departments of the government is classified as Non-tax revenue.
Share in Central Taxes
As elastic sources of revenue are assigned to the Centre and more functional responsibilities to the States, there is an imbalance in the revenues of the Union and the States, and their respective responsibilities..
In order to address this vertical imbalance, Article 280 of the Constitution provides the constitution of the Finance Commission at the expiration of every fifth year or earlier to recommend the distribution between the Union and the States of the net proceeds of the Central taxes. Under the present dispensation, the net proceeds of all Central taxes are sharable with the States. The share of the States in Central taxes during the period 2021-26 is 41 per cent as recommended by the Fifteenth Finance Commission. After determining the States’ share of Central taxes, the Finance Commission also recommends the allocation between the States of their respective shares.
Grants-in-aid and Contributions:
Grants-in-aid from the Government of India are recorded under this head.
For the sake of illustration, the analysis of the Revenue Receipts of Uttar Pradesh compiled from the Reserve Bank of India’s annual publication entitled, ‘State Finances-A Sudy of Budgets of 2022-23.’ is presented below.
Composition of Revenue Receipts – Uttar Pradesh
| (Rs. in crore) | |||
| Item | 2020-21 Accounts | 2021-22 (Revised Estimates) | 2022-23 (Budget Estimates) |
| Revenue Receipts (I+II+III+IV) | 296176 | 378731 | 499213 |
| I. Own Tax Revenue | 119897 | 160350 | 220655 |
| i. Taxes on Sales and Trade | 22127 | 28655 | 36213 |
| ii. State Excise | 30061 | 36212 | 49152 |
| iii. Stamps and Registration | 16475 | 19745 | 29692 |
| iv. Taxes on Vehicles | 6483 | 5950 | 10887 |
| v.Others | 44751 | 69789 | 94711 |
| II. Own Non-Tax Revenue | 11846 | 15524 | 23406 |
| 1. Interest receipts & Dividends | 1220 | 2127 | 2200 |
| 2. General Services | 2239 | 1756 | 3193 |
| 3. Social Services | 1046 | 1082 | 1836 |
| 4. Economic Services | 7341 | 10459 | 16177 |
| Own Revenue Receipts (I+II) | 131743 | 175874 | 244061 |
| III. Share in Central Taxes | 106687 | 114894 | 146499 |
| IV. Grants-in-aid | 57746 | 87963 | 108652 |
As per 2020-21 accounts, taxes on sales and trade and excise duties accounted for nearly 44 per cent of the own tax revenues of the State. This percentage tends to be in the range of 70-80 per cent in the of richer states.. In the total revenue receipts, the share of the States’ own revenue is 44.5 Per cent, the rest being accounted for by tax devolution and grants from the Centre. The share of the tax devolution and grants from the Centre is invariably higher in respect of less developed States. In the richer states, the share of own revenues in total revenue receipts is much higher as they receive lower tax devolution and grants from to Centre to address the horizontal or income inequalities across states.
II. Revenue Expenditure
Revenue expenditure represents the current expenditure of the state government. It is incurred towards meeting the day to day expenditure of running the government, payment of interest charges on the borrowings of the government, maintenance and repair of various capital assets like irrigation and power projects, buildings, etc. In a broader sense, expenditure, which does not result in the creation of any asset, is classified as Revenue Expenditure. However, maintenance of capital asset and working expenses necessary for such maintenance is a charge on the revenue expenditure. This also includes all expenditure on the working and upkeep of the projects and also on renewals and replacements as may be prescribed by the government.
Revenue expenditure is the most important account of a state government accounting for the bulk of the transactions. A summary of the Revenue Account in respect of the State of Uttar Pradesh for the recent years is presented below.
Composition of Revenue Expenditure – Uttar Pradesh
| (Rs. In crore) | |||
| Item | 2020-21 AC | 2021-22 RE | 2022-23 BE |
| Revenue Expenditure | 298543 | 356624 | 456089 |
| 1. General services (a+b+c) | 119058 | 139316 | 177670 |
| a.Tax Collection | 4070 | 4780 | 5804 |
| b.Administrative Services | 25156 | 31077 | 39661 |
| c.Others | 89832 | 103458 | 132205 |
| 2. Social services | 109727 | 127199 | 169118 |
| 3. Economic services | 55551 | 73610 | 91301 |
| 4. Grants-in-aid & Contribution | 14208 | 16500 | 18000 |
The composition of General Services, Social and Economic services is presented below.
| General Services | Social Services | Economic Services |
| Organs of State, Fiscal Services, Interest Payments and Servicing of Debt, Administrative Services, Pensions and Miscellaneous General services, and Other Fiscal Services | Education, Sports, Art and Culture, Health and Family Welfare, Water Supply, Sanitation, Housing and Urban Development, Information and Publicity, Welfare of Scheduled Castes, Scheduled Tribes and Other Backward Classes, Labour and Labour Welfare, Social Welfare and Nutrition. | Agriculture and Allied Activities, Rural Development, Irrigation and Flood Control, Energy, Industry and Minerals, Transport, Science Technology and Environment and General Economic Services |
III. Capital Account:
Capital expenditure records expenditure of capital nature, which is incurred on the creation of assets of lasting nature such as the purchase of land, construction of irrigation and power projects, construction of buildings,etc. Expenditure incurred for the purchase of machinery is also treated as capital expenditure, if it exceeds prescribed limits. In addition to the above items, investments made by the State government in public undertakings, cooperative institutions are also treated as capital expenditure. Capital expenditure is generally met from receipts, which are in the nature of capital or debt as distinct from revenues derived from taxes and non-taxes. Capital expenditure can also be met from the surpluses in the Revenue Account. This is ideal as it reduces debt burden. But such cases are few and far between.
Capital Receipts
Capital receipts consist mainly of borrowings and recovery of loans. Major head wise expenditure under capital account are shown in the statement named “E- Statement of Capital Expenditure outside the Revenue Account” in Volume I of the Budget publications. Details of such expenditure are shown in the relevant volume of Budget publications. A Summary of the Capital Account of Uttar Pradesh for the recent years is presented below.
Structure of Capital Account of Uttar Pradesh
| (Rs.in crore) | |||
| Item | 2020-21 AC | 2021-22 RE | 2022-23 BE |
| I. Capital Receipts | 91744 | 96786 | 87739 |
| II. Capital Expenditure | 52237 | 96481 | 123920 |
| 1. General Services | 1523 | 5052 | 7380 |
| 2. Social Services | 12386 | 31981 | 44914 |
| 3. Economic Services | 38328 | 59447 | 71626 |
| III.Capital Disbursements | 26777 | 28733 | 22563 |
| Total Capital Expenditure and Disbursements (II+III) | 79015 | 125214 | 146483 |
Capital receipts mainly consist of open market loans permitted by the Centre under Article 293, loans from the Centre and other institutions. The annual borrowings of a State are fixed as per the limits mandated under the Fiscal Responsibility and Budget Management Act. The Act has been enacted in 2005 by all the States following the recommendations of the Twelfth Finance Commission. As per this Act amended from time to time, the borrowing limits are fixed at 3 per cent of the GSDP and the States are mandated to balance their revenue budgets and maintain their fiscal deficit at 3 per cent of GSDP. However, these limits are subject to relaxations allowed by the Finance Commissions and the Union Government in case of certain exigencies. Capital disbursements mainly consist of repayment of public debt and to a limited extent the loans disbursed by the State Government to corporations and Government employees, etc.
Measures of Budgetary Deficits
The golden rule in public financial management is that revenue account should not be in a deficit. Revenue surplus is the excess of revenue receipts over revenue expenditure. Revenue deficit denotes excess of revenue expenditure over revenue receipts. Revenue deficits are met by borrowing. Borrowing to meet current expenditure is not fiscally sustainable.
The fiscal deficit is the difference between total revenue receipts of a State and the total expenditure (both revenue and capital). It indicates the net borrowings of a State in a year. Fiscal deficits should remain within prudent limits. Otherwise, interest payments and repayments will drain a major chunk of budgetary resources and force governments to borrow more and more.
Public Account of the State
Public Account of the Budget relates to the transactions in respect of which the Government acts as a banker, incurs liability to repay the moneys received or recovers the amounts paid..
These include moneys deposited in Government treasuries by contractors, merchants etc., as Security Deposits. Deposits are also made in courts in connection with litigations. Local Bodies, Panchayati Raj Institutions keep their funds in Government for various purposes in Public Account till they are actually utilized by them. The Provident Fund accumulations of Government servants are retained by Government till the funds become due for payment to the subscribers. All such moneys do not actually belong to Government. But they have to be accounted for in the same way as Government money and they have to be paid to the parties concerned on the due dates. All these transactions are entered in the “Public Account” as distinct from the Consolidated Fund. The repayment of these amounts do not require the vote of the Legislature, as they are in the nature of ordinary banking transactions.
All public moneys received by or on behalf of the state government, which are not credited to the Consolidated Fund of the State, are accounted for under the “Public Account’.
Transactions relating to Public Account of Uttar Pradesh are summarized below.
Structure of the Public Account – Uttar Pradesh
| (Rs. in crore) | |||
| Item | 2020-21 AC | 2021-22 RE | 2022-23 BE |
| I. Receipts | 1807147 | 461914 | 464516 |
| 1. Small Savings & Provident funds | 11289 | 15150 | 15150 |
| 2. Reserve funds | 5431 | 8047 | 9865 |
| 3. Deposits and advances | 20021 | 19244 | 19244 |
| 4. Suspense and miscellaneous | 1732323 | 414974 | 415758 |
| 5. Remittances | 38082 | 4500 | 4500 |
| II. Disbursements | 1812606 | 456414 | 458516 |
| 1. Small Savings & Provident funds | 10226 | 13447 | 13447 |
| 2. Reserve funds | 5931 | 8448 | 10446 |
| 3. Deposits and advances | 18107 | 22104 | 22104 |
| 4. Suspense and miscellaneous | 1739934 | 407416 | 407519 |
| 5. Remittances | 38408 | 5000 | 5000 |
| Net Public Account (I-II) | -5458 | 5500 | 6000 |
Demands for Grants
Demands for Grants are the expenditure demands of each department of the government presented in a separate volume in a State Budget.
Each section contains Head of the Department-wise details of the Budget provisions included in the demands for Grants for expenditure in the current year and the Budget year and the Revised Estimates for the current year along with the actuals for the previous year. The breakup of these provisions are shown under minor heads, sub-heads and sub-detailed heads. Under each sub detailed head, provisions are shown object wise. For example, under detailed head ‘010 Salaries’, details of provisions under pay, allowances, dearness allowance, etc., are shown. These details enable the legislators and the citizens to know the provisions under each programme and scheme and how the money is proposed to be spent under a scheme. These details also enable the citizen to know how the provisions under a programme are increasing or declining.
Summing Up
With this fairly exhaustive narration, one is equipped to find out what he/she is looking for in a Budget. The following Table enables a reader to locate the information he/she is looking for. There are likely to be some variations in the presentation of detailed estimates from state to state.
| What is one looking for | Where to find |
| Broad aggregates like total revenue, total revenue expenditure, borrowings, capital expenditure, revenue, and fiscal deficits etc. | Budget in brief |
| Summary of revenue receipts, capital receipts and expenditure. | Annual Financial Statement |
| Summary of sector wise and department wise allocations and expenditure incurred in the previous financial years. | Summary of demand for grants |
| Detailed estimates of receipts both revenue and capital | Receipts Budget |
| Detailed sector wise and subsector wise information on allocations and expenditures | Detailed demands for grants of the respective sectors |
| Expenditure on salaries and wages and transfers to local bodies | Appendices to the budget estimates |
| Number of employees department wise | Appendix on number of Government employees |
| Information on Government undertakings | Volume on Government undertakings |
| Macroeconomic policy, medium term fiscal policy, fiscal strategy statements | Statement of Fiscal Policy presented to the State Legislature as mandated under the Fiscal Responsibility and Budget Management Act |