Budget, Tax and Fiscal Policy

Capital or revenue receipt?

• Ask one question of any government receipt: does it create a new debt, or shrink what the government owns?
• If yes, it is a capital receipt. Borrowing, and selling a stake in a public company (disinvestment), both count here.
• If no, it is a revenue receipt. It is routine income that changes neither what the government owes nor what it owns.
• Tax collections are revenue receipts. So is interest the government earns on loans it has given out.
• Exam trap: interest income sounds financial, so it feels like a capital item. But receiving it creates no new debt and shrinks no asset. So it is revenue.

The Capital Budget and deficit financing

• The same split organises the whole Budget. The Capital Budget has two sides: capital expenditure and capital receipts.
• Capital expenditure means buying long-lasting assets, like roads and machinery. It also covers loans the Centre gives to States and Union Territories.
• Capital receipts mean the government’s own borrowing, including loans from foreign governments.
• A deficit can be covered in three ways: borrow from the public, borrow from banks, or create new money.
• Exam trap: creating new money is the most inflationary option. It adds fresh spending power, but no extra goods appear to match it.
• Borrowing only moves money that already exists into government hands. The total money supply barely changes.

What a PAN tells you

• A PAN is not a random string. Each of its ten characters has a job, set by the Income Tax Department. Take the example ALWPG5809L.
• The first three letters run through the alphabet, AAA to ZZZ. They mean nothing alone.
• The fourth letter names the holder’s category. This is what exam questions care about.
• The fifth letter is the first letter of the surname for an individual. For a company or other non-individual, it is the first letter of the entity’s name.
• The next four digits are a running serial number, from 0001 to 9999.
• The tenth character is a check digit. It helps catch typing errors, so the Department can flag many typos automatically. The exact formula is not published.
• (Source: Income Tax Department)

Base Erosion and Profit Shifting, and the MLI

• Base Erosion and Profit Shifting (BEPS) is a trick used by multinationals.
• They find gaps between countries’ tax rules, then shift profits to low-tax countries to cut their overall tax bill.
• India ratified the OECD’s Multilateral Instrument (MLI) in 2019 to fight this.
• The MLI rewrites India’s existing tax treaties and closes the loopholes.

The Economic Survey

• The Economic Survey comes out once a year, just before the Union Budget.
• It reviews how the economy performed over the past year.

The deficit in the 2008 crisis

• In 2007-08, India’s fiscal deficit was a disciplined 2.6% of GDP, in line with the FRBM Act.
• Then the 2008 global financial crisis hit. The government raised spending hard to counter the shock. The deficit spiked to 6.6% of GDP. The page’s source for these two figures is not cited, so treat them as approximate.
• Returning to discipline took years. The deficit only came back to around 3.5% of GDP by 2016-17, nearly a decade later.
• A real shock does not undo itself quickly.

• The Union Budget 2026-27 set the fiscal deficit target at 4.3% of GDP. That is down slightly from 4.4% in 2025-26 (revised estimate).
• It also introduced a new anchor: a debt-to-GDP ratio of 50% (±1%) by FY30-31.
• This replaces the FRBM Act’s older approach of fixed annual deficit targets.
• So what? India now watches a debt ratio over several years, not one year’s deficit number.
• (Source: PIB, Highlights of Union Budget 2026-27)