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India: Budget
Country Study > Chapter 6 > Character and Structure of the Economy > Finance > Budget


India's public finance system follows the British pattern. The constitution establishes the supremacy of the bicameral Parliament -- specifically the Lok Sabha (House of the People) -- in financial matters. No central government taxes are levied and no government expenditure from public funds disbursed without an act of Parliament, which also scrutinizes and audits all government accounts to ensure that expenditures are legally authorized and properly spent. Proposals for taxation or expenditures, however, may be initiated only within the Council of Ministers -- specifically by the minister of finance. The minister of finance is required to submit to Parliament, usually on the last day of February, a financial statement detailing the estimated receipts and expenditures of the central government for the forthcoming fiscal year and a financial review of the current fiscal year.

The Lok Sabha has one month to review and modify the government's budget proposals. If by April 1, the beginning of the fiscal year, the parliamentary discussion of the budget has not been completed, the budget as proposed by the minister of finance goes into effect, subject to retroactive modifications after the parliamentary review. On completion of its budget discussions, the Lok Sabha passes the annual appropriations act, authorizing the executive to spend money, and the finance act, authorizing the executive to impose and collect taxes. Supplemental requests for funds are presented during the course of the fiscal year to cover emergencies, such as war or other catastrophes. The bills are forwarded to the Rajya Sabha (Council of States -- the upper house of Parliament) for comment. The Lok Sabha, however, is not bound by the comments, and the Rajya Sabha cannot delay passage of money bills. When signed by the president, the bills become law. The Lok Sabha cannot increase the request for funds submitted by the executive, nor can it authorize new expenditures. Taxes passed by Parliament may be retroactive.

Each state government maintains its own budget, prepared by the state's minister of finance in consultation with appropriate officials of the central government. Primary control over state finances rests with the state legislature in the same manner as at the central government level. State finances are supervised by the central government, however, through the comptroller and the auditor general; the latter reviews state government accounts annually and reports the findings to the appropriate state governor for submission to the state's legislature. The central and state budgets consist of a budget for current expenditures, known as the budget on revenue account, and a capital budget for economic and social development expenditures.

The national railroad (Indian Railways), the largest public-sector enterprise, and the Department of Posts and Telegraph have their own budgets, funds, and accounts. The appropriations and disbursements under their budgets are subject to the same form of parliamentary and audit control as other government revenues and expenditures. Dividends accrue to the central government, and deficits are subsidized by it, a pattern that holds true also, directly or indirectly, for other government enterprises.

During the eighth plan, the states were expected to spend nearly Rs1.9 trillion, or 42.9 percent of the public outlay. Because of its greater revenue sources, the central government shared with the states its receipts from personal income taxes and certain excise taxes. It also collected other minor taxes, the total proceeds of which were transferred to the states. The division of the shared taxes is determined by financial commissions established by the president, usually at five-year intervals. In the early 1990s, the states received 75 percent of the revenue collected from income taxes and around 43 percent of the excise taxes. The central government also provided the states with grants to meet their commitments. In FY 1991, these grants and the states' share of taxes collected by the central government amounted to 40.9 percent of the total revenue of state governments.

The states' share of total public revenue collected declined from 48 percent in FY 1955 to about 42 percent in the late 1970s, and to about 33 percent in the early 1990s. An important cause of the decline was the diminished importance of the land revenue tax, which traditionally had been the main direct tax on agriculture. This tax declined from 8 percent of all state and central tax revenues in FY 1950 to less than 1 percent in the 1980s and early 1990s. The states have jurisdiction over taxes levied on land and agricultural income, and vested interests exerted pressure on the states not to raise agricultural taxation. As a result, in the 1980s and early 1990s agriculture largely escaped significant taxation, although there has long been nationwide discussion about increasing land taxes or instituting some sort of tax on incomes of the richer portion of the farm community. The share of direct taxes in GDP increased from 2.1 percent in FY 1991 to 2.8 percent in FY 1994.

Since independence government has favored more politically palatable indirect taxes -- customs and excise duties -- over direct taxes. In the 1980s and early 1990s, indirect taxes accounted for around 75 percent of all tax revenue collected by the central government. State governments relied heavily on sales taxes. Overall, indirect taxes accounted for 84.1 percent of all government tax revenues in FY 1990. Total government tax revenues amounted to 17.1 percent of GDP in that year, up from 9.0 percent in FY 1960, 11.5 percent in FY 1970, and 14.9 percent in FY 1980. In FY 1990, the share of the public sector in GDP was 26.4 percent. In terms of rupees (in current prices), total government income rose from Rs259.8 billion in FY 1981 to Rs1.3 trillion in FY 1992.

Comprehensive tax reforms were implemented with the FY 1985 budget. Corporate tax was cut, income taxes simplified and lowered for high-income groups, and wealth taxes reduced. Tax receipts in FY 1985 rose by 20 percent over FY 1984 as a result of tightened enforcement, and taxpayers responded to lower taxes with greater compliance. In FY 1986, another major change was made with the launching of a long-term program of tax reform designed to eliminate annual changes, which had produced uncertainty. However, in FY 1987, when the monsoon failed, the government raised taxes on higher income groups. The emergency budget of FY 1991, designed to cope with the nation's 1990 balance of payments crisis, increased indirect and corporate taxes, but the budgets for FY 1992 and FY 1993 reflected the policy of economic liberalization. They reduced and simplified direct taxes, removed the wealth tax from financial investments, and indexed the capital gains tax. The highest marginal rate of personal income tax was 42.5 percent in FY 1992.

Data as of September 1995

Last Updated: September 1995

Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for India was first published in 1995. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on

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