Budget sets priorities for government spending

Budget 2016-17 has introduced a new classification system for the Centre’s spending. The new system divides Centrally Sponsored Schemes (CSS) into three categories: Core of the Core, Core, and Optional Schemes. This system is based on the recommendations of a sub-committee of chief ministers formed by Niti Aayog for the rationalisation of the CSS. Accordingly the Mahatma Gandhi National Rural Employment Guarantee Scheme got the highest priority by deeming it ‘Core of the Core’. This system has been put in place as a run-up to the next financial year, when the Plan/Non-Plan distinction in government expenditure will be done away with.

As per the new system, the Core of the Core schemes will retain their expenditure allocation framework. For example, MGNREGA had 75 per cent of the material expenditure from the Centre and 25 per cent from the states. The Core schemes will have a 60:40 formula, while the Optional schemes will have a 50:50 formula, with the states having the flexibility to decide whether to invest in these or not.

Under the new classification, eight schemes will be classified as Core of the Core, including MGNREGA and all the umbrella schemes for the upliftment of minorities, Scheduled Castes, and Scheduled Tribes. The Core schemes, 33 in number, include schemes as far-ranging as the Krishi Unnati Yojana, the Smart Cities programme, and the modernisation of the police force.


An expert committee headed by C Rangarajan had in 2011 proposed that the distinction between plan and non-plan expenditure be abolished for both the Centre and the states. It favoured the current classification of revenue and capital expenditure and recommended adjusting the revenue deficit to the extent of grants for creating assets, but only for fiscal responsibility budget management compliance. Main recommendation – from a segmented view of Plan and Non-Plan to holistic view of expenditure; from one year horizon to a multi-year horizon; and from input based budgeting to the budgeting linked to outputs and outcomes.

Expenditure Management Commission headed by former RBI Governor, Bimal Jalan recommended: Rationalisation and merger of the plethora of Centrally-sponsored schemes, extension of the Direct Benefit Transfer (DBT) scheme to cover almost all government subsidies and welfare payments, using the Post Office as a payments bank to facilitate such transfers, and eliminating the distinction between plan and non-plan expenditures.

The committee headed by Planning Commission Member B K Chaturvedi has suggested that the number of CSS should be reduced from 147 to 59.With a view to streamlining public expenditure and improving efficiency, the panel has also recommended changes in the fiscal norms and normal central assistance, besides suggesting classification of such schemes into flagship, sub-sectoral and umbrella schemes.

The government’s expenditure is divided under two broad heads—plan and non-plan. Non-plan expenditure constitutes bulk of the government’s expenditure. The plan expenditure of the government is normally associated with productive expenditure, which helps increase the productive capacity of the economy. It includes outlays for different sectors such as rural development and education.

Non-plan expenditure, on the other hand, includes expenses on heads such as interest payment on government debt, subsidies, defence, pensions and other establishment costs of the government. A large part of this is obligatory in nature. For example, the government may cut allocation towards rural development or education if it falls short of funds, but it cannot cut interest payments on borrowed funds.

Lower plan expenditure adversely impacts the growth prospects of the economy. So, it is important that government rationalizes expenditure on heads such as subsidies in the non-plan segment. This will help it contain the deficit and allow it to spend on activities that create assets and contribute to development in the long run.

The distinction would be merely between revenue and capital expenditures: While the latter refers to spending, which leads to the creation of assets yielding financial or social returns, the former include salaries, interest payments and other such recurrent spending.

The financial year in India commences from 1st April every Year. Before the start of each financial year, the government of India seeks the permission/approval of the Parliament to raise income and to make expenditures in the coming financial year. A detailed financial procedure has been stated in the Article 112 of the constitution of India. The budget, introduced by the Finance Minister, shows the estimated receipts and expenditure for the coming financial year.Article 112 of the constitution of India provides that at the beginning of the every financial year, the President shall, in respect of the financial year, cause to be laid before both the houses of Parliament a statement of the estimated receipts and expenditure of the government of India for that year. This statement is called the Annual Financial Statement which is popularly known as the budget. The budget consists of two parts, namely, the Railway Budget and the General Budget. The Railway Budget relates to the Railway Finance while the General Budget deals with the overall financial position of the government of India excluding the Railways. A separate Railway Budget was presented for the first time in 1925. The Budget statement shows the receipts and payments of the government of India under three heads, namely, (i) Consolidated Fund; (ii) Contingency Fund, and (iii) Public Account.

Consolidated Fund of India

All revenues received by the government of India except certain taxes which are transferred to states, all loans raised by the government, and all money received by the government in repayment of loans are credited to the Consolidated Fund of India.

Under Article 112 (3), the salary and allowances of the President of India, the presiding officers of both Houses of the Parliament, the Judges of the Supreme Court and the High Courts of India, the Comptroller and Auditor General of India, and certain other expenditures are charged upon the Consolidated Fund of India. These items, though placed before the Parliament, are not votable. However, other items of expenditure, which are votable, are presented to the Lok Sabha in the form of demands for grants. The House has the power to either grant or reduce or reject these demands, but it cannot increase the demands.

The Contingency Fund of India

Under the Contingency Fund of India Act, 1950, the Contingency Fund of India has been constituted. It is an impress placed at the disposal of the President of India to meet urgent unforeseen expenditure pending authorization by the Parliament.

Public Account of India

Besides the normal receipts and expenditure of the government of India which pertain to the Consolidated Fund of India, certain other transactions enter the government account. In respect of these transactions the government acts as a banker.

These transactions relates to Provident Funds, Small Savings, Collections, other deposits etc. The money, thus received, is kept in the Public Account of India. This covers the money received by an officer or court in connection with affairs of the union. The related disbursements are also made from the account.