Fiscal Policy is a concept referring to the government's use of taxation, public expenditure, and public borrowing to influence the nation's economy, rooted in Keynesian economics. The Budget is the act that operationalizes this policy, formally known as the Annual Financial Statement. The concept of the Budget originates from the Indian Constitution, which mandates in Article 112 that the President shall cause the Annual Financial Statement of estimated receipts and expenditure for every financial year to be laid before Parliament. This process solves the problem of ensuring legislative control over the executive's finances, as Article 266(2) and Article 114(3) require parliamentary authorization for any withdrawal from the Consolidated Fund of India.
The mechanism of the Budget involves presenting the Revenue Budget (tax and non-tax receipts, and revenue expenditure) and the Capital Budget (capital receipts and expenditure). The government must also present a Finance Bill under Article 110(1)(a) to detail proposed tax changes. Fiscal Policy connects directly to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, an Act created to ensure fiscal discipline, long-term macroeconomic stability, and greater transparency by setting limits on deficits and debt. The FRBM Act, 2003, mandates that the government lay three key policy statements before Parliament: the Macro-economic Framework Statement, the Medium Term Fiscal Policy Statement, and the Fiscal Policy Strategy Statement.
The FRBM framework has changed recently: the 2018 Amendment removed the targets for Revenue and Effective Revenue Deficit. The Act's core mechanism of setting a fiscal deficit target, initially 3% of GDP by March 31, 2021, has stayed, though the deadline was extended, and the government is now working towards a target of bringing the deficit below 4.5% of GDP by FY 2025–26. Fiscal Policy also connects to the Finance Commission, established under Article 280, which acts as the "balancing wheel" of fiscal federalism by recommending the devolution of central taxes to states.