Zero-based budgeting was developed by Peter Pyhrr and adopted at the federal level in the United States by:

Robert McNamara at the Defense Department

Which of the following statements about the Comptroller and Auditor General of India are correct? Select all that apply.

The CAG conducts performance audit as well as compliance audit

The CAG's reports on Union accounts are submitted to the President

The CAG can be removed only in the manner of a Supreme Court judge

The CAG conducts performance audit as well as compliance audit

The CAG is eligible for further office under the government after retirement

The CAG's reports on Union accounts are submitted to the President

The CAG can be removed only in the manner of a Supreme Court judge

Assertion (A): The Estimates Committee is called a "continuous economy committee". Reason (R): It examines the estimates throughout the year and suggests economies, improvements in organisation and alternative policies. Choose the correct option.

Both A and R are true, and R is the correct explanation of A

Both A and R are true, but R is not the correct explanation of A

Under the 2018 amendment to the FRBM Act, the principal fiscal anchor became:

The debt-to-GDP ratio, with general government debt of 60 per cent of GDP

Under a progressive income tax:

The rate of tax rises as income rises

The poor pay a larger share of their income than the rich

Everyone pays the same rate regardless of income

The rate of tax rises as income rises

Tax is levied only on consumption

Financial Administration: Nature and Scope; the Budget and the Budgetary Process; PPBS, Performance, Zero-Based and Gender Budgets; the FRBM Act and Sunset Legislation; Fiscal Federalism and the Finance Commission; Legislative and Executive Control, Parliamentary Committees and the CAG; Taxation

The second block of Unit VI reads: "Financial Administration: Public Finance – Revenue and Expenditure: Nature, Scope and Significance of Financial Administration; Budget – Meaning, Purpose and Significance; Budgetary Process – preparation, enactment and execution; Types of Budget – PPBS, Performance Budget, Zero-Based Budget and Gender Budget; Fiscal Responsibility and Budget Management Act (FRBMA) and Sunset legislation. Fiscal Federalism – Union-State Financial Relations, Finance Commission. Financial Control- Legislature and Executive; Parliamentary Committees and Comptroller and Auditor General of India. Taxation policies – Principles of Taxation –Progressive and Proportional taxation – Reforms in Taxation policies." Financial administration is the part of administration concerned with raising, spending and accounting for public money. This chapter follows the money through the budget cycle, the reforms of budgeting technique, the fiscal rules and the federal transfers, to the controls that answer for it — with the arithmetic that the fiscal questions require.

1. Financial administration and the budget

Public finance studies the revenue and expenditure of government; financial administration is the organisation and processes through which that revenue is raised, allocated, spent, accounted for and audited. Its scope covers budgeting, treasury and cash management, accounting, audit, and the relations among the legislature, the finance ministry and spending departments. Its significance is that every policy is ultimately a claim on money — Lloyd George's dictum that "government is finance" — and that control of the purse is the oldest instrument of legislative accountability.

The word budget comes from the French bougette, a leather bag in which the British Chancellor carried his papers. The Constitution does not use the word: Article 112 requires an "annual financial statement" of estimated receipts and expenditure to be laid before Parliament for each financial year. The budget distinguishes expenditure charged on the Consolidated Fund (not voted, though it may be discussed — the salaries of the President, judges and the CAG, debt charges) from expenditure voted through demands for grants; revenue from capital accounts; and the three funds — the Consolidated Fund of India (Article 266(1)), into which all revenues and loans go; the Public Account (Article 266(2)), for money held by government in trust, such as provident funds; and the Contingency Fund (Article 267), an imprest at the disposal of the President for unforeseen expenditure pending authorisation. Its purposes are financial accountability, economic management (allocation, distribution, stabilisation), planning and management control.

2. The budgetary process: preparation, enactment and execution

The budget cycle in India
Stage	What happens
Preparation	The Budget Division of the Department of Economic Affairs issues a budget circular; spending departments prepare estimates, which are scrutinised by the Finance Ministry's expenditure side and integrated with revenue estimates; the Finance Minister finalises the budget in consultation with the Prime Minister and Cabinet
Enactment	Presentation (on 1 February since 2017, when the separate Railway Budget was also merged into the general budget); general discussion; scrutiny of demands for grants by the Departmentally Related Standing Committees; voting on demands for grants (Article 113) in the Lok Sabha, with cut motions; the guillotine on remaining demands; the Appropriation Bill (Article 114) authorising withdrawal from the Consolidated Fund; the Finance Bill giving effect to tax proposals
Execution	Release of funds to departments; re-appropriation within a grant; supplementary and excess grants (Article 115); control of expenditure by the Finance Ministry and the departments' financial advisers; accounting, followed by audit and the legislature's review

Policy cut: reduce the demand to ₹1 — disapproval of the policy behind it.
Economy cut: reduce the demand by a specified amount — to effect an economy.
Token cut: reduce the demand by ₹100 — to ventilate a specific grievance.
Vote on account (Article 116): an advance grant for part of the year, usually two months, so that government can spend before the full budget is passed — common in election years.

🧠 The fiscal arithmetic

Fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts); it equals the government's borrowing requirement. Revenue deficit = revenue expenditure − revenue receipts. Primary deficit = fiscal deficit − interest payments, and shows current borrowing net of paying for past borrowing. Example: expenditure 50, revenue receipts 38, non-debt capital receipts 2 → fiscal deficit 10; with interest of 4, primary deficit 6.

3. Types of budget: PPBS, performance, zero-based and gender budgets

The traditional line-item budget lists inputs — salaries, travel, supplies — by object of expenditure and is designed for control: it tells the legislature what is bought, not what is achieved. Reforms since the mid-twentieth century shifted the emphasis to management and planning, and then to outcomes and equity.

Reforms in budgeting technique
Type	Origin	Method	In India
Performance budget	Recommended by the first Hoover Commission (1949) in the United States	Classifies spending by functions, programmes and activities, and relates money to measurable work done and unit costs	Recommended by the first ARC (1968); introduced in development ministries from the late 1960s; the Outcome Budget from 2005 measures results rather than outputs
PPBS (Planning–Programming–Budgeting System)	Developed at the RAND Corporation; introduced by Robert McNamara in the US Department of Defense (1961) and extended to federal agencies by President Johnson (1965); largely abandoned by 1971	Sets long-term objectives, identifies alternative programmes, compares them by systems and cost–benefit analysis, and budgets over several years	Influenced plan budgeting, but never adopted as a system
Zero-based budget	Peter Pyhrr at Texas Instruments (around 1970); adopted by Jimmy Carter as Governor of Georgia and then as President (1977)	Every programme must justify its whole budget from zero each year, through decision packages ranked in priority order, rather than taking last year's base for granted	Tried in the Department of Science and Technology (1983) and extended to all ministries from 1986–87; heavy paperwork limited its use
Gender budget	Australia's Women's Budget Statement (1984) was the first	Analyses the budget for its differential impact on women and men, and earmarks and tracks allocations for women	A Gender Budget Statement has accompanied the Union Budget since 2005–06: Part A lists schemes wholly for women, Part B schemes with at least 30 per cent of allocation for women

🎯 Why incremental budgeting survives

Aaron Wildavsky's The Politics of the Budgetary Process (1964) showed that real budgets are made incrementally — agencies take last year's base for granted and argue about the increment — because comprehensive re-examination every year is beyond anyone's time and knowledge. PPBS and zero-based budgeting both tried to replace incrementalism with comprehensive rationality and both collapsed under their paperwork, which is the budgetary version of the Lindblom–Dror debate in Unit VIII.

4. The FRBM Act, sunset legislation and fiscal federalism

The Fiscal Responsibility and Budget Management Act, 2003 (in force from July 2004) put rules-based fiscal discipline into law: the Union was to eliminate the revenue deficit and bring the fiscal deficit down to three per cent of GDP by stated dates, lay a medium-term fiscal policy statement and other fiscal statements before Parliament, and limit borrowing from the Reserve Bank. The targets were repeatedly deferred (after the 2008 crisis, and again after 2020). On the recommendation of the N. K. Singh FRBM Review Committee (2017), a 2018 amendment made debt the principal anchor — general government debt of sixty per cent of GDP, of which forty per cent for the Union — with the fiscal deficit as the operational target and an escape clause for defined shocks. The states passed their own fiscal responsibility laws.

Sunset legislation provides that a programme, agency or regulation automatically expires on a fixed date unless the legislature, after review, positively renews it; the burden of proof shifts to those who want it continued. The American state of Colorado passed the first general sunset law in 1976. Sunset clauses complement zero-based budgeting, since both force periodic justification, and they have been used in India for temporary tax concessions and some special laws; their weakness is that reviews can become perfunctory.

Fiscal federalism arises because the Union has the more elastic taxes (income tax, corporation tax, customs) while the states carry most spending responsibilities — a vertical fiscal imbalance — and states differ in capacity — a horizontal imbalance. The Constitution's Part XII (Articles 264–293) divides taxing powers, provides for sharing of Union taxes and for grants-in-aid (Article 275 statutory grants; Article 282 discretionary grants). The Goods and Services Tax (101st Amendment, 2016; in force 1 July 2017) pooled most indirect taxes and created the GST Council (Article 279A), a joint Union–state body. The Finance Commission (Article 280), constituted by the President every five years, recommends the vertical share of the divisible pool of Union taxes going to the states, the horizontal distribution among states by a formula (population, area, income distance, forest cover, demographic performance and others), and grants to states and local bodies. The Fifteenth Commission (N. K. Singh) recommended 41 per cent for 2021–26; the Sixteenth Finance Commission, constituted on 31 December 2023 and chaired by Arvind Panagariya, covers the award period 2026–31.

5. Financial control, parliamentary committees, the CAG and taxation

Legislative control works through the budget votes and the three financial committees of Parliament. The Estimates Committee (1950; thirty Lok Sabha members) examines estimates and suggests economies and alternative policies — the "continuous economy committee". The Public Accounts Committee (1921; fifteen Lok Sabha and seven Rajya Sabha members, chaired by an opposition member) examines the appropriation accounts and the CAG's audit reports after the event. The Committee on Public Undertakings (1964) examines public enterprises. Executive control is exercised by the Ministry of Finance (the Department of Expenditure) through sanctions, delegation of financial powers and the Integrated Financial Advisers posted in ministries; accounts were departmentalised from 1976, separating them from audit and placing them under the Controller General of Accounts.

The Comptroller and Auditor General of India (Articles 148–151) is appointed by the President, holds office for six years or until sixty-five, can be removed only like a Supreme Court judge, and is ineligible for further office under government; his salary and conditions are charged on the Consolidated Fund. His duties are laid down by the CAG (Duties, Powers and Conditions of Service) Act, 1971: to audit all receipts and expenditure of the Union and states, government companies and bodies substantially financed by government, conducting compliance (legality and regularity), financial and performance (economy, efficiency and effectiveness) audit, and to submit reports to the President and Governors to be laid before the legislatures (Article 151). He is described as the "friend, philosopher and guide" of the Public Accounts Committee, and B. R. Ambedkar called the office probably the most important under the Constitution.

Principles of taxation go back to Adam Smith's four canons — equality (in proportion to ability), certainty, convenience and economy of collection — to which later writers added productivity, elasticity, simplicity and diversity. Two principles of fairness compete: ability to pay and the benefit principle. Under progressive taxation the rate rises as the base rises, so the rich pay a larger share of their income (income-tax slabs); under proportional taxation the rate is constant (a flat tax); under regressive taxation the burden falls proportionately more on the poor (many indirect taxes on necessities). Reforms in India include the Raja Chelliah Tax Reforms Committee (1991–93), which recommended lower rates and a broader base; the Kelkar Task Forces (2002) on direct and indirect taxes; the introduction of GST in 2017; the cut in corporate tax rates in 2019; and faceless assessment of income tax from 2020.

Key takeaways

Article 112 requires an annual financial statement; the budget passes through preparation, enactment (demands for grants, cut motions, Appropriation and Finance Bills) and execution.
Performance budgeting comes from the Hoover Commission (1949), PPBS from McNamara (1961), zero-based budgeting from Peter Pyhrr and Jimmy Carter; India's Gender Budget Statement dates from 2005–06.
The FRBM Act (2003) set a 3 per cent fiscal-deficit target; the 2018 amendment anchored policy on debt (60 per cent general government, 40 per cent Union). Sunset laws make programmes expire unless renewed.
The Finance Commission (Article 280) sets vertical and horizontal devolution; the Sixteenth, chaired by Arvind Panagariya, covers 2026–31.
The CAG (Articles 148–151; 1971 Act) conducts compliance, financial and performance audit and is the PAC's "friend, philosopher and guide"; progressive tax rates rise with income, proportional rates stay constant.

Practice questions (10)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

A government's total expenditure is ₹50 lakh crore, its revenue receipts ₹38 lakh crore and its non-debt capital receipts ₹2 lakh crore. Interest payments are ₹4 lakh crore. What is the primary deficit, in lakh crore rupees? Type a number.
Numerical answer — type the value.
Show answer
Answer: 6
Fiscal deficit = 50 − (38 + 2) = 10. Primary deficit = fiscal deficit − interest = 10 − 4 = 6 lakh crore rupees.
A cut motion that reduces a demand for grant to ₹1, expressing disapproval of the policy underlying it, is a:
1. Economy cut
2. Guillotine
3. Token cut
4. Policy cut
Show answer
Answer: D — Policy cut
A policy cut reduces the demand to ₹1. An economy cut reduces it by a specified amount, a token cut by ₹100 to air a grievance; the guillotine is the closure that puts all remaining demands to vote together.
Zero-based budgeting was developed by Peter Pyhrr and adopted at the federal level in the United States by:
1. President Jimmy Carter
2. Robert McNamara at the Defense Department
3. President Lyndon Johnson
4. The first Hoover Commission
Show answer
Answer: A — President Jimmy Carter
Carter used ZBB as Governor of Georgia and brought it to the federal government in 1977. Johnson extended PPBS (from McNamara's Defense Department) in 1965; the Hoover Commission recommended performance budgeting.
Which of the following statements about the Comptroller and Auditor General of India are correct? Select all that apply.
1. The CAG conducts performance audit as well as compliance audit
2. The CAG is eligible for further office under the government after retirement
3. The CAG's reports on Union accounts are submitted to the President
4. The CAG can be removed only in the manner of a Supreme Court judge
Show answer
Answer: A — The CAG conducts performance audit as well as compliance audit; C — The CAG's reports on Union accounts are submitted to the President; D — The CAG can be removed only in the manner of a Supreme Court judge
Removal like a Supreme Court judge, reports to the President (Article 151) and performance audit are all correct. The CAG is barred from further office under the Union or any state after leaving office, to secure independence.
Assertion (A): The Estimates Committee is called a "continuous economy committee". Reason (R): It examines the estimates throughout the year and suggests economies, improvements in organisation and alternative policies. Choose the correct option.
1. Both A and R are true, and R is the correct explanation of A
2. Both A and R are true, but R is not the correct explanation of A
3. A is true, but R is false
4. A is false, but R is true
Show answer
Answer: A — Both A and R are true, and R is the correct explanation of A
Both are true and R explains A: because the committee's work is a continuing examination aimed at economy in expenditure, it earned that description.
Under the 2018 amendment to the FRBM Act, the principal fiscal anchor became:
1. The inflation rate
2. The debt-to-GDP ratio, with general government debt of 60 per cent of GDP
3. The current account deficit
4. The revenue deficit alone
Show answer
Answer: B — The debt-to-GDP ratio, with general government debt of 60 per cent of GDP
Following the N. K. Singh Committee, debt became the anchor — 60 per cent for general government, 40 per cent for the Union — with the fiscal deficit as the operational target.
Sunset legislation provides that:
1. Every budget begins from zero
2. Laws cannot be amended after five years
3. A programme or agency expires automatically on a fixed date unless the legislature renews it after review
4. Government offices close at sunset
Show answer
Answer: C — A programme or agency expires automatically on a fixed date unless the legislature renews it after review
A sunset law shifts the burden of proof onto continuation; Colorado passed the first general sunset law in 1976. Starting every budget from zero is zero-based budgeting, a related but separate idea.
Which of the following are among Adam Smith's canons of taxation? Select all that apply.
1. Economy
2. Progressivity
3. Convenience
4. Certainty
Show answer
Answer: A — Economy; C — Convenience; D — Certainty
Smith's four canons are equality, certainty, convenience and economy. Progressivity is a later principle; Smith's "equality" meant taxation in proportion to ability, not rising rates.
The Sixteenth Finance Commission is chaired by:
1. Y. V. Reddy
2. Arvind Panagariya
3. Vijay Kelkar
4. N. K. Singh
Show answer
Answer: B — Arvind Panagariya
The Sixteenth Commission, constituted on 31 December 2023, is chaired by Arvind Panagariya for the award period 2026–31. N. K. Singh chaired the Fifteenth, Y. V. Reddy the Fourteenth and Vijay Kelkar the Thirteenth.
Under a progressive income tax:
1. The poor pay a larger share of their income than the rich
2. Everyone pays the same rate regardless of income
3. The rate of tax rises as income rises
4. Tax is levied only on consumption
Show answer
Answer: C — The rate of tax rises as income rises
Progressive taxation raises the rate as the base rises. A constant rate is proportional taxation, and a larger burden on the poor is regressive taxation.