Importance of a Union Budget

Last Updated: 18 Aug 2025

The term Union Budget came to the fore because India is the Union of States. The Constitution of India has established the federal form of Government in India. Therefore, it is called the Union of States. In India, a federation has been established consisting of 28 States and 7 Union Territories.

The Union Budget of India, also referred to as the Annual Financial Statement in the Article 112 of the Constitution of India, is the annual budget of the Republic of India.

The word ‘budget’ has its origin in the French word Bougette, which means leather briefcase. Finance Ministers in the past have used leather bags to unveil the budget. In 2019, when Sitharaman presented her first Budget, she replaced the budget briefcase with the ‘bahi khata’.

The country has left its colonial past to create a new identity of being an economic powerhouse. The Union Budget also provides the required framework for the government to introduce policies and reforms for the betterment of the common taxpayers.

What is the Union Budget?

It is the Government of India’s annual financial statement that details projected receipts and expenditures for the coming fiscal year. Prepared under Article 112 of the Constitution, it specifies how revenue will be raised and how resources will be allocated to ministries, flagship schemes, and states. As a cornerstone of fiscal policy India, the document shapes aggregate demand and influences inflation through tax changes and public-spending plans.

Beyond accounting, the exercise demonstrates the need for a union budget by signalling policy priorities and reform intent to Parliament, investors, and citizens. Underscoring the importance of Union budget, every proposal requires parliamentary approval, ensuring democratic oversight while charting the economy’s trajectory.

Importance of a Union Budget

• The importance of union budget in India can be seen in how it guides the country’s economic direction every year.
• The Union Budget shapes government policies and tells everyone the priorities for spending and development.
• One key need and importance of union budget is to make sure public money is used wisely to benefit all sections of society.
• The basic importance of a union budget is that it helps the government collect and manage money for social programs, education, health, and infrastructure.
• It is also seen in how it sets plans to reduce poverty and unemployment and aims for fair growth across different groups. It works to lower wealth and income differences by adjusting rules and tax systems.
• The budget ensures that government spending is controlled and that prices do not rise too fast.
• By presenting the budget to Parliament, the government shows transparency and follows constitutional rules, reinforcing the importance of union budget in India.
• It is the President who presents the budget, but the Finance Minister prepares and explains it in the Parliament.
• The budget includes proposals from ministries, states, and other bodies, showing the need for a union budget for national cooperation.
• Each year, the Union Budget makes changes based on the country’s needs, which is of primary importance for a union budget for continuous growth.
• The document also has a powerful  on the sectors, affecting jobs, business opportunities, and public welfare.

Budget Classification

The Union Budget contains details about the projected receivables and payables of the government for a particular fiscal year (April 1 to March 31). This budget statement is divided into two central parts: the capital budget and the revenue budget.

Capital Budget

• The Capital Budget shows all the money the government will borrow and all the big things it will spend money on, like building roads or hospitals.
• Money that comes into the government from loans, selling old buildings or assets, or money received from the Reserve Bank of India is part of the capital receipts.
• Capital expenditure is money spent on creating new assets. This includes building schools, hospitals, highways, bridges, railway tracks, and buying machinery.
• Giving long-term loans to states or other countries also counts as capital expenditure.
• The union budget economic impact is strongly seen through these kinds of spending, as they help the country grow in the long run.
• The basic importance of a union budget with capital budgeting is to make sure India invests in things that will help people for many years.

Revenue Budget

• The Revenue Budget is about the money that the government earns and spends every day.
• Revenue expenditure refers to money used to pay things like salaries, pensions, interest payments, and subsidies. This spends money on daily services but does not create new assets.
• If the government spends more than it earns here, it faces a revenue deficit. The need and importance of union budget in this area is to make sure the government runs smoothly and provides services to everyone.

Who Prepares the Union Budget

Drafting starts in September, led by the Budget Division of the Department of Economic Affairs within the Ministry of Finance. Line ministries, autonomous bodies, and public enterprises first submit spending requests and revenue estimates.

The Expenditure Department scrutinises outlays, whereas the Revenue Department estimates tax inflows. NITI Aayog, regulators, and state officials provide additional inputs to assess the union budget economic impact on growth and employment.

Several review rounds follow to balance development goals with fiscal deficit management targets mandated by the Fiscal Responsibility and Budget Management Act. Industry chambers, economists, and civil society groups are consulted to refine priorities and highlight the need for union budget reforms. Once figures are finalised, a high-security “Halwa Ceremony” initiates printing in late January. The Finance Minister then seeks Cabinet approval before presenting the document to Parliament on 1 February, demonstrating again the importance of a union budget as the country’s chief financial blueprint.

What is the Role of an RBI Chief in the Union Budget?

Although autonomous, the Reserve Bank of India works closely with the Finance Ministry. Pre-Budget, the RBI Governor supplies growth, liquidity, and inflation assessments, thereby reinforcing the importance of union budget in India for macro-stability.

The Governor advises on market-borrowing limits so that government debt issuances do not disrupt monetary operations – an area that highlights the need for a union budget for investor confidence.

Once the Budget announces its borrowing calendar, the RBI conducts auctions of Treasury bills and dated securities, directly linking the fiscal policy India to day-to-day liquidity conditions. Post-Budget, the central bank uses open-market operations and standing facilities to ensure that public borrowing does not crowd out private credit, underscoring the practical side of fiscal deficit management.

The Governor’s continuous feedback loop during the fiscal year exemplifies the importance of a union budget as a document whose success relies on coordinated monetary and fiscal actions. By shaping and then executing borrowing programmes, the RBI Chief helps translate the Union Budget’s economic impact projections into ground-level financial stability.

Analyses the Fiscal Position

RBI publishes two statutory reports, its Annual Report and the Report on Trend and Progress of Banking in India. RBI brings out an annual publication entitled “State Finances: A Study of Budgets,” which analyses the fiscal position of state governments on the basis of primary state-level data.

Categorically, there are two broad dimensions of economic policies, Monetary and Fiscal.

RBI’s sole responsibility is to work on monetary policy to check on the inflation in the market by regulating money supply through various policies like Reserve Ratio, Repo rate and Open Market Operations (OMO).

While the Government keeps an eye on the deficit, revenue and expenditure parts, put in other words, it goes for capacity building and growth of the economy (GDP).

Frequently Asked Questions

1. What is the importance of the union budget in India?

It sets nationwide spending and revenue plans that guide economic growth and social welfare, illustrating both the vision and constraints of government action.

2. Why is the need and importance of the union budget highlighted every February?

The Budget resets tax rates, subsidy regimes, and development priorities for the year ahead, making it crucial for businesses, investors, and households to plan.

3. What is the basic importance of a union budget compared with state budgets?

The Union Budget governs defence, railways, and macro-taxation, while state budgets focus on regional programmes, making the national document foundational for overall fiscal coordination.

4. How does the document shape the union budget's economic impact across sectors?

Targeted capital expenditure boosts infrastructure, and calibrated incentives support agriculture and MSMEs, jointly fostering inclusive growth and job creation.