The Constitution of India under Article 112 mandates the government to present before the Parliament a statement of estimated receipts and expenditures of the government for each financial year. This ‘Annual Financial Statement constitutes the main budget document of the government.

The government utilises the budget to intervene in the economy in the following ways:

Allocation function of government budget:

• The allocation function in budgeting determines where the government revenue will be spent. Certain goods, referred to as public goods (such as national defence, roads, government administration), as distinct from private goods (like clothes, cars, food items), cannot be provided through the market mechanism and must he provided by the government. This necessitates the involvement of the public sector enterprises in the economy.
• The allocation decisions become more significant in political and economic terms as a high proportion of national income is devoted to public expenditure. Further, the resources available to the government are scarce as calls for expenditure on specific services or activities, or for more generous transfer payments, usually exceed the amount that can reasonably be raised in taxation or by borrowing.
• Government tries to allocate resources in accordance with economic (profit maximisation) and social (public welfare) priorities of the country.

Redistribution function of government budget:

• The government through its tax and expenditure policies attempts to bring out income redistribution in the society that is fair to all. The government affects the personal disposable income of households by collecting taxes (from high income sections) and providing subsidies and transfer payments (to poorer sections).
• The argument for redistribution is that it would provide a more efficient means of eradicating severe hardship, suffering, or starvation. Left to itself, the market economy creates casualties among those who lack the skills to participate fully or those who have failed to generate sufficient resources to tide them over into old age. Therefore, the redistributive function of the government enhances the overall social welfare in the country.

Stabilisation function of government budget:

• The economy tends to be subject to substantial fluctuations and may suffer from prolonged periods of inflation or deflation. This depends upon the level of aggregate demand, which, in turn, depends on many factors such as income and credit availability. Government stabilises such fluctuations in the economy through policy measures.
• During inflation, the government brings a restrictive fiscal policy i.e. increases taxes and reduces its expenditure. Similarly, during deflation, the government adopts an expansionary fiscal policy i.e. decreases taxes and increases public expenditure to stabilise the economy.
• Stabilization of the economy, including high employment, control of inflation, and an equitable balance of payments are the objectives that the government attempts to fulfill through manipulation of fiscal and monetary policies.

Thus, in this manner, the government uses the budgetary functions of allocation, redistribution and stabilisation to achieve the goals of inclusive and equitable development in India.