It refers to the types of functions which the government performs or the services which it provides such as economic services, social services, defence services and the like.
The functional classification covers only the expenditure and not the receipts. The functional classification of the governmental expenditure has been allocated into four main categories: (1) General Services, (2) Social Services, (3) Economic Services and (4) Unallocable.
1. General Services:
This category covers both civil and defence expenditure meant to provide basic administrative structure and includes general administration, tax collection, police, currency and mint, external affairs, defence, non-plan provision against natural calamities, etc.
2. Social Services:
They include basic social amenities like education, medical, public health, a combined category of labour welfare, housing and other social welfare schemes.
3. Economic Services:
This category covers all those expenditures which directly or indirectly promote economic activity within the country and are divided into agriculture, industry, transport and communications and other economic services.
4. Unallocable Services:
It covers those items which cannot be classified under the above three heads like interest payments, pensions, food subsidies, statutory grants-in-aid to states, special loans, aid to foreign countries and the like.
Thus, economic and functional classification of the budget can prove very helpful in arriving at various decisions for achieving different goals in the economy, particularly when authorities are actively engaged in regulating it in accelerating the process of its economic growth and imparting distributive justice.
Economic classification of the Government of India budget started with the budget for 1957-58, and with effect from the budget for 1967-68, a functional classification was also added to it.