2. BUDGET & THE ECONOMY
BUDGET IS THE ANNUAL FINANCIAL STATEMENT
OF THE ESTIMATED RECEIPTS AND EXPENDITURE
OF THE GOVERNMENT FOR A FISCAL YEAR.
FISCAL YEAR IS TAKEN FROM 1ST APR TO 31
MARCH.
3. OBJECTIVE OF GOVERNMENT BUDGET
Government prepares the budget for fulfilling certain objectives. The
various objective of government budget are:
1. Reallocation of resources: Through budgetary policy,, Government
aims to reallocate resources in accordance with the economic (profit
maximization) and social (public welfare) priorities of country.
Government can influence allocation of resources through:
(i) Tax Concessions and Subsidies
(ii) Directly producing goods and services.
2. Reducing inequalities in income and wealth: Government aims to
influence distribution of income by imposing taxes on the rich and
spending more on the welfare of the poor. It will reduce income of the rich
and raise standard of living of the poor, thus reducing inequalities in the
distribution of income.
4. 3. Economic Stability: Economic stability means absence of large scale
fluctuation in prices. Government can exercise control over these inflationary and
deflationary fluctuations through taxes and expenditure.
4. Management of Public Enterprises: There are large numbers of public sector
industries, which are established and managed for social welfare of the public.
Budget is prepared with the objective of making various provisions for managing
such enterprises and providing them financial help.
5. Economic Growth: Economic growth means an increase in volume of goods
and services produced in an economy. Budget can be an effective tool to ensure the
economic growth in a country.
(i) The government provides tax rebates and other incentives for productive
ventures and projects.
(ii) Spending on infrastructure of an economy enhances the production activity in
different sectors of an economy.
6. Reducing Regional Disparities: The Government budget aims to reduce
regional disparities through its taxation and expenditure policy for encouraging
setting up of production units in economically backward regions.
5. COMPONENTS OF BUDGET
BUDGET
REVENUE
BUDGET
CAPITAL
BUDGET
REVENUE
RECEIPT
REVENUE
EXPENDITURE
CAPITAL
RECEIPT CAPITAL
EXPENDITURE
6. Classification of Receipts
Budget receipts refers to the estimated money receipt of the
government from all the sources during a given fiscal year.
Budget receipt may be further classified as:
(i) Revenue Receipts
(ii) Capital Receipts
7. REVENUE RECEIPTS
TAX REVENUE NON TAX REVENUE
DIRECT TAX INDIRECT TAX COMMERCIAL
REVENUE ADMINISTRATIVE
REVENUE
FEES
FINES & PENALTIES
FOREFEITURE
ESCHEAT
8. REVENUE RECEIPTS
Revenue Receipt: Revenue receipt refers to those receipts
which neither create any liability nor cause any reduction
in the assets of the government.
They regular and recurring in nature and government
receives them in its normal course of activities.
Two Sources of Revenue Receipts are:
(i) Tax Revenue: Tax revenue refers to sum total of receipts
from taxes and other duties imposed by the government
(ii) Non Tax Revenue: Non tax revenue refers to receipts of
the government form all sources other than those of tax
receipts.
9. TAX REVENUE
Tax Revenue can be further classified as :
(i) Direct Tax: Direct tax refer to taxes that are imposed on
property and income of individuals and companies and are paid
directly by them to the government.
Example: Income tax, Corporate tax, Interest tax, Wealth tax,
Death Tax. Capital gain tax, etc.
(ii) Indirect Tax: Indirect taxes refers to those taxes which
affect the income and property of individual and companies
through their consumption expenditure.
Example: Goods and Services Tax (GST).
How to classify a Tax as Direct Tax and Indirect Tax:
A Tax is a direct tax, if its burden cannot be shifted.
A tax is an indirect tax, if its burden can be shifted.
11. Main Sources of Non Tax Revenue
1. Interest: Interest receipts on loan given by Government to state
government, union territories, private enterprises and general public is an
important source of non-tax revenue.
2. Profit and Dividends: Government earns profit through public sector
undertakings like Indian Railway, IOC, LIC, ONGC, etc. Government also
gets dividend from its investments in other companies.
3. Fees: Fee refers to charges imposed by the government to cover the
cost of recurring services provided by Government like court fees,
registration fees, import fees, etc.
4. License Fee: It is payment charged by the government to grant
permission for something. For example, license fee paid for permission of
keeping a gun or to obtain National Permit for commercial vehicles.
5. Fines and Penalties: They refer to those payment which are imposed
on law breakers. For example, fine for jumping red light.
12. 6. Escheats: It refers to claim of the government on the
property of a person who dies without leaving behind any legal
heir or a will.
7. Gifts and Grants: Government receives gifts and grants
from foreign government and international organizations. Such
gifts are not a fixed source of revenue and are generally
received during national crisis such as war, flood, etc.
8. Forfeitures: These are in the form of penalties which are
imposed by the courts for non compliance of orders or non
fulfillment of contracts etc.
9. Special Assessment: It refers to the payment made by the
owners of those properties whose value has appreciated due
to development activities of the government. For example, if
value of a property near a metro station has increased, then a
part of development expenditure is recovered from owners of
such property in the form of special assessment.
14. REVENUE EXPENDITURE
Revenue Expenditure: Revenue expenditure refers to expenditure
which neither create any asset nor causes reduction in any liability of
the government.
It is recurring in nature.
It is incurred on normal functioning of the government and the
provisions for various services.
Examples:
(i) Payment of salaries
(ii) Pension
(iii) Interest payment
(iv) Expenditure on administrative services
(v) Defence services
(vi) Health services
(v) Grants to states, etc.
15. .
CAPITAL BUDGET
CAPITAL RECEIPTS CAPITAL EXPENDITURE
1. RECOVERIES OF LOAN
2. BORROWINGS
3. DISINVESTMENTS
4. SMALL SAVINGS
1.CREATION OF ASSETS
2. REDUCTION OF LIABILITY
16. CAPITAL RECEIPT
Capital Receipts: Capital receipts refers to those which either
create a liability or cause a reduction in the assets of the
government.
They are non recurring and non routine in nature.
Source of capital receipts:
1. Borrowings: Borrowings are the funds raised by government to
meet excess expenditure.
Government borrow funds from:
(i) Open market (Public)
(ii) Reserve Bank of India (RBI)
(iii) Foreign governments
(iv) International institutions (like World Bank, International Monetary
Fund).
Borrowing are capital receipts as they create a liability for the
government.
17. 2. Recovery of Loans: Government grants various loans to
state government or union territories. Recovery of such loans
is a capital receipt as it reduces the assets of the government.
3. Other Receipts: These include:
(a) Disinvestment: Disinvestment refers to the act of selling
of part or the whole of shares of selected public sector
undertakings (PSU) held by the government. They are termed
as capital receipts as they reduce the assets of the
government.
(b) Small Savings: Small savings refer to funds raised from
the public in the form of Post Office Deposits, National
Saving Certificates, Kisan Vikas Patras etc. they are
treated as capital receipts as they lead to an increase in
liability.
18. Capital Expenditure
Capital Expenditure: Capital expenditure refers to the
expenditure which either creates asset or causes a reduction
in the liabilities of the government.
It is non-recurring in nature.
It adds to capital stock of the economy and increases its
productivity through expenditure on long period
development programmes, like Metro or Flyover.
Examples:
(i) Loan to states and Union Territories.
(ii) Expenditure on building roads, flyovers, factories,
purchase of machinery.
(iv) Repayment of borrowings, etc.
20. MEASURES OF GOVERNMENT DEFICIT
Budgetary Deficit: Budgetary deficit refers to the excess
of total estimated expenditure over total estimated
revenue.
Budgetary Deficit can be of 3 types:
(i) Revenue Deficit
(ii) Fiscal Deficit
(iii) Primary Deficit
21. REVENUE DEFICIT
Revenue deficit refers to excess of revenue expenditure over
revenue receipts during the given fiscal year.
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Measures to reduce revenue deficit:
(i) Reduce Expenditure: Government should take serious steps to
reduce its expenditure and avoid unproductive or unnecessary
expenditure.
(ii) Increase Revenue: Government should increase its receipts
from various sources of tax and non-tax revenue.
22. FISCAL DEFICIT
Fiscal deficit refers to the excess of total expenditure over total
receipts (excluding borrowings) during the given fiscal year.
Fiscal Deficit = Total Expenditure – Total Receipts excluding
borrowings
Sources of financing fiscal deficit:
(i) Borrowing: Fiscal deficit can be met by borrowings from the
internal sources (public, commercial banks etc.) or the external
sources (foreign government, international organization etc.)
(ii) Deficit financing (Printing of new currency): Government
may borrow from RBI against its securities to meet the fiscal
deficit. RBI issues new currency for this purpose. This process is
known as deficit financing.
23. PRIMARY DEFICIT
Primary deficit refers to difference between fiscal
deficit of the current year and interest payment on
the previous borrowings.
Primary Deficit = Fiscal Deficit – Interest Payments
26. Homework/Assignment
Q 1. Differentiate between revenue budget and capital budget?
Q 2. Can be a fiscal deficit in a government budget without a revenue
deficit? Explain.
Q 3. Explain the need for reduction in inequalities of income and
wealth. Explain any two budgetary measures by which it can be
done.
Q 4. Borrowing in government budget is:
(a) Revenue Deficit (b) Fiscal Deficit (c) Primary Deficit (d) Deficit in
taxes.
Q 5. The non – tax revenue in the following is:
(a) Income Tax (b) Corporate Tax (c) Dividends (d)Borrowings
