Government Budget & the Economy 5

Govt. Budget is a statement of expected recepits and expected expenditures of

the govt. for a fiscal year.
Last day of the month of february is well known in India as a day the Finance
Minister present annual budget of the govt.
OBJECTIVES OF GOVERNMENT BUDGET
Budget is not only a statement but it is a reflaction of Govt. policies and set
of objectives that the govt. seeks to achieve over time.
(i) Managing Public Enterprise: There are large number 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 enterprise and providing them financial help. However in case public
sector enterprises are showing inefficiency and losses. The govt may plan their
privalisation.
(ii) Economic stability: Main objective of govt. is to bring stability in
economy. It control fluctuations in general price level through taxes, subsidies
and govt. expenditure for eg. when there is inflation (continuous rise in prices)
Govt. can reduce its expenditure when there is deflation (continuous fall in prices).
Govt. can reduce taxes and grant suibsidies to encourage spending by people.
(iii) Redistribution of income and wealth: It means reduce the inequalities
between income and wealth. Through the policy Govt. seeks to promote “equity”.
To increase the disposable income of poor, Govt. provide them subsidies. To
decrease the disposable income of rich section tax system is made progressive.
Putting greater burden on richer sections of the society. These are reflacted in
the govt. budget by way of tax revenue and welfare expenditure.
(iv) Allocation of Resources: Through the budgetary policy, Govt. aims to
reallocate resources in accordance with profit maximisation and social welfare.
Govt. can influence allocation of resources thorugh taxation and subsidies
policy. To encourage investment for welfare Govt. can give tax concessions and
subsidies etc. to the producers. It can also discourage the production of harmful
consumption goods like, liquor, bidi, cigarettes, tobacco etc. through heavy
taxation and encourages the use of “Khadi product” by way of subsidies.
* Govt Budget has two broad components:
(i) Budgetary receipt
(ii) Budgetary expenditure
(i) Budgetary receipt
Budgetary receipts refer to estimated money receipts of the Govt. from all
sources during the fiscal year.
Budgetary receipt are of two types:
(A) Revenue Receipt
(B) Capital Receipt
(60)
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(A) Revenue Receipt

These are those receipt of the Govt. which do not create only liability of Govt.
and do not cause any reduction in the assets of the govt.
* Revenue receipt are of two types:
(i) Tax receipt
(ii) Non-tax receipt
(i) Tax receipt: These are those receipt of the Govt. which are received from
the tax. component (Tax source).
‘Tax’ is a compulsory payment to Govt. under any law. The taxpayer cannot
expect any service or benefit from the Govt. in Return. If a person fails to pay
tax. He is liable to penal action. It is to be treated as revenue receipt because it
neither create any liablity nor reduce any asset of the Govt.
Tax are of two types:
(a) Direct tax
(b) Indirect tax
(a) Direct tax: Direct tax are those tax the person who bears the burden of
tax does himself deposit it with Govt.
* Burden of these tax are not shiftable i.e. the amount of tax cannot be
recover from any other.
eg. Income tax, Corporation tax, Gift tax, Wealth tax etc.
(b) Indirect tax: Indirct tax are those tax the person who bears the burden
of tax does not himself deposit it with Govt.
* Burden of those tax are shiftable i.e. the amount of tax can be recover from
customer.
eg. Sales tax, Excise duty, Custom duty, Entertainment tax, Service tax etc.
(ii) Non-tax receipt: Non-tax receipts are those receipts which are received
from sources other than taxes. These are the following:
(i) Fines: Fines are those payments which are made by the law breakers to
the Govt. by way of economic punishment. The aim is not to earn revenue, but
to make people respectful towards the laws.
(ii) Fees: A fees is a payment to the Govt. for the services that it renders to
the people.
eg. Land registration fees, birth registration, passport, court, licence. It is
to be noted that fee is not a payment for commercial service. It is a payment for
administrative and judicial services provided to the people.
(iii) Escheat: It refers to income of the state which arises out of the property
left by the people with a legal heir.
(iv) Grants/Donations: Grants received by the Govt. are also a source of
revenue. In the event of some natural calamities (like floods, famine, earthquake)
or during wars. It also includes donations received from citizens and non residents
and rest of the world.
(v) Income from public enterprises: Several enterprises are owned by the
Govt. eg. Indian Railways, Indian Oil, Bhilai, Steel Plant etc.
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(B) Capital Receipts

These receipts are those receipts of the Govt. which creates any liability of
the Govt. or cause any reduction in assets.
It is classified as
(i) Recovery of loan: Loan offered to others are assets of the Govt.
Accordingly recovery of loan cause any reduction in assets.
(ii) Disinvestment (PSU): Disinvestment occurs due to the privatisation.
It means sale of share of public sector undertaking to provide corporate
sector. It reduces the asset of Govt.
(iii) Borrowings & other liability: Govt. borrow money from general public
by issuing share / securities, by RBI, by Rest of the world. It create
liability of the Govt.
(ii) Budgetary expenditure
It refers to estimated expenditure of the Govt. relating to its development as
well as non development expenditure during a year. These are classified as:
(a) Revenue expenditure and Capital Expenditure
(b) Plan expenditure & Non-plan expenditure
(c) Development & Non-development expenditure
(i)(a) Revenue expenditure: These are those expenditure of the Govt. which
do not create any asset of the Govt. or do not cause any reduction in liability of
the Govt.
Examples: Old age pension, subsidy, scholarship, salaries, interest
payment, gifts, grants, donation any type, expense on defence service, wage bill
of the govt, expenditure on collection of taxes. These all are revenue expenditure
because they do not create any assets or cause any reduction in liability of the
Govt.
(i)(b) Capital expenditure: These are those expenditure of the Govt. which
cause reduction in liabilities of the Govt. or it creates any Assets of the Govt.
eg. Repayment of loan, equity shares of the domestic or multinational,
corporations purchased by the Govt. expenditure on land and Building.
Machinery, equipment, contraction fo school, collage, flyover, hospitals etc.
(ii) (a) Plan expenditure: It refers to that expenditure which relates to (i)
five year plans or (ii) assistance of the Central Govt. to the state Govt. It includes
both Revenue expenditure (like payment on salaries) and capital expenditure
(like construction of a hospital building). However once a particular project is
complete. Plan expenditure of the Govt. is taken to be as over.
eg. Expenditure by Govt. on construction of a hospital building will be taken
as plan expenditure only. So long as the hospital project is not completed . Once
the project is completed, any subsequent expenditure (related to maintenance
of the hospital) will not be categorised as plan expenditure. It will be deemed as
non plan expenditure.
(ii) (b) Non-plan expenditure: Non-plan expenditure refers to the expenditure
which is not related to five year plans and assistance of the Central Govt. to
GOVERNMENT BUDGET & THE ECONOMY 63

State Govt. like plan exp, non-plan expenditure also included revenue as well
as capital expenditure. Broadly any expenditure other than plan-expenditure
is considered as non-plan expenditure. Expenditure on defence and subsidies,
salaries & pension are notable examples of non-plan expenditurre.
(iii) (a) Development expenditure: These are those expenditure of the Govt.
which are related to development activities of the country. Like expenditure on
road, building, schools, hospitals, research and development, welfare etc. These
expenditure may be revenue and capital. It results to increase in production of
goods & services in the economy.
(iii) (b) Non-development expenditure: These are those expenditure of the
Govt. which are not related to development activities but these expenditure is
necessary for survival of a country like expenditure on police, justice, defence,
subsidies etc. These exenditure may be Revenue or Capital.
It does not related to increase in production of goods and services in economy.
3. Situation in Govt. Budget
(i) Balanced budget / equilibrium in Budget: It is a situation when
budgetary expenditure is equal to budgetary receipts.
TR = TE
(ii) Surplus Budget: It is a situation when budgetary receipts are greater
than budgetary expenditure.
TR > TE
(iii) Deficit Budget: It is a situation when budgetary expenditures are
greater than budgetary receipt.
TE > TR
*Budgetary Deficit are of 3 types:
(i) Revenue deficit,
(ii) Fiscal deficit
(iii) Primary deficit
(i) Revenue deficit: It is the excess of revenue receipts.
RD = RE – RR Here (RE > RR)
IMPLICATIONS
Since revenue receipts and revenue expenditure are related largely to recurring
expenses of the Govt. (as on administration & maintenance) High revenue deficit
gives a warning signal to the govt. either to cut its expenditure or increase its
tax/non tax receipts. In less developed countries like India. It is difficult to force
the poor people to pay high taxation. In such situation, the Govt. is compelled to
cope with high revenue deficit through borrowings or disinvestment, borrowings
creates liability of the Govt. whereas disinvestment cause in reduction in assets
of the Govt.
(ii) Fiscal deficit: It is the excess of total expenditure over total receipt other
than borrowings.
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ie. Fiscal deficit is equal to borrowings of the Govt.

Fiscal deficit = TE – TR (excluding borrowings)
⇒ (RE + CE) – RR – Recovery of loan – PSU disinvestment
IMPLICATIONS
Greater fiscal deficit implies greater borrowings by the Government.
(a) It causes Inflation: Govt. borrowings includes borrowing from RBI. It
increases circulation of money in economy and causes inflation.
(b) Increase foreign dependence: Govt. also borrows from rest of the world.
It increases our dependence on other countries.
(c) It accumulates financial burden for future generation to repay the loan
with interest.
(d) Increase in fiscal deficit implies increase in borrowings i.e. ultimately
leads to increase in interest expenditure i.e. increase in revenue deficit
also. It is also called Debt Trap.
(iii) Primary Deficit: It is the difference between fiscal deficit and interest
payment.
Primary Deficit = Fiscal deficit – Interest payment
While fiscal deficit shows borrowings requirement of the Govt. including
of interest payment on the accumulated national debt. Primary deficit shows
borrowing requirement of the Govt. exclusive of interest payment.
* Budgetary Deficit = Total expenditure – Total receipt
* Fiscal deficit = Borrowings & other liabilities + Budgetary deficit
SUMMARY
Formulae (i) Revenue deficit = Revenue exp – Revenue receipt
Borrowings = Fiscal deficit
(ii) Fiscal deficit = Total exp. – RR – Capital Receipt (excl. Borrowings)
(iii) Primary deficit = Fiscal deficit – Interest Payment.
Total Receipt = Revenue Receipts + Capital Receipt
Total Expenditure =
(i) Revenue expenditure + Capital exp.
Or (ii) Plan expenditure + non-plan expenditure
Or (iii) Development expenditure + Non-development expenditure
Revenue Receipt = Tax Receipt + Non Tax Receipt
Tax Receipt = Direct Tax + Indirect Tax
GOVERNMENT BUDGET & THE ECONOMY 65

IMP. REVISION
Concept ∆ in Liabilities ∆ in Assets
Revenue Receipt Don’t create any liability OR Don’t Reduce any Asset.
Capital Receipt Create liability Or Reduce any Asset.
Revenue expenditure Do not reduce any liability. OR Donot create any asset.
Capital expenditure Reduction of liability Or Creation of Assets

IMPORTANT QUESTIONS
Q.1. Find out (a) Fiscal deficit and (b) Primary deficit.
(i) Revenue Receipts 80,000
(ii) Borrowings 45,000
(iii) Revenue expenditure 1,00,000
(iv) Interest payments is 25% of Revenue deficit.
Q.2. Calculate (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit.
(i) Capital Receipt net of borrowings (excluding borrowings) `95
(ii) Revenue expenditure 100
(iii) Interest payment 10
(iv) Revennue Receipts 80
(v) Capital expenditure 110
Q.3. Calculate (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit
(i) Tax Revenue 47
(ii) Capital Receipt 34
(iii) Non-tax revenue 10
(iv) Borrowings 32
(v) Revenue expenditure 80
(vi) Interest payments 20
Q.4. Calculate (i) Revenue deficit, (ii) Fiscal deficit, (iii) Primary deficit
(i) Plan capital expenditure 120
(ii) Revenue expenditure 100
(iii) Non-plan capital expenditure 80
(iv) Revenue receipts 70
(v) Capital receipt net of borrowings 140
(vi) Interest payment 30
Q.5. Find borrowings by the Govt. if payment of interest is estimated to be of
`15,000 crore which is 25% of primary deficit.
Q.6. Revenue deficit is estimated to be `20,000 crores, and borrowing is
estimaed to be `15000 crore. If expenditure on interest payment is
estimated to be 50% of the revenue deficit find fiscal deficit and primary
deficit.
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Q.7. Giving reasons categorise the following into revenue and capital
expenditure:
(i) Grants given to state govt.
(ii) Repayment of loans.
(iii) Expenditure on construction of roads.
(iv) Interest payment on past loans.
(v) Payment of salaries to Govt. employees.
(vi) Taking over a private firm by the Govt.
(vii) Expenditure on subsidies.
(viii) Purchase of shares by the Govt.
Q.8. Classify the following into Revenue Receipt & Capital Receipts.
(i) Loan from world bank
(ii) Corporation tax
(iii) Sale of shares held by Govt. of a PSU.
(iv) Dividend Received by Govt. from a company.
Q.9. Classify the following into debt creating and non-debt creating capital
receipt. Give reasons.
(i) Sale of public sector undertakings. Ans. non debt
(ii) Borrowings from public Ans. debt
(iii) Recovery of loans Ans. non debt
Q.10. How can the deficit in budget be financed?
(i) Deficit financing: This refers to borrowing by Govt. from RBI against
Treasury Bills. RBI purchase the Bill in Return of Cash, which the Govt.
uses to fund the deficit.
(ii) Borrowing from public.
(iii) Disinvestment
(iv) Govt. should reduces its expenditure and increase tax & non tax revenue

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