Ramesh Singh : Summary of Public Finance in India - Part - 1 - Notes | Study Famous Books for UPSC Exam (Summary & Tests) - UPSC

BUDGET
Data in the Budget :

• Actual data of the preceding year (here preceding year means one year before the year in which the Budget is being presented. Suppose the Budget presented is for the year 2019- 20, the Budget will give the final/actual data for the year 2017-18. After the data either we write 'A', means actual data/final data or write nothing (India writes nothing).
• Provisional data of the current year (i.e., 2018-19) since the Budget for 2019-20 is presented in 2018-19 itself, it provides Provisional Estimates for this year (shown as 'PE' in brackets with the data).
• Budgetary estimates for the following year (here following year means one year after the year in which the Budget is being presented or the year for which the Budget is being presented, i.e., 2019-20). This is shown with the symbol 'BE' in brackets with the concerned data.).
  (i) Revised Estimate (RE) : Revised Estimate is basically a current estimation of either the budgetary estimates (BE) or the provisional estimates (PE). It shows the contemporary situation. It is an interim data.
  (ii) Quick Estimate (QE) : Quick Estimate is a kind of revised estimate which shows the most latest situation and is useful in the process of going for future projections for some sector or sub-sector. It is an interim data.
  (iii) Advance Estimate (AE) : Advance Estimate is a kind of quick estimate but done ahead (is advance) of the final stage when data should have been collected. It is an interim data.

Developmental and Non-developmental Expenditure : Total expenditure incurred by the government is classified into two segments—developmental and non-developmental. All expenditures of productive nature are developmental such as on the heads of new factories, dams, bridges, roads, railways, etc.—all investments. The expenditures which are of consumptive kind and do not involve any production are non-developmental, i.e., paying salaries, pensions, interest payments, subsidies, defence expenses, etc.

Plan and Non-Plan Expenditure : Every expenditure incurred on the public exchequer is classified into two categories—the plan and the non-plan. All those expenditures which are done in India in the name of planning is the plan expenditure and rest of all are non-plan expenditures.

• Basically, all asset creating, and productive expenditures are planned and all consumptive, nonproductive, non-asset building are non-plan expenditures and are developmental and non-developmental expenditures, respectively.
• Since the financial year 1987-88, there was a terminology change in Indian public finance literature when developmental and non-developmental expenditures were replaced by the new terms plan and non-plan expenditures, respectively.
• A high-power panel headed by Dr. C. Rangarajan (Chairman, Prime Minister's Economic Advisory Council), in September 2011 suggested for redefining Plan and Non Plan expenditures as Capital and Revenue expenditures, as the former set of terms 'blur the classification'—this will facilitate linking expenditure to 'outcomes' and better public expenditure, the panels suggested.

Revenue : Every form of money generation in the nature of income, earnings are revenue for a firm or a government which do not increase financial liabilities of the government, i.e., the tax incomes, non-tax incomes along with foreign grants.
Non-revenue : Every form of money generation which is not income or earnings for a firm or a government (i.e., money raised via borrowings) is considered a non-revenue source if they increase financial liabilities.
Receipts : Every receiving or accrual of money to a government by revenue and non-revenue sources is a receipt. Their sum is called total receipts. It includes all incomes as well as non-income accruals of a government.
Revenue Receipts : Revenue receipts of a government are of two kinds—Tax Revenue Receipts and Non-tax Revenue Receipts—consisting of the following income receipts in India.
Tax Revenue Receipts : This includes all money earned by the government via the different taxes the government collects, i.e., all direct and indirect tax collections.
Non-tax Revenue Receipts : This includes all money earned by the government from sources other then taxes. In India they are :

• Profits and dividends which the government gets from its public sector undertakings (PSUs).
• Interests received by the government out of all loans forwarded by it, be it inside the country (i.e., internal lending) or outside the country (i.e., external lending). It means this income might be in both domestic and foreign currencies.
• Fiscal services also generate incomes for the government, i.e., currency printing, stamp printing, coinage and medals minting, etc.
• General Services also earn money for the government as the power distribution, irrigation, banking, insurance, community services, etc.
• Fees, Penalties and fines received by the government.
• Grants which the governments receive—it is always external in the case of the Central Government and internal in the case of state governments.

Revenue Expenditure : All expenditures incurred by the government are either of revenue kind or current kind or compulsive kind. The basic identity of such expenditures is that they are of consumptive kind and do not involve creation of productive assets. They are either used in running of a productive process or running a government.

Revenue Deficit :

• If the balance of total revenue receipts and total revenue expenditures turns out to be negative it is known as revenue deficit, a new fiscal terminology used since the fiscal 1997-98 in India.
• This shows that the government's Revenue Budget is running in losses and the government is earning less revenue and spending more revenues—incurring a deficit
• Revenue expenditures are of immediate nature and since they are consumptive/non-productive they are considered as a kind of expenditure which sums up to a heinous crime in the area of fiscal policy.
• Governments fulfil the gap/deficit with the money which could have been spent/invested in productive areas.

Effective Revenue Deficit :

• Effective revenue deficit (ERD) is a new term introduced in the Union Budget 2011-12. Conventionally, 'revenue deficit' (RD) is the difference between revenue receipts and revenue expenditures.
• Revenue expenditures includes all the grants which the Union Government gives to the state governments and the UTs—some of which create assets (though these assets are not owned by the Government of India but the concerned state governments and the UTs).
• According to the Finance Ministry (Union Budget 2011-12), such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature like other items in the revenue expenditures.

Revenue Budget : The part of the Budget which deals with the income and expenditure of revenue by the government. This presents the annual financial statement of the total revenue receipts and the total revenue expenditure—if the balance emerges to be positive it is a revenue surplus budget, and if it comes out to be negative, it is a revenue deficit budget

Capital Budget : The part of the Budget which deals with the receipts and expenditures of the capital by the government. This shows the means by which the capital is managed and the areas where capital is spent.

Capital Receipts : All non-revenue receipts of a government are known as capital receipts. Such receipts are for investment purposes and supposed to be spent on plan-development by a government. But the receipts might need their diversion to meet other needs to take care of the rising revenue expenditure of a government as the case had been with India.
The capital receipts in India include the following capital kind of accruals to the government :
(i) Loan Recovery
(ii) Borrowings by the Government
(iii) Other Receipts by the Government

Capital Expenditure

• Loan Disbursals by the Government : The loans forwarded by the government might be internal (i.e., to the states, UTs, PSUs, FIs, etc.) or external (i.e., to foreign countries, foreign banks, purchase of foreign bonds, loans to IMF and WB, etc.).
• Loan Repayments by the Government : Again loan payments might be internal as well as external. This consists of only the capital part of the loan repayment as the element of interest on loans are shown as a part of the revenue expenditure.
• Plan Expenditure of the Government : This consists of all the expenditures incurred by the government to finance the planned development of India as well as the central government financial supports to the states for their plan requirements.
• Capital Expenditures on Defence by the Government : This consists of all kinds of capital expenses to maintain the defence forces, the equipment purchased for them as weligs the modernisation expenditures. It should be kept in mind that defence is a non-plan expenditure which has capital as well as revenue expenditures in its maintenance.
• General Services : These also need huge capital expenditure by the government—the railways, postal department, water supply, education, rural extension, etc.
• Other Liabilities of the Government : Basically, this includes all the repayment liabilities of the government on the items of the Other Receipts. The level of liabilities depends on the fact as to how much such receipts were made by the governments in the past. The Amount of payment liabilities in the year also depends on the fact as to which years in the past the governments had other receipts and for what duration of maturity periods.

Capital Deficit : The government in the news is facing the problem of managing as much funds, money, capital as is required by it for public expenditure. Such expenditure might be of revenue kind or capital kind. Such difficulties have

always been with the developing economies due to their high level requirement of capital expenditures. Had there been a term to show this situation, it would naturally have been Capital Deficit.

Fiscal Deficit

• When balance of the government's total receipts (i.e., revenue + capital receipts) and total expenditures (i.e., revenue + capital expenditures) turns out to be negative, it shows the situation of fiscal deficit, a concept being used since the fiscal 1997-98 in India.
• Ruing to the government, be it income or borrowings). Fiscal deficit may be shown in the quantitative form (i.e., the total currency value of the deficit) or in the percentage form of the GDP for that particular year (percentage of GDP).
• In general, the percentage form is used for domestic or international (i.e., comparative economics) studies and analyses. Fiscal deficit of the governments (Centre and States) has been rising continuously due to diverse socio-economic reasons. The issue has been hotly debated during the period of economic reforms

Primary Deficit

• The primary deficit, a term India started using since the fiscal 1997-98. It shows the fiscal deficit for the year in which the economy had not to fulfil any interest payments on the different loans and liabilities which it is obliged to—shown both in quantitative and percentage of GDP forms.
• This is considered a very handy tool in the process of bringing in more transparency in the government's expenditure pattern.
• The Union Budget 2020-21 has set a target of 0.4 per cent (of GDP) for the primary deficit, which was estimated to be 0.7 per cent for 2019-20. Primary deficit has been 'decreasing' over the years— from the highest of 3.2 per cent in 2009-10, it deteriorated to 1.8 per cent in 2010-11 before climbing to 3.0 per cent in 2011-12. Since 2011-12 it has been declining every year.

Primary Surplus : This is a situation in budgeting process when the tax receipts of government are higher than its total expenditures excluding interest payments. This concept is also being used in India since 1997-98 as an indicator to understand the fiscal health in a better way.

Monetised Deficit

• The part of the fiscal deficit which was provided by the RBI to the goverrntient in a particular year is Monetised Deficit, this is a new term adopted since 1997-98 in India. This is shown in both the forms—in quantitative as well as a percentage of the GDP for that particular financial year.
• To finance its expenditures Government of India depends on short- and long-term borrowings. To borrow, Government issues short-term (Treasury Bills) and long-term (G-Secs) securities. These securities were to be subscribed (purchased) by the RBI on compulsory basis. The value of investment made by the RBI in the year used to be the monetised deficit of the Government.

Deficit and Surplus Budget

• When the budgetary proposals of a government for a particular year proposes higher expenditures than the receipts, it is known as a deficit budget.
• Opposite to this, if the budget proposes lesser expenditures than the receipts, then it is a surplus budget.

DEFICIT FINANCING

• The act/process of financing/supporting a deficit budget by a government is deficit financing. In this process, the government knows well in advance that its total expenditures are going to turn out to be more than its total receipts and enacts/follows such financial policies so that it can sustain the burden of the deficits proposed by it.

Need of Deficit

• Financing It was in the late 1920s that the idea and need of deficit financing was felt. It is when government needs to spend more money than it was expected to earn or generate in a particular period, to go for a desired level of growth and development. Had there been some means to go for more expenditure with less income and receipts, socio-political goals could have been realised as per the aspirations of the public policy. And once the growth had taken place, the extra money spent above the income would have been reimbursed or repaid. This was a good public/government wish which was fulfilled by the evolution of the idea of deficit financing.

Means of Deficit

• Financing Once deficit financing became an established part of public finance around the world, the means of going for it were also evolved by that time. These mean, basically are the ways in which the government may utilise the amount of money created as the deficit to sustain its budget for developmental or political needs.
• These means are given below in order of their suggested and tried preferences :
  (i) External Aids are the best money as a means to fulfil a government's deficit requirements even if it is coming with soft interest. If they are coming without interest nothing could be better.
  (ii) External Grants are even better elements in this case (which comes free—neither interest nor any repayments) but it either did not come to India (since 1975, the year of the first Pokhran testings) or India did not accept it (as happened post-Tsunami, arguing grants/aids coming with a tag/condition).
  (iii) External Borrowings are the next best way to manage fiscal deficit with the condition that the external loans are comparatively cheaper and long-term, though external loans are considered an erosion in the nation's sovereign decision making process, this has its own benefit and is considered better than the internal borrowings due to two reasons:
  (a) External borrowing bring in foreign currency/hard currency which gives extra edge to the government spending as by this the government may fulfil its developmental requirements inside the country as well as from outside the country.
  (b) It is preferred over the internal borrowings due to 'crowding out effect'.
  (iv) Internal Borrowings come as the third preferred route of fiscal deficit management. But going for it in a huge way hampers the investment prospects of the public and the corporate sector. It has the same impact on the expenditure pattern in the economy. Ultimately, economy heads for a double negative impact—lower investment (leading to lower production, lower GDPs and lower per capita income, etc.) and lower demands (by the general public as well as by the corporate world) in the economy—the economy moves either for stagnation or for a slowdown (one can see them happening in India repeatedly throughout the 1960s, 1970s, 1980s).
  (v) Printing Currency is the last resort for the government in managing its deficit. But it has the biggest handicap that with it the government cannot go for the expenditures which are to be made in the foreign currency.

Composition of Fiscal Deficit :

• The keynesian idea of deficit financing, though he advocated it, had a catch in it also which was usually missed by third world economies or intentionally overlooked by them. The catch is related to the question as to why an economy wants to go for fiscal deficit. Thus, it becomes essential to go for an analysis of the composition of the fiscal deficit of a government.
• There should be a judicious mix of plan and non-plan expenditure as well as revenue and capital expenditures in India, lesser non-plan expenditure or higher plan-expenditure are better reasons behind deficit financing in India.
• Third world economies (including India) though went for higher and higher fiscal deficits and deficit financing, they either did not address or failed to address the composition of deficit favourable towards capital and non-revenue expenditures.