Chapter 12 - Budget - Chapter Notes, Macro Economics, class 12 - Commerce PDF Download

GOVERNMENT BUDGET AND THE ECONOMY

GOVT. BUDGET :: It is annual financial statement of the estimated receipt and expenditure of govt. over fiscal year i.e from 1st April to 31st March.
It also includes govt. report on its financial performance over the past one year.

OBJECTIVE OF GOVT. BUDGET OR BUDGETARY POLICY

(1) REDISTRIBUTION OF INCOME AND WEALTH [ DISTRIBUTION FUNCTION ] :: Equitable distribution of income and wealth is a sign of social justice and objective of welfare state .The govt. uses fiscal instrument of TAXATION AND SUBSIDIES with the view of improving the distribution of income and wealth .This is done

by imposing high taxes on luxury goods
by progressive tax structure having more burden on rich section of society
by giving tax concessions, excise rebates and similar concessions and incentives for production of goods of mass consumption and thus making these goods available to poorer sections at lower prices.
Spending the amount collected as tax on social security like Free education, medical facilities, drinking water, sanitation, and transport facilities add to the real income of the poor.
Governemnt incur huge expenditure on providing guaraanteed employment ( 100 days ) to jobless in rural areas

by providing essential food items to BPL families at subsidies rate

(2) REALLOCATION OF RESOURCES [ ALLOCATION FUNCTION ] ::

(a) Main objective is to reallocate resources in such a manner that there is balance between profit maximisation & social welfare .
(b) Pvt. sector always desire to allocate resources to high profit areas like production of tobaco, alchol etc , but such areas may not promote social welfare so Govt. will reallocate resources to social welfare areas such as construction of schools , roads , hospital etc
(c) It can be done in two ways

By using FISCAL POLICY ( TAXATION AND SUBSIDY) :: Production of goods which are harmful to health like cigarettes and whisky is discouraged through heavy taxation and Production of Socially useful goods like Khadi is encouraged through subsidies
BY SELF ALLOCATION :: If private sector does not take interest , government can directly undertake the production by allocating more fund to social and public useful sector

(3) ECONOMIC STABILITY :: Free play of market forces of demand and supply generates trade cycle also called business cycle.These refers to phases of recession , depression , recovery and boom .
Budget as govt. tool is used to control this trade cycle and the situation of inflation and deflation . In other words it tries to prevent business fluctuations and maintain Economic Stability i.e price stability with high level of employment.
(i) The government can change the tax rates in response to the needs of the economy. For example :: During inflation or excess demand an increase in income tax rates would reduce the disposable incomes, this would cut down the demand for goods and servicers,
(ii) Public expenditure can also serve as an instrument to bring price stability. An increase in public expenditure pumps in more money in the economy, while a cut in public expenditure sucks out more money.

(4) MANAGING THE PUBLIC ENTERPRISES :: The Budgetary policy shows the interest of the govt. to increase the rate of growth through Public Enterprises . Government undertakes commercial activities that are of the nature of Natural Monopolies and requires heavy manufacturing .Private sector in these areas may cause lesser production and higher price to maximizes profit and thereby reducing social welfare.

THREE LEVELS OF IMPACT OF BUDGET

(1) ALLOCATION OF RESOURCES .:: Same as point (1) above
 

(2) AGGREGATE FISCAL DISCIPLINE :: Fiscal discipline means an ideal balance between revenue and exp. of the government .
Budget helps in keeping check/control on the expenditure given the limited revenues of govt. and thus maintains an ideal balance between revenue and expenditure of the govt.Otherwise there will be deficit budget and this will force govt to borrow from RBI and thus results in printing of more currency.This increase in supply of money will push the economy to inflationary spiral where high wages leads to higher prices and vice versa

(3) EFFECTIVE AND EFFICIENT PROVISION OF PROGRAMME AND DELIVERY OF SERVICES :: Here the focus is on infrastructural services including means of transport and communication ,energy , health , education.Better the provision of these services better will be growth and development.Budget ensures that there is achievement of the set targets through these services and at minimum possible cost

STRUCTURE / COMPONENTS OF BUDGET

(A) BUDGET RECEIPTS :: It refers to estimated money receipts of the government from
all sources during fiscal year .It is classified into

(1) Revenue Receipts
(2) Capital Receipts
REVENUE RECEIPTS :: These are those receipts which
(a) Don’t create any corresponding liability for the Government e.g Tax is a revenue receipt because it is one-sided payment and doesn’t create any liability of repayment.
(b) Don’t cause any reduction in assets of the govt. Eg receipts of the govt. from sale of share of Maruti Udyog causes reduction of assets and thus is not a revenue receipt.

These are RECURRING IN NATURE

REVENUE RECEIPTS are further classified into
(I) TAX RECEIPTS :: Tax is a compulsory payment by the household,firms or other institutional units to the government without reference to any in return benefit. If a person fails to pay tax , he is liable to penal action.
It can be

(a) Direct Taxes
(b) Indirect Taxes

(2) NON- TAX RECEIPTS :: All those receipts which are received from sources other than taxes like interest, dividend etc.It can be in the form of
(a) Commercial Revenue which are received in form of price paid by he public for government supplied commodity and services . It is income from Public Enterprises like Railways , Indian Oil , Bhilai Steel plant , and income from Postage , tolls etc.
(b) Interest and Dividend received on investment made by the government.

(c)Gifts and Cash In Grants Received by the government from public and rest of the world and also from international organisation like WHO , UNESCO at the times of natural calamities ( like earthquake,floods, famines ) and for development purposes

(d) Administrative revenue which arises due to administrative function of the govt.

FEES :: It is payment to the govt. for recovering the cost of services that it renders to the
public e.g Land registration fees , Passport fees, Birth and Death registration fees
LICENCE :: It is payment made to the govt. in order to get permission for something E.g
Diving Licence , Import Licence

ESCHEAT :: It refers to the claim of the govt. on the property of a person who dies without
having any legal heirs or without leaving a will
FINES and PENALTIES :: It refers to payment made by the Law-breaker to the govt. by way of economic punishment. E.g Fine for not filling Tax return in Time
SPECIAL ASSESSMENT :: It is that payment which is made by the owners of those properties whose value has appreciated due to development activities of the govternment .

E.G when as a result of construction of public park or roads , the value of property or its rental value appreciates, then a part of development expenditure is recovered from the owners of such property by way of special assessment
 

CAPITAL RECEIPTS :: These are those receipts which either
(a) Create a liability for the Government E.g loans taken by the government is a liability as it has to be paid back . These are debt creating capital receipts
(b) Cause reduction in assets of the Government E.g receipts of the govt. from sale of share of Maruti Udyog causes reduction of assets and hence is capital receipts .These are non - debt creating capital receipts
These are NON - RECURRING IN NATURE

CAPITAL RECEIPTS are further classified into
(1) RECOVERY OF LOAN :: Loan given to others are assets of govt. and as such recovery of loan given to

(i) States and Union Territories
(ii) PSU
(iii) Foreign govt. causes reduction of assets and thus is a capital assets

(2) BORROWING AND OTHER LIABILITY :: Govt borrows loan from
(i) The general public (called market borrowing / loan) in form of sale of
treasury bill in open market
(ii) RBI
(iii) Rest of world i.e loan from foreign govt. and international institutional (World bank , IMF )

(3) OTHER RECEIPTS :: It includes item like DISINVESTMENT WHICH MEANS GOVT. SELLS OFF its shares of public sector to private sector and thus this cause reduction in assets of government. It involves transfer of ownership and thus is CALLED PRIVATISATION

(4) SMALL SAVING :: It includes small savings like Post office deposits, GPF deposits, NSC deposits etc.

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CHECK YOUR CONCEPT’s

(Ques) Identify the following as revenue receipts and capital receipts. Give reasons.
(a) Loans recovered from Public sector enterprises.
(b) License and court fees received by the Government in the year 2009-10.
(c) Loan taken from USA for the infrastructural developments.
(d) Sale of shares held by Government in a PSU.
(e) Financial help from Microsoft for the victims of flood affected areas.
(f) Amount borrowed from Japan for construction of Metro.
(g) Dividend received by Government from a company.
(h) Funds raised from public in the form of NSC and Kisan Vikas Patras.
(i) Sale of 40% shares of a public sector undertaking to a private enterprise.
(j) Profits of LIC, a public enterprise.

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(B) BUDGET EXPENDITURE :: It refers to estimated expenditure of the government on its “development and non-development programmes” or on its “plan and non-plan programmes” during fiscal year.Thus it is estimated exp. of the govternment under different head in a given year

REVENUE EXP. :: These are those exp. which are incurred for the normal working of the govt. departments and maintenance of services and thus
(1) Donot create assets for the govt like Old-age pension, Scholarship
(2) Donot cause reduction in liability of the govt.

These are short period expenditure and recurring in nature
It is incurred for normal running of government departments and provision of various services 

In India important Revenue Expenditure are
(a) Interest payment
(b) Expenditure on Subsidies
(c) Expenditure on Defence
(d) All grants given by the Centre to the State / Union Govt. are treated as Revenue exp. even when some grants may result in creation of assets.
(e) All expenses incurred for normal functioning of govt. departments and various services like education, salaries payment , family welfare , flood control etc.

CAPITAL EXP. :: Those exp. of the govt. which EITHER
(1) Create assets for the govt like Equity share of Domestic or Foreign Co. purchased by Govt.
(2) Cause reduction in liability of the govt. like Repayment of loan .
These are long period expenditure and non- recurring in nature
It is incurred mainly for acquisition of assets and granting of laons and advances

In India important Capital Expenditure are
(a) Exp. on acquisition of land and building
(b) Exp. on acquisition of machinery and equipment
(c) Purchase of shares of Domestic and foreign companies
(d) Loan given by central govt. to state and union territory govt., to govt. companies
(e) Repayment of Loan

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NATURAL MONOPOLY :: These refers to areas of production where there are economies of scale over a large range of output and a single firm can produce at a lower average cost than many competing firms Govt. generally undertakes these areas through Public enterprise like Railways in India. Private sector in these areas may cause lesser production and higher price

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CHECK YOUR CONCEPT’s

(Ques) Identify the following as revenue expenditure and capital expenditure. Give reasons.
(a) Salary paid to Army officers.
(b) Purchase of Metro coaches from Japan.
(c) Repayment of Loan taken from World Bank.
(d) Grants given by central government to state Government.
(e) Loan given to Union Territories.
(f) Interest paid on National Debt.
(g) Expenditure on construction of Metro.
(h) Pension paid to retired Government employees.
(i) 10% shares purchased by the Government in a private company.

(Ques) Classify the following into development and non - development expenditure
(a) Interest payment
(b) Defence Expenditure
(c) Setting up a hospital
(d) Expenditure on police
(e) Expenditure on railways
(f) Social welfare
(g) Administration

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CHECK YOUR CONCEPT’s

(Ques) Classify into direct and indirect tax
(a) Gift tax
(b) Wealth tax
(c) Entertainment tax
(d) Corporation tax
(e) Excise Duty
(f) Income tax
(g) Fringe benefits tax (direct tax)
(h) Sales Tax
(i) Service Tax
(j) Custom duty
(k) Capital Gains Tax.

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BUDGET TYPES

(A) BALANCED BUDGET :: A balanced budget is one where estimated revenues of the govt. is equal to estimated expenditure of the govt.
 

Govt. RECEIPT = Govt. EXPENDITURE

MERITS ::

(1) The govt. doesn’t indulge in Wasteful Expenditure
(2) It ensures financial stability
(3) A balanced budget is expected to increase AD slightly.Accordingly balance dbudget is a good policy to increase AD when the country is not at FULL EMPLOYMENT but very near to it.
DEMERITS :: Balanced budget is not an achievement of the govt. as it has following limitation
(1) It doesn’t offer solution to the problem of unemployment during depression
(2) It doesn’t match with the growth and development of less developed countries as these countries need more and more govt. expenditure in form of investment.

FOUR TYPES OF DEFICIT & MEASUREMENT
(1) BUDGET DEFICIT :: It is the difference between (excess of) Total expenditure and Total receipt of the government
BD = TE - TR where TE > TR

(2) REVENUE DEFICIT :: It is the difference between (excess of) Total revenue expenditure and Total revenue receipt of the government
RD = RE - RR where RE > RR
 

IMPLICATIONS OF REVENUE DEFICIT

(a) It indicates the inability of the government to meet its regular and recurring expenditure in the proposed budget.
(b) It implies that government is dissaving; i.e. government is using up savings of other sectors of the economy to finance its consumption expenditure.
(c) It also implies that the government has to make up this deficit from capital receipts
through borrowings which leads to an increase in liability ; or

through disinvestments which reduces the assets
(d) Use of capital receipts for meeting the extra consumption expenditure leads to an inflationary situation in the economy. Higher borrowings increase the future burden in terms of loan amount and interest payments.
(e) A high revenue deficit gives a warning singal to the government either
to cut its expenditure ; or
to increase its revenue.
(3) FISCAL DEFICIT :: It is the difference between (excess of) Total expenditure (revenue and capital ) and Total receipt (revenue and capital except borrowing of the government)

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FD = TE - TR (except than capital borrowing ) ; or
FD = TE - Revenue Receipts - Capital Receipts except borrowing ) ; or
FD = TE - Revenue Receipts - Non debt creating capital receipts ;  

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FD is infact Total borrowing which Government has to do from all sources. As govt. borrowing increases , its liabilty to pay interest in future also increase. Payment of interest increases revenue expenditure leading to higher revenue deficit

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FD = BD + Capital / other borrowing
 FD = NET BORROWING ( Home + RBI + Abroad ) { in case only total borrowings are given

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It is open expressed as % of GDP

(4) PRIMARY DEFICIT :: It is difference between fiscal deficit and interest payment. PD = FD - Net Interest payment
It is a basic measure of fiscal irresponsibility , it indicates
- how much of govt. current borrowing is going to meet interest payment ; and
- how much will be left to meet other expenses.

PRIMARY DEFICIT IS THE ROOT CAUSE OF FISCAL DEFICIT IN INDIA ::

In india , interest payments have increased significantly . High interest payments on past borrowing has further increased Fiscal deficit . Thus to solve this situation , repayment of laon should be done as early as possible .
ZERO PD ::
It means the govt. has to borrow only to fulfill its earlier commitment of interest payments.
That is new borrowing is done for payment of interest on past borrowings . It is a measure of fiscal irresponsibility of the govt.

SIGNIFICANCE // IMPLICATION OF FD

Greater FD implies greater borrowing by the government .It has following significance

(1) CAUSES INFLATION :: Greater borrowing from RBI by the govt. implies more currency printing by the RBI.This increases Money supply in the country and thus purchasing power of the public which causes inflation in the country
(2) INCREASE IN FOREIGN DEPENDENCE :: Govt. also borrow from ROW. It increases our dependence on other country which lead to economic and political interference by the lender countries.
(3) FINANCIAL BURDEN FOR FUTURE GENERATION :: It is the future generation which has to repay loan and interest thereon.Thus greater the borrowing , lesser will be available for Growth and Development of the country . Also payment of interest increases revenue expenditure leading to higher revenue deficit
(4) DEFICT MULTIPLY BORROWING :: Payment of interest increases revenue expenditure and thus revenue deficit sets in for which govt. has to borrow. Thus a vicious circle sets in wherein deficit multiply Borrowings.

This process takes country to situation of DEBT- TRAP.
 

WHICH OF FISCAL DEFICIT OR BUDGETARY IS A BETTER MEASURE

Fiscal deficit is a better and wider measure of deficit because

(a) It indicates real volume / amount of resources to meet expenditure needs. Budgetary deficit, on the other hand , shows only a part of this.

(b) Fiscal deficit is an indicator of increase in future liabilities because government has to back borrowed money along with interest.

CAN THERE BE FISCAL DEFICIT WITHOUT REVENUE DEFICIT

YES , when
(1) WHEN REVENUE BUDGET IS BALANCED BUT CAPITAL BUDGET SHOWS A
 DEFICIT
Example ::

(a) R. R = 500 cr

(b) R.E = 500 cr
(c) C.R ( other than capital borrowing) = 100 cr

(d) C.E = 700

Revenue Budget = (a) - (b) = nil ,
Capital Budget = (c) - (d) = (-) 600 cr
Fiscal deficit = (a + c) - (b + d) = 600 - 1200 = (-) 600 cr

(2) WHEN REVENUE BUDGET IS IN SURPLUS BUT CAPITAL BUDGET SHOWS A
 DEFICIT
Example ::

(a) R. R = 800 cr       (b) R.E = 500 cr
(c) C.R ( other than capital borrowing) = 100 cr      (d) C.E = 700 cr
Revenue Budget = (a) - (b) = 300
Capital Budget = (c) - (d) = (-) 600 cr
Fiscal deficit = (a + c) - (b + d) = 900 - 1200 = (-) 300 cr

FINANCING OF DEFICIT BUDGET // HOW IS FISCAL DEFICIT MET

(1) MONETARY EXPANSION :: This amounts to printing of currency notes to meet
the deficit { already done }
(2) DISINVESTMENT :: { already done }
(3) NET LOANS AND BORROWING AS A SOURCE OF CAPITAL RECEIPT

MEASURE TO CONTROL BUDGETARY DEFICITS

(1) LOWERING OF GOVERNMENT EXPENDITURE :: LOWERING Expenditure on development programme in countries like India would mean lowering the speed of development. Thus in this regard the government should consider
(a) Assigning greater role to private sector in the process of growth and development
(b) Restricting non-development expenditure of the govt. on subsidies , interest payment , defence
(c) There should be cut on grants and aids offered by government to increase their vote bank.

(2) RAISING GOVERNMENT REVENUE :: It has two aspects
(a) Imposing MORE DIRECT AND INDIRECT TAXES and striking balance between them . Direct tax has the merit of promoting equality as its impact is more on rich and less on poor. Indirect taxes, on the other hand has wider coverage and there is less chance of evasion
 

(B) DISINVESTMENT :: It means Govt. sells off its shares of public sector to private sector and thus this cause reduction in assets of government. It involves transfer of ownership and thus is called Privatisation . However disinvestment should be
(i) Confined to inefficient public sector enterprise
(ii) Proceed of disinvestment should be used only for FURTHER INVESTMENT
i.e in areas of high productivity or infrastructural expansion in the country

CHECK YOUR CONCEPT’s

(Q1) Find RD , FD , PD
Plan capital Expenditure = 120 cr
Revenue Expenditure = 100 cr
Non plan capital Exp . = 80 cr
Revenue receipt = 70 cr
Non debt Capital Receipt = 140 cr
Interset Payment = 30

Ans ( 30 , 90 , 60 )

(Q2) In a govt. budget, revenue deficit is Rs 50000 cr and borrowing are Rs 75000 cr. How
much is fiscal deficit ?

(Q3) Find FD and PD : RD = 20000 cr
Borrowing = 15000
Interset payment = 50% of RD Ans ( 15000, 5000 )

(Q4) Calculate : (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit
(a) Revenue receipts 2037
(b) Revenue Exp. 2811
(c) Capital receipts 1348
(d) Capital Exp. 574
(e) Recoveries of loans and other liabilities 235
(f) Borrowing and other liability 1113
(g) Interest payment 1013

(Ans. 774cr,1113cr,100cr)

(Q5) Calculate Fiscal deficit from the following data :
(i) Total Expnditure 75000 cr
(ii) Revenue Receipts 60000 cr
(iii) non - debt capital receipts 5000 cr ( Ans 10000 cr )

(Q6) If budgetary deficit of the govt. is Rs 13184 crores and the borrowing and other liabilities are rs 53549 crores , how much will be the fiscal deficit ?

(Q7) Calculate revenue deficit from the following data : Rs. in crore
(i) Income tax receipts 70
(ii) Grants to state govt. 65
(iii) Loans from World Bank 40
(iv) Adminisitrative revenue 50
(v) Expenditure on subsidies 165 ( Ans. Rs 110 crore )

(Q8) In a govt. budget, primary deficit is Rs 10000 crores and interest payment Rs 8000 crores.
How much is the fiscal deficit ?

(Q9) If PD is Rs 4400 cr. and exp. on interest payment is Rs. 400 cr. Find Fiscal deficit ?

(Q10) Calculate (a) Revenue Deficit, (b) Fiscal deficit, and (c) Primary Deficit.
Items Rs. in crores
(1) Revenue receipts 200
(2) Revenue expenditure 300
(3) Capital receipts 160
(4) Capital expenditure 60
(5) Recoveries of loans and other receipts 30
(6) Borrowings and other liabilities 130
(7) Interest payments 90

(Ans. Rs. 100 cr; 130 cr; 40 cr)

(Q11) The following figures are based on budget estimates of GOI for the year 2013 - 2014 :
(Rs. crores)
(1) Revenue receipts 10,56,331
(2) Revenue expenditure 14,36,169
(3) Capital receipts 6,08,967
(4) Capital expenditure 2,29,129
(5) Total Receipts 16,65,297
(6) Total Expenditure 16,65,297
(7) Recoveries of loans Other receipts (mainly PSU disinvestment) 66,467
(8) Borrowings and other liabilities 5,42,499
(9) Interest payments 3,70,685
Calculate (i) Fiscal deficit (ii) Revenue deficit and (iii) Primary deficit.

(Ans. 5,42,499 ; 3,79,838 ; 1,71,814 crores)