98151-67577 Mr.

Vipul Budhiraja

XII ECONOMICS
Session 2021-22
CHAPTER 10
GOVERNMENT BUDGET

Celebrating 15th Year!

Q. What is government budget ?

Government budget is an annual statement, showing item wise
estimates of receipts and expenditure during a Fiscal year.

Q. What are the objectives of Government Budget ?

1. REALLOCATION OF RESOURCES: Through the budgetary policy,
Government aims to reallocate resources in accordance with the
economic (profit maximisation) and social (public welfare) priorities of
the country. Government can influence allocation of resources through:
(i) Tax concessions or subsides : To encourage investment,
government can give tax concessions , subsides etc. to the producers.
For example, Government discourages the production of harmful
consumption goods ( like liquor, cigarettes etc.) through heavy taxes and
encourages the use of ‘Khadi products’ by providing subsidies.
(ii) Directly producing goods and services: There are many non-
profitable economic activities, which are not taken by private sector like,
water supply, sanitation law and order, national defence, etc. These are
called public goods. Such activities are necessarily undertaken by the
government in public interest and to raise social welfare.

2. REDUCING INEQUALITIES IN INCOME AND WEALTH: Economic

inequality is an inherent part of every economic system. Government
aims to reduce such inequalities of income and wealth through
budgetary policy. Government aims to influence distribution of income
by imposing taxes on the rich and spending more in the welfare of the
poor. It will reduce income of rich and raise standard of living of poor,
thus reducing inequalities in the distribution of income.

98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja

98151-67577 Mr. Vipul Budhiraja
3. ECONOMIC STABILITY: Economic stability means absence of large
scale fluctuation in prices. Such fluctuations create uncertainties in the
economy. Government can exercise control over these fluctuations
through taxes and expenditure.
(i) Inflationary tendencies emerge when aggregate demand is higher
than the aggregate supply. Government can bring down aggregate
demand by reducing its own expenditure.
(ii) During deflation, government can increase its expenditure and give
tax concessions and subsidies.
In short, policy of surplus budget during inflation and deficit budget
during deflation helps to maintain stability of prices in the economy.

4. MANAGEMENT OF PUBLIC ENTERPRISES: There are large number of

public sector industries (especially natural monopolies) , 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 implies a sustainable increase

in the real GDP of an economy, i.e. an increase in volume of goods and
services produced in an economy. Budget can be an effective tool to
ensure the economic growth in an economy.
(i) If the government provides tax rebates and other incentives for
productive ventures and projects, it can stimulate savings and
investments in an economy.
(ii) Spending on infrastructure of an economy enhances the production
activity in different sectors of an economy. Government Expenditure is a
major factor that generates demand for different types of goods and
services in an economy which induces growth in the private sector too.
However, before planning such expenditure, rebates and subsidies,
Government should check the the rate of inflation and tax rates. Also ,
there may be the risk of debt trap if the loans are too high to finance the
expenditure.

6. REDUCING REGIONAL DISPARITIES: The government budget aims ti

reduce regional disparities through its taxation and expenditure policy
for encouraging setting up of production units in economically backward
regions.
98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja
98151-67577 Mr. Vipul Budhiraja

Q What are the components of budget ?

Components of budget refer to structure of the budget. Two main
components of budget are:
1. REVENUE BUDGET: It deals with the revenue aspect of the government
budget. It explains how revenue is generates or collected by the
government and how it is allocated among various expenditure heads.
Revenue budget has two parts (i) Revenue Receipts and (ii) Revenue
Expenditure
2. CAPITAL BUDGET: It deals with the capital aspect of the government
budget and it consists of (i) Capital Receipts and (ii) Capital Expenditure

Q What are budget receipts ?

Budget Receipts refer to the estimated money receipts of the government
from all sources during a given fiscal year.
Budget receipts may be further classified as (i) Revenue receipts ; (ii) Capital
receipts

Q. What are Revenue Receipts ? What are sources of

Revenue Receipts ?
Revenue receipts refer to those receipts which neither create any liability
nor cause any reduction in the assets of the government. They are
regular and recurring in nature and government receive them in its
normal course of activities.

TWO SOURCES OF REVENUE RECEIPTS ARE

(I) Tax Revenue (II) Non Tax revenue

Q. What are Tax Revenues ? Explain its types ?

Tax Revenue refers to the sum total of receipts from taxes and other
duties imposed by the government. Tax is a compulsory payment made
by people and companies to the government without reference to any
direct benefit in return. It means, there are two aspects of taxes:
(i) Tax is a compulsory payment, i.e., no one can refuse to pay it;

98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja

98151-67577 Mr. Vipul Budhiraja
(ii) Tax receipts are spent by the government for the common benefit of
the people in the country . A tax payer cannot expect that the tax amount
will be used for his direct benefit.

Tax Revenue can be further classified as:

(i) Direct taxes (ii) Indirect taxes

DIRECT TAXES
Direct taxes refer to the taxes that are imposed on the property and
income of the individuals and companies and their burden cannot be
shifted to the other person/entity.
• They are imposed on individuals and companies and their monetary
burden is borne by those on whom they are levied.
• The ‘Liability to pay’ the tax and the ‘actual burden’ of the tax lie on the
same person, i.e. its burden cannot e shifted.
• They directly effect the income level and purchasing power of people
and help to change the level of aggregate demand in the economy.
• Examples: Income Tax, Corporate Tax, Interest Tax, Wealth Tax, etc

INDIRECT TAXES
Indirect taxes are those taxes which can be shifted to another person/entity.
Their monetary burden is ultimately borne by final users of goods and
services, rather than the person on whom the tax is levied.
• They are imposed on good and services.
• The ‘liability to pay’ the tax and ‘actual burden’ of the tax lie on different
persons , i,e, its burden can be shifted to others.
• Example: Goods and Services Tax (GST).
• Indirect taxes can be avoided: Indirect taxes are Compulsory payments.
But, they can be avoided by not entering into those transactions,
which call for such taxes. For example, Consumers may save taxes by
purchasing Khadi Gram Udyog items as there is no indirect tax on
khadi items.

Q. How to classify a Tax as direct tax or Indirect Tax?

• A tax is is direct tex if its burden cannot be shifted. For example, income
tax is a direct tax is a direct tax as its impact and incidence is on the
same person.

98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja

98151-67577 Mr. Vipul Budhiraja
• A Tax is an indirect tax, if its burden can be shifted. For example, Goods
and Services Tax (GST) is an indirect tax as its impact and incidence is
on different persons.

NON- TAX REVENUE

Non-Tax revenue refers to receipts of the government from all sources
other than those of tax receipts. The main source of non tax revenue are:
1. Interest: Government receives interest on loans given by it to state
government, union territory, private enterprises and general public.
Interest receipts from these loans is an important source of non- tax
revenue.
2. Profits and dividends: Government earns profit through public sector
undertakings like Indian Railways, LIC, BHEL, etc. It earns profit from the
sale proceeds of the products of such public enterprises. Government
also gets dividend from its investment in other companies.
3. License Fee: It is a 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.
4. Fees: Fees refer to charges imposed by the government to cover the
cost of recurring services provided by it. Such services are generally in
public interest and fees is paid by those, who receive such services. It is
also a compulsory contribution like tax. Court fees, registration fees,
import fees, etc. are some examples of fees.
5. Fines and Penalties: They refer to those payments which are imposed on
law breakers. For example, fine for jumping red light or penalty for non-
payment of tax. Fines are different from taxes as the former is levied to
maintain law and order, whereas, the latter is imposed to generate
revenue.
6. Escheats: It refers to the 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
governments and international organisations. Sometimes, individuals
and companies also voluntarily gift money to the government. 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- fulfilment of contracts etc.

98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja

98151-67577 Mr. Vipul Budhiraja
9. Special Assessment: It refers to the payment made by owners of those
properties whose value has appreciated due to development activities of
the government . For example, if the value of a property near metro
station has increased , then a part of developmental expenditure is
revered from the owners of such property in the form of special
assessment.

Q. What are Capital receipts?

Capital receipts refer to those receipts which either create a liability or
cause a reduction in the assets of the government. They are non-recurring
and non-routine in nature .
A receipt is a capital receipt if it satisfies any one of the two conditions:
(i) The receipts must create a liability for the government. For example.
Borrowings are capital receipts as they lead to an increase in the liability
of the government. However, tax received is not a capital receipt as it
does not result in creation of any liability.
(ii) The receipts must cause a decrease in the assets. For example. receipts
from sale of of public enterprise is a capital receipt as it leads to
reduction in assets of the government.

Sources of Capital Receipts

Capital receipts are broadly classified into three groups
1. Borrowings: Borrowings are the funds raised by government to meet
excess expenditure Government borrow funds from Open Market
(Public): (ii) Reserve Bank of India (iii) Foreign governments (like loans
from USA, England etc.),(iv) International institute (like World Bank,
International Monetary Fund). Borrowings are capital receipts create a
liability for the government.
2. Recovery of Loans: Government grants various loans to state
governments or 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 a 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. Government holds ownership in various PSU's in
98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja
98151-67577 Mr. Vipul Budhiraja
the form of equity shares. When the government sells a part or whole of its
shares, it leads to transfer of ownership of PSU's to the private enterprises
 (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.

How to Classify a receipt as Revenue Receipts or Capital Receipts?

• A receipt is a capital receipt, if it either creates a liability or reduce an
asset.
• A receipt is a revenue receipt, if it neither creates a liability nor reduces
any assets.

Q. What are Budget Expenditure?

Budget Expenditure refers to the estimated expenditure of the government
during a given fiscal year.The Budget expenditure can be broadly
categorised as
(i) Revenue Expenditure
(ii)Capital Expenditure

REVENUE EXPENDITURE
Revenue Expenditure refers to the expenditure which neither creates any
assets 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: Payment of salaries, pensions, interests, expenditure,on
administrative services, defence services, health services, grants to state,
etc.

An expenditure is a revenue expenditure, if it satisfies the following two

essentials conditions :
(i) The expenditure must not create an asset of the government. For
example, payment of salaries or pension is revenue expenditure as it
does not create any asset. However, the amount spent on construction
of Metro is not a revenue expenditure as it leads to creation of an asset.
98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja
98151-67577 Mr. Vipul Budhiraja
(ii) The expenditure must not cause decrease in any liability. For example,
repayment of borrowings is not revenue expenditure as it leads to
reduction in liability of the government.

Q, What is Capital Expenditure?

Capital expenditure refers to the expenditure which either creates an asset
or causes 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 Loan to states and Union Territories, expenditure on building
roads, flyover, factories purchase of machinery, repayment of borrowings,
etc
An expenditure is a capital expenditure, if it satisfies any one of the
following two conditions :
(i) The expenditure must create an asset for the government. For example,
Construction of Metro is a capital expenditure as it leads to creation of
an asset However, any amount paid as salaries is not a capital
expenditure as there is no increase in the assets
(ii) Capital expenditure must cause a decrease in the liabilities. For
example, repayment of borrowings is a capital expenditure as it leads to
a reduction in the liabilities of the government.

HOW TO CLASSIFY EXPENDITURE AS REVENUE OR CAPITAL

EXPENDITURE:
• An expenditure is a capital expenditure, if it either creates an asset or
reduces a liability.
• An expenditure is revenue expenditure, if it neither creates any assets nor
reduces any liability.

MEASURES OF GOVERNMENT DEFICIT

Budgetary Deficit is defined as the excess of total estimated expenditure
over total estimated revenue. When the government spends more than it
collects, then it incurs a budgetary deficit. With reference to budget os
Indian government, budgetary deficit can be of 3 types:
(i) Revenue Deficit
(ii) Fiscal Deficit
98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja
98151-67577 Mr. Vipul Budhiraja
(iii) Primary Deficit

REVENUE DEFICIT
Revenue deficit is concerned with the revenue expenditure and revenue
receipts or the government. It refers to excess of revenue expenditure over
revenue receipts during the given fiscal year.

IMPLICATIONS OF REVENUE DEFICIT

(i) The government to meet its regular and recurring expenditure in the
proposed budget.
(ii) It implies that government is dissaving, i.e. government is using up
savings of other sectors of the economy to finance its consumption
expenditure.
(ii) It also implies that the government has to make up this deficit from
capital receipts,i.e. through borrowings or disinvestment. It means, revenue
deficit either leads to an increase in liability in the form of borrowings or
reduces the assets through disinvestment
(iv) 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.
(v) A high revenue deficit gives a warning signal to the government to
either curtains expenditure or increase its revenue.

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.

FISCAL DEFICIT
Fiscal deficit presents a more comprehensive view of budgetary
imbalances. It is widely used as a budgetary tool for explaining and
understanding the budgetary developments in India. 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
The extent of fiscal deficit is an indication of how far the government is
spending beyond its means.
98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja
98151-67577 Mr. Vipul Budhiraja
IMPLICATIONS IF FISCAL DEFICIT
The implications of fiscal deficit are as follows:
1. Debt TRAP: Fiscal deficit indicates the total borrowing requirements of
the government. Borrowings not only involve repayment of principal
amount, but also require payment of interest. Interest payments increase
the revenue expenditure, which leads to revenue deficit. It creates a vicious
circle of fiscal deficit and revenue deficit, wherein government takes more
Loans to repay the earlier loans. As a result, country is caught in a debt trap.
2. Inflation: Government mainly borrows from Reserve Bank of India (RBI)
to meet its fiscal deficit. RBI prints new currency to meet the deficit
requirements. It increases the money supply in the economy and creates
inflationary pressure.
3. Foreign Dependence: Government also borrows from rest of the world,
which raises its dependence on other countries.
4. Hampers the future growth Borrowings increase the financial burden
for future generations, It adversely affects the future growth and
development prospects of the country.

SOURCES OF FISCAL DEFICIT

Government has to look out for different options to finance the fiscal deficit.
The main two sources are:
1. Borrowings: Fiscal deficit can be met by borrowings from the internal
sources (public commercial banks etc.) or the external sources (foreign
governments, international organisations etc.).
2. 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.

PRIMARY DEFICIT
Primary deficit refers to the difference between fiscal deficit of the
current year and interest payments on the previous borrowings.

IMPLICATIONS OF PRIMARY DEFICIT

It indicates, how much of the government borrowings are going to meet
expenses other than the interest payments. The difference between fiscal
deficit and primary deficit shows the amount of interest payments on the
borrowings made in past. So, a low or zero primary deficit indicates that
98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja
98151-67577 Mr. Vipul Budhiraja
interest commitments (on earlier loans) have forced the government to
borrow.
Primary Deficit is the root Cause of Fiscal Deficit
In India, interest payments have considerably increased in the recent years.
High interest payments on past borrowings have greatly increased the fiscal
deficit. To reduce the fiscal deficit, interest payments should be reduced
through repayment of loans as early as possible.

98151-67577 SESSION 2021-22 Mr. Vipul Budhiraja