Government Budget and The Economy 5

Government Budget is a statement of expected recepits and expected expenditures

of the government for a fiscal year. Every government prepares budget whether it
is local, state and central government.
First day of the month of february is well known in India as a day the Finance
Minister present annual budget of the government called Union Budget of India.
OBjectives of Government Budget
Budget is not only a statement but it is a reflaction of Government policies
and set of objectives that the government seeks to achieve over time.
(i) Managing Public Sector Enterprise:  There are large number of public
sector enterprises 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 privatisation.
(ii) Economic stability:  Main objective of budget is to bring stability in
economy. It control fluctuations in general price level through taxes, subsidies
and government expenditure for eg. when there is inflation (continuous rise in
prices) Government can increase taxes and reduce its expenditure. When there
is deflation (continuous fall in prices). Government can reduce taxes and grant
subsidies to encourage spending by people.
(iii) Redistribution of income and wealth:  It means reduce the inequalities
between income and wealth. Through the policy Government seeks to promote
“equity”. To increase the disposable income of poor, Government 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 government budget by way of tax revenue and welfare expenditure.
(iv) Allocation of Resources:  Through the budgetary policy, government
aims to reallocate resources in accordance with profit maximisation and social
welfare. Government can influence allocation of resources through taxation and
subsidies policy. To encourage investment for welfare, Government can give tax
concessions and subsidies to the producers. Government 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.
* Government Budget has two broad components:
(i) Budgetary receipt
(ii) Budgetary expenditure

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Government Budget & the Economy 61

(i) Budgetary receipt

Budgetary receipts refer to total estimated money receipts of the Government
from all sources during a fiscal year.
Budgetary receipt are classified as:
(A) Revenue Receipts
(B) Capital Receipts
(A) Revenue Receipts
These are those receipts of the government which do not leads to reduction
in any assets of the government nor creation of any liabilities of the government.
* Revenue receipts are of two types:
1. Tax receipt
2. Non-tax receipt
1. Tax receipt:  These are those receipt of the Government which are received
from the tax component (Tax source).
‘Tax’ is a compulsory payment to the government under any law. The taxpayer
cannot expect any service or benefit from the Government 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 government
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 government
* Burden of these taxes are not shiftable i.e. the amount of tax can’t be
recover from any other.
These taxes are progressive in nature.
eg. Income tax, Corporation tax, gift tax, wealth tax, etc.
(b) Indirect tax:  Indirect tax are those tax, the person who bears the burden
of tax does not himself deposit it with Government
* Burden of these taxes are shiftable i.e. the amount of tax can be recover
from customer.
These taxes are regressive in nature.
eg. Goods and services tax, custom duty, etc.
2. Non-tax receipts: 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 Government 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 Government for the services that it
renders to the people.
eg. Land registration fees, birth registration fees, passport fees, court fees,
license fees, etc. 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.
62 Macro EConomics

(iii) Escheat: It refers to income of the state which arises out of the property
left by the people without a legal heir.
(iv) Grants/Donations:  Grants received by the Government are also a
source in 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
Government eg. Indian Railways, Indian Oil, Bhilai Steel Plant, LIC, BHEL, etc.
(vi) Interest:  Interest received by the government on loans are considered
as a revenue receipts.
(B) Capital Receipts
These receipts are those receipts of the Government which leads to creation
of any liabilities the government or reduction in any assets of the government.
These are classified as
(i) Recovery of loan:  Loan offered to others are assets of the Government
Accordingly recovery of loan cause reduction in assets.
(ii) Disinvestment (PSU): Disinvestment occurs due to the privatisation.
It means sale of share of public sector undertaking to private corporate
sector. It reduces the assets of Government
(iii) Borrowings & other liability:  Government borrow money from general
public by issuing share / securities, from RBI, from Rest of the world, it
create liabilities of the Government. Borrowings are debt creating capital
receipts.
Difference between Revenue Receipts & Capital Receipts
Basis Revenue Receipts Capital Receipts
1. Meaning These are those receipts These are those receipts
of the government which of the government which
don’t leads to reduction in leads to reduction in any
any assets nor creation of assets or creation of any
any liabilities. liabilities.
2. Nature These are recurring in These are non recurring in
nature. nature.
3. Debt Revenue receipts are not Some capital receipts
Creation debt creating. like borrowing are debt
creating.
4. Examples Tax receipts, fees, fines, Recovery of loans,
interest, penalties, etc. disinvestments (PSU) &
borrowings.
Formulae:
Total receipts = Revenue receipts + Capital receipts
Revenue receipts = Tax revenue + Non tax revenue
Tax revenue = Direct tax + Indirect tax
Capital receipts = Recovery of loans + Disinvestment + Borrowings
Government Budget & the Economy 63

(ii) Budgetary expenditure

It refers to the total estimated expenditure of the government over a fiscal
year.
Budgetary expenditure is classified into:
(A) Revenue expenditure
(B) Capital expenditure
(A) Revenue expenditure: These are those expenditure of the government
which do not create any asset nor reduction in liability of the government.
Examples: Old age pension, subsidy, scholarship, salaries to Government
employees, interest payment, gifts, grants, donation any type, expense on defence
service, wage bill of the government, expenditure on collection of taxes, etc.
These all are revenue expenditure because they do not create any assets nor
reduction in any liabilities of the government.
(B) Capital expenditure: These are those expenditure of the government
which leads to reduction in liabilities of the government or creation of any Assets
of the government
Examples: Repayment of loan, equity shares of the domestic or multinational,
corporations purchased by the Government Expenditure on land and Building,
Machinery, equipment, construction of school, flyover, hospitals, college, etc.
Difference between Revenue Expenditure & Capital Expenditure
Basis Revenue Expenditure Capital Expenditure
1. Meaning These are those expenditure These are those expeditures
of the government which of the government which
don’t leads to creation of leads to creation of any
any assets nor reduction assets or reduction of any
of any liabilities. liabilities.
2. Nature These are recurring in These are non recurring in
nature. nature.
3. Purpose These are incurred on These are incurred on
normal functioning of the acquisition of assets and
government. granting loans.
4. Examples Interest, subsidies, Acquisition of machinery,
expense on collection of construction of school,
taxes, donation, pensions, hospital, building, repaid
etc. loans, etc.
Formulae:
Total expenditure = Revenue expenditure + Capital expenditure
Situation in Government Budget
(i) Balanced budget / Equilibrium Budget:  It is a situation when budgetary
expenditure is equal to budgetary receipts.
TR = TE
64 Macro EConomics

(ii) Surplus Budget:  It is a situation when budgetary receipts are greater

than budgetary expenditure. In situation of inflation, surplus budget is prepared
by the government.
TR > TE
(iii) Deficit Budget:  It is a situation when budgetary expenditures are greater
than budgetary receipt. In situation of deflation, deficit budget is prepared by the
government.
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 expenditures over revenue
receipts.
RD = RE – RR, Here (RE > RR)
Implications of revenue deficit
Since revenue receipts and revenue expenditures are related largely to
recurring expenses of the Government (as on administration & maintenance)
High revenue deficit gives a warning signal to the government 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 tax. In such situation, the
Government is compelled to cope with high revenue deficit through borrowings
or disinvestment. Borrowings creates liability of the Government whereas
disinvestment cause reduction in assets of the Government
(ii) Fiscal deficit:  It is the excess of total expenditure over total receipt
other than borrowings.
ie. Fiscal deficit is equal to borrowings of the Government
Fiscal deficit = TE – TR (excluding borrowings)
⇒ Fiscal deficit = (RE + CE) – RR – Recovery of loan – Disinvestment
⇒ Fiscal deficit = Budgetary deficit + Borrowing & Other liabilities
Implications of Fiscal deficit
Greater fiscal deficit implies greater borrowings by the Government.
(a) It causes Inflation:  Government borrowings includes borrowing from
RBI. It increases circulation of money in economy and cause inflation.
(b) Increase foreign dependence: Government 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.
Government Budget & the Economy 65

Primary Deficit = Fiscal deficit – Interest payment

While fiscal deficit shows borrowings requirement of the Government
including of interest payment on the accumulated national debt. Primary deficit
shows borrowing requirement of the Government exclusive of interest payment.
Tax Receipt = Direct Tax + Indirect Tax

Important Revision
Concept ∆ in Liabilities ∆ in Assets
Revenue Receipts Do not create any liability Do not reduce any Asset.
(OR)
Capital Receipts Creation of liability      Reduction of Asset.
(OR)
Revenue expenditure Do not reduce any liability. (OR) Do not 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.
Sr. No. Particular ` in crore
(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.
[Link]. Particular ` in crore
(i) Capital Receipt net of borrowings (excluding ` 95
borrowings)
(ii) Revenue expenditure ` 100
(iii) Interest payment ` 10
(iv) Revenue Receipts ` 80
(v) Capital expenditure ` 110
Q.3. Calculate (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit
[Link]. Particular ` in crore
(i) Tax Revenue ` 47
(ii) Capital Receipt ` 34
(iii) Non-tax revenue ` 10
(iv) Borrowings ` 32
(v) Revenue expenditure ` 80
(vi) Interest payments ` 20
66 Macro EConomics

Q.4. If the budgetary deficit of the government is `25,000 crores and the
borrowings and other liabilites and `7000 crores, how much will be the
fiscal deficit?
Q.5. Find borrowings by the Government 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.
Q.7. Giving reasons categorise the following into revenue and capital
expenditure:
(i) Grants given to state government
(ii) Repayment of loans.
(iii) Expenditure on construction of roads.
(iv) Interest payment on past loans.
(v) Payment of salaries to Government employees.
(vi) Taking over a private firm by the Government
(vii) Expenditure on subsidies.
(viii) Purchase of shares by the Government
Q.8. Classify the following into Revenue Receipts & Capital Receipts, give
reason.
(i) Loan from world bank
(ii) Corporation tax
(iii) Sale of shares held by Government of a PSU.
(iv) Dividend Received by Government from a company.
(v) Profit of LIC, a public enterprise.
(vi) Amount borrow from Japan for bullet train.
(vii) Goods & Service Tax collection
(viii) Recover amount of loan from Bhutan.
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 Government from RBI
against Treasury Bills. RBI purchase the Bill in Return of Cash, which
the Government uses to fund the deficit.
(ii) Borrowing from public.
(iii) Disinvestment
(iv) Government should reduces its expenditure and increase tax & non tax
revenue
Government Budget & the Economy 67

Q.11. Differentiate the following points

(a) Revenue Receipts & Capital Receipts
(b) Revenue Expenditure & Capital Expenditure
(c) Direct Taxes & Indirect Taxes
Q.12. What are the objectives of government budget?
Q.13. What are the implications of Revenue deficit?
Q.14. What are the implications of Fiscal deficit?
Q.15. Write any 5 components of non Tax Receipts.

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