GOVERNMENT BUDGET Government estimate of its revenue and expenditure is known as Government Budget. While framing budgets of the country , the government decides the heads of expenditure and the amount likely to be spent on these heads, Theses heads may be developmental and and non-developmental also. In order to decide the total expenditure the economy is divided divided and sub-divided sub-divided into various sectors and regions. While framing budgets the government estimates the expenditure on various economic and social activities. The expenditures on different heads is decided by predetermined priorities. AT the same time the government estimates the expected revenue though though different sources The sources of revenue may be tax sources and non-tax sources. sources. As such, governments budget is a statement showing item wise estimated receipts and estimated expenditure under various various heads during a fiscal year beginning on April of the year and ending on March 31 of t he next year. Initially begets are prepared for every sector, regions, departments and heads. Finally, different sub-budgets are merged with one national budget, known as Government budget. Objectives of Government Budget The main objectives served by the g overnment budget are as under:
OBHECTIVES
1. Reallocation of resources
OF THE
2. Redistribution of activities
GOVERNMENT
3. Stabilizing economic activates
BUDGET
4. Management of public enterprises 5. Indicator of the trend of economy
1. Reallocation of resources. Incase, the market economy fails or odes odes not achieve the desired social objectives, the government has to interfere through budget and reallocate resources accordingly. We have adopted socialistic planned developmental developmental economy, so it becomes the prime duty of the government to build sound social infrastructure concerning education , health, housing and civic amenities. 2. Redistribution of activities: Every economy strives to attain a society, where in quality of income and wealth should be minimum. In order to achieve this objective the government government spends sufficient money on social security schemes, economic subsidies and public works etc. 3. Stabilizing economic activities. It is the prime duty of the economy to stabilize price of goods and services, Economic fluctuations fluctuations affect the economy badly, There should be considerable employment opportunities. Efforts should b e made to achieve the balanced economic economic development with regional equality. 4. Management of public enterprises. We have adopted mixed economy economy , where both public and private sectors flourish. The government owns manages and controls natural monopolies monopolies like railways, post offices, electricity etc. There are large number of public public sector industries
established and managed in the social welfare of the people and public public interest. These social welfare activities are operated through budget. 5. Indicator of the trend of economy. economy. Government budget is based upon upon the needs of the economy and prioritization of those needs./ This indicates the overall direction or trend of economy which may be either agriculture or industry or service based. Components of government budget: The budget of the central government has got two components i.e. Revenue budget and Capital budget. Revenue budget consists of revenue revenue receipts of the central government and the expenditures met from such revenues. The capital budget consists consists of capital receipts and its payments. Let us now discuss these budget receipts and payments. Classification of Budget Receipts Government Budget receipts are classified as under: Classification
Revenue receipts
Receipts from tax revenue Receipts from non-tax revenue
Of Budget Receipts
Capital receipt
Recoveries of loans Borrowings Other receipts
Revenue Receipts Receipts which do not create either a liability or lead to reduction in assets are known as Revenue receipts. Theses receipts are routine, routine, ordinary and usual in nature. Every government receives revenue receipts in its ordinary course o f governance. Revenue receipts are further classified as receipts from tax revenue. Receipts from taxes are obtained by both the Central and State governments. These taxes may be further classified classified as direct and indirect taxes. Revenue receipts are also obtained through non-tax sources such as receipts from interest, dividend, profit and external grants. The government receives interest on loans loans granted to state governments, local bodies and other parties. It also receives dividend and profit from its own enterprises. The government also receives financial assistance from aboard as external grant. GENERATION OF RECENUE BY THE GOVERNMENT GOVERNMENT The government can generate revenue through tax sources and non-tax sources, Let us now discuss generation of revenue though tax sources. Generation of Revenue through Taxes. Taxes are legal compulsory payment payment imposed by the government. Tax Revenue of Central Government The Central government is competent enough enough to levy taxes all around the country. In India the main sources of tax revenue of the central government are as under: SOURCES OF
1. Personal Income tax
TAX REVENUE
2. Corporation tax
OF THE
3. Custom Duties
CENTRAL
4. Central Excise
GOVERNMENT
5. Wealth Tax 6. Estate Duty
A.
Taxes Levied
1. Personal Income tax
By Central
2. Corporation tax
Government
3. Custom duties 4. Central Excise 5. Wealth tax 6. Estate duty
GOVERNMENT REVENUE THROUGH TAXES (a) Taxes on income
1. Agriculture income tax 2. Profession tax 3. Share in income tax
B. Taxes Levied By state Governments
(b) Taxes on Income
1. Land Revenue 2. Share is Estate duty 3.Stamps and Registration fee
(c )Taxes on Commodities
1. Sales tax 2. Excise Duties 3.Entertainment taxes
A. Taxes Levied by Central Government 1. Personal income tax. Income earned by the individuals as income from salaries, property, profession, business and other sources are assessed to income tax. Generally personal income tax is deducted at source by the employers or at source of its origin. Personal income tax is also levied on Hindu undivided families, unregistered firms and other association of people. For taxation purpose, income from all sources is added and necessary deductions are allowed as per rules. India has adopted the policy of assessing income tax at progressive rates, i.e. higher rate o f waxes on higher slabs of income. Before 1974-75 the marginal rate for income tax was 97.75 per cent which was the highest in the world. Subsequently was reduced to 77% , 50% and 40%. Sometimes surcharge is also charged on income tax. Progressive taxation was adopted to reduce the inequality of income, but it
has completely failed. Now, it can be safely summarized that income tax in its present form is merely a means to to collect revenue. It has limited relevance as a source of fiscal. 2. Corporation tax. Income tax levied on the income of registered companies and corporations is termed as corporation tax. The rationale for having separate corporation tax is that the companies and corporations have separate identity. So there should be separate income tax for them. Upto 1960-61 corporations were taxed in partial sense. A corporation was required to pay income tax on dividends on behalf pf its shareholders and each shareholders got credit to this effect. Since 1960-61 corporations are being treated as independent entities and shareholders are allowed no credit against their individual tax liabilities. Corporation taxes are levied at flat rates. Certain rebates and exemptions such as depreciation allowance and development rebates etc. are also allowed as per rules. 3. Custom duties Taxes levied on the imports and exports of goods are known as custom duties. Custom duties are one of the indirect taxes., whose incidence is shifted by the tax players to others. This has been one of the major source of revenue of the Central government for long time. The importance of custom duties as a sources of revenue started declining. Because the government adopted the policy of according protection of Indian developing industries. As such imports were discouraged and the quantum of customs reduced. During World War II and post-war periods restrictions were imposed on imports of various consumer goods resulting in the decline of customs. After the introduction of planning imports f capital equipment, necessary raw material, food grains, petroleum etc., increased but heavy taxation was ruled out. These days customs have once again become the important sources of government revenue. India has now joined GATT (General Agreement on Trade and Tariffs) so it is under an obligation to accept tax rates on imports of various commodities as decided by GATT. 4. Central excise Taxes levied on the production of certain commodities are known as excise duty. It is one of the source of indirect taxes, whose incidence is shifted by the tax payers to buyers of the commodities. Union excise duties are levied by Central government on commodities except liquors and narcotics. The proceeds from Union Excise duties are shared between Central and State government in accordance with the recommendations of Finance c ommission. 5. Wealth tax. Tax levied by t he central government on the wealth accumulated is known as wealth tax. There are certain individuals who earn huge income but do not make huge expenditures. Consequently there is an accumulation of wealth, which is subjec t to wealth tax. 6. Estate duty. There are certain individuals, who die leaving behind huge wealth for their successors, who receive it without making any sacrifice for it. The Central government levies estate duty on such acquired wealth. B. Tax Revenue of State Governments: The state governments are also competent to levy certain taxes within their states. Taxes levied by the state government are motioned herewith. 1. Taxes levied by state government n income. The State Government levies taxes on the following income. (i)
Agricultural income: There are certain states, where agricultural income is also subject to tax. Generally agricultural income is not taxed by most of the states.
(ii)
Profession tax. The state government levies profession tax on professionals such as advocates, chartered accountants, doctors etc., This tax is levied on the lines of sales tax because it is taken as sale of services.
(iii)
Share in Income Tax. State governments receive share from the income tax collected by the Central government. The ratio of distribution is determined by Finance Commissions.
2. Taxes levied by the state government on property. The state governments are empowered to levy taxes on the property of individuals in the estate. 3. (i) land Revenue. This is one of the important source of revenue to state government. The land owners are required to pay land re venue to the state government on t he land owned by them. 4. (ii) Stamps and Registration fee. The state government sells court stamp papers, which is used for agreements,contracts, sales, and purchase deeds also. In case of registration of property i.e. Land,Building etc. registration fee is charged by the state governments. Revenue is also received from licence fee, road tax etc. 5. (iii) Share in Estate Duty. Estate duty collected by the central government is shared with the state governments. As such it becomes source of income for the state governments also. 3. Taxes levied by the state gover nment on commodities. State government are also empowered to levy taxes on certain commodities. (i)
Sales Tax. This is the most important source of revenue for the state government. This tax is charged on the sales made by traders. These days sales tax is charged @ 10%. It is an indirect tax.
(ii)
Excise Duties: State excise duty is levied on the production of liquor and narcotics within the state.
(iii)
Entertainment Tax: The state government levies entertainment tax on all the paid entertainment activities. The tax is levied on cinema tickets and stage performances such as Circus,Kavi sammelones, Maushaira and stage performance of artists, if tickets are sold for these performances.
CLASSIFICATION OF TAXES ON THE BASIS OF INCIDENCE Taxes cal also be classified on the basis of incidence (burden ) on tax payer. A. DIRECT TAXES 1. Income tax 2. Corporation tax 3. Profession tax 4. Agricultural income tax 5. Wealth tax 6. Estate duty 7. Land revenue 8. Registration and stamp fee
B. INDIRECT TAXES 1. Sales tax 2. Excise 3. Customs Taxes may further be classified according to t he incidence (burden) of taxation: A. Direct tax. Income tax, corporation tax, wealth tax, estate duty and gift tax etc., B. Indirect tax. Customs, excise, sales tax and entertainment tax. A. Direct Taxes: The burden of these taxes cannot be shifted to some other person. It has to be borne by the tax payer himself . For example, the income tax-payer bears the burden of tax himself. Important direct taxes are as under: 1. Income tax. Taxes are levied on salaries, business, profession, property and other sources of individuals. 2. Corporation tax. It is levied on the income of companies and business corporations 3. Professional tax. It is charged on the income of professionals i.e. doctors, chartered accountants, artists and actors etc. by the state government. 4. Agricultural income tax. Certain states have taxed agricultural income. 5. Wealth tax. It is levied on the wealth accumulated by individuals. 6. Estate duty. It is levied on the inherited wealth, if it exceeds beyond certain limit. 7. 7 and 8. These revenue are received by state governments as land revenue, stamps and registration fee. B. Indirect taxes C. The burden of tax is not borne by the tax payer. It is shifted to certain other persons. Important examples of these taxes are as under: 1. Sales tax. This tax is levied by the State Governments. The tax is paid by the trader on sales made by him to the Government. The trader charges the amount of tax from the customers. 2. Excise. Central excise is imposed on the production of sugar, cotton, cloth tobacco, match boxes, cement and spirit etc., State excise is imposed on liquor, opium and other drugs and narcotics. Excise is the most important source of Government revenue. It accounts for almost 37% of our national revenue. 3. Customs. It is levied on the imported goods, it is the source of revenue and also protects our industries. The purpose of taxation policy is to reduce inequality of income, providing sufficient revenue to the government and speed up economic development. NON-TAX SOURCES OF REVENUE In addition to tax sources of revenue the government earns revenue through on-tax sources also. Let us now discuss non-tax sources of revenue: Non-tax Revenue
Revenue is also obtained through non-tax sources:
The contribution of non-tax sources is very limited. It is revenue, charged by the Governmetn for services rendered. CLASSIFICATION
1. Interest and receipts
OF NON-TAX
2. Dividend and profit
REVENUE
3. Monetary receipts 4.Cash grant 5.Other services.
1. Interest and receipts: Interest is received on the funds, advanced to statesm union territories, Railways, Post and telegraph, other institutions and undertakings. 2. Dividend and profit. The Governmetn earns profit through public sector undertakings. Dividends are also received from investment in other companies. 3. Monetary receipts. Currency notes are issued by the Reserve Bank of India as the agent of the Government. One rupee notes are issued by the Secretary, Ministry of Finance. 4. Cash grants. Amount received from foreign countries as loans and grants are known as cans grant. It can be received from World Bank and other international institutions. 5. Other services. Nominal receipts are obtained from: (a) GEnral services, stationery, printing public works etc. (b) Social and community and services. Services like education, family welfare, public health, hosuing, employment and labour bring nominal services chages. ( c) Economic services. Agriculture, industry, water and power development and minerals also fetch nominal receipts. The following tables shows the Revenue Receipts of t he Union Governmetn during the Financial year 2001-02. Itmes Revenue Receipts ( i) Tax Revenue ( ii) Non-tax REvenue
Amount (Rs Crores) 2,31,745 163.031 68,714
CAPITAL RECEIPTS Receipts creating liability or leading to reduction in assets are called Capital Receipts. Capital receipts are obtained by the government by raising funds through borrowings, recovery of loans, and disposing off assets. Capital receipts are casual and irregular in nature. Let us discuss the measures of capital receipts. 1. Recoveries of loans. The central government extends loans to the state governemtn, union territories local bodies and other praries. These borrowers repay back loans advanced to them.
These funds are covered by the central governemtn and form part of capital receipts. The logic behind the treatment of recoveries o f laons as caitpal receipts is that thses recoveries reduce financial assets of the government. 2. Borrowings and other liabilities. In order to meet its financial requiremtns the governemtn may borrow funds from different sources. These borrowings create liabilities. The government can raise loans from the market. Reserve Bank of India. Foreign governemtns and other bodies. These laons may also be raised from public by issuging bonds, uit certificates etc., 3. Other capital receipts. Sources of capita receipts other than recoveries of loans and borrowings mauy be termed as sources of other capital receipts. Amount received by the government from disinvestemtn may be known as other capital receipts. Disinvestmetn means funds received by the governemtn by selling a part or thewhole of the equity shae4s of public enterprises held by government. Such receipts are called capital receipts because is redues financial assets to the governemtn. During the year 2000-2001, the government proposed to raise Rupees ten billion from ‘disinvestmetn
; During the year 2001-2002 it has been proposed to raise Rupees 12000 crores from disinvestment. Table showing the capital receipts of the union government as per 2001-2002 budget e stimates. Item Capital Receipts ( i)Recovery of Loans (ii) Other Receipts (Mainly PDU disinvestment) ( iii ) Borrowings and other Liabilities
Amount (Rs. Crores) 1,43,478 1.164 12,000 1,16,314
PUBLIC EXPENDITURE These days governments actively participte in the economic activities of the country. In certain cases, government participates direcly in the economic activities through public enterprises. In other cases, government governs the economic activities thorugh its fiscal and monetary policies. The government is also responsible for defence,law and order, economic and social infrastructure etc., So it has to incur expenditure on various fronts. Expenses incurred by the government are known as public expenditures. Public expenditure may be classified as under: CALSSIFICATION OF PUBLIC EXPENDITURE Revenue
plan and Non-
Developmental and Non-
Capital Expenditure
Plan Expenditure
Developmental Expenditure
Revenue Expenditure The expenditure incurred for the normal functioning of government departments and provision for various services, interest, charges on debt, incurred by the government, subsides etc., are known as revenue expenditure. In other wards, all expenditures whihch do not create assets are termed as Revenue expenditures. Grantsm sactioned to the state governments are also the part of revenue expenditure, although some of the grants may create assets. The main revenue expenditures of
government are salaries, pensions, interest, subsides and grants etc.,. The following table shows the Revenue Expenditure estimates of the Centrtal Government for 2001-02. Item Revenue Expenditures ( i) Interest payments (ii) Major Subsidies ( iii ) Defence Expenditure
Amount ( Rs. Crores) 1,82,186 1,12,300 27,845 42,041
Capital Expedniture Expenditures on acquisition of assets such as land, bulding, machinery, equipments, investment in shares etc., loans and advances granted by the central government to state governments, union territories , government companies , corporations and other partis are termed as capital expenditure. Estimated expenditure of government under different heads in termed as Budget expenditure. Plan Expenditure Expenditure incurred during the year on t he programmes uner the current five -year plans is known as plan expenditure. These expenditures are the proposed expenditures under the plan. Plan expenditure is further classified as Revenue expenditure and apital e xpenditure, Revenue expenditures are the routine, usual and normal expenditures incurred by governments and in the maintenance of government properly. The main revenue expeditures of the government are salaries, pensions, interest, subsides, grants etc., Revenue expenditure may be further classified as developmental and non-developmetnal Expenditures directly concerned with the socio-economic developmental activities of the government are called developmental expenditures. The government expenditure on agriculatre, industrial development, educatin, healty, transporation, communication, social welfare, scientific research etc are called developmental expenditure. Non-developmental expenditures are incurred on essential general services of the government/ These expenditures do not contribute to the anional product directly but iubricate the wheels of our developmental process. Expenditue on defence, administration, police, tax collection, interest on public debt, subsidies, external affairs etc. are non-developmental expenditures. Non-plan Expenditure Expenditures other than the expenditure related to the current five year plan are treted as Non- Plan Expenditure. Non-plan expenditures can also be classified as Revenue and Captial expenditure which can further be classified as developmental and non-developmentl expenditure. PUBLIC EXPENDITURE IN INDIA Before independce the pattern of public expenditure was determined by the Colonial policy of the British rulers. After independence the nationalist government had its own priorities and consequently the pattern of expenditure completely changed. The classical economists were in favour of restricting the role oof governemtn because they thought that the government activities were unproductive. The
Britishers took advantage of this theory and restrained from increasing public expenditure and concentrated on accumulating revenue. After independence we adopted planned developmental economy. The government accorded importance to public sector and took the initiative of huge spending for the economic and social development of the country. The governemtn engaged itself in introducing effective measures for the growth of agriculture, trade, transport, industry. Communication etc./ The acceleration of pace for economic growth needed sound economic and social infrastructure. It was, therefore, necessary for the governemtn to incur expendityre on education, heatlth hosing and civic anebities. Besides all these, it was the responsibility of the government to remove poverty. Unemploymnent, inequality of income and other social eveils. The gvoernments’ commitment to all these objectives increased public expenditure
consieabley and at present it is beyond control. COMPONENTS OF PUBLIC EXPENDITURE The main components of public expenditure are summarized as under: COMPONENTS OF PUBLC EXPENDITURE ( FUNCTIONAL CLASSIFICATION) DEVELOPMENTAL EXPENDITURE Expenditure on social
Expenditure on
NON-DEVELOPMENTAL
And community
economic Services
PUBLIC EXPENDITURE
( i ) Medical
( i) Agriculture
(i) Defence
(ii ) public health
( ii ) Industry
( ii ) Administration
( iii ) Education
( iii ) Transport
( iii) Police
( iv ) Housing
( iv) Communication
(iv) Tax collection
( v) sanitation
( v) Power
(v) Interest on public debt
( vi ) Social and family welfare
(vi) Minerals
( vi) Subsidies
Services
Programmes
( vii ) External Affairs.
Deparmental Expenditure These expenditures of the government aim at buildings sound ne economic and social infrastructure. The balanced, stable and sound agricultural and industrial development must be based upon sufficient infrastructure. The developmental expenditure are made on economic services such as Agriculture, Industry, Transportation, Communication, Minerals, power etc. Expenditures on social and community services also form part of developmental activities can be undertaken. Expenditures on social and community services include expenses on medical , public health , education, hosing sanitation, civil amenities, social and family welfare programmes. These developmental expenditures are necessary for making the people self-sufficient and self-reliant. These expenditures are necessary to accelerate the pace of our economic growth. Developmental Expenditures on Economic Services The following expenses are incurred as developmental expenditures o n economic services:
DEVELOPMETNAL
1. Agriculture
EXPENDITURES
2. Industry
ON ECONOMIC
3. Transportation
SERVICES
4. Power 5 . Minerals
1. Agriculture: Agriculture is the backbone of our economy. Without agricultural development of the economy, economic growth is not possible. Nearly 70% our population is engaged in agriculture. About 27% of the income is generated though agriculture. It supplies food to millions. This is why top priority was accorded to agriculture in the first five year plan. Government had to incur heavy expenditure on agr icultural seed, tools, appliances, irrigation, finance and marketing etc. This is why, excessive expenditure on agriculture leads to budgetary deficit. 2. Industry. Industrialization of the economy at rapid rate is necessary for the economic growth. Industry supplies necessary consumer and producer goods. It also supplies Raw materials to agriculture. Agricultural land is limited, so it cannot provide employment to our exploding population. It is the industrial development which provides lot f employment opportunities. For industrialization of our undeveloped economy we had to incur lot of expenditure. 3. Transportation. Without proper transportation facilities, agricultural and industrial development is not possible. It is one of the most important economic infrastructures of the economy. The government has to make huge expenditure one eh development of road, rail airways, shipping and pipeline transportation. 4. Communication. Development of communications necessary for establishing contact between two places. It will help in the development of trade and industry. The government has to incur hue expenditure for t he development of post and telegraph services. Telephone satellite links, broadcasting telecasting, press. 5. Power. Every manufacturing activity needs power, It is needed for both consumption and capital formation. The government has to incur heavy expenditure in the production of power. i.e. coal, lignite, petroleum natural gas, LPG, LNG, electricity, bioenergy, biogas, solar wind and atomic energy. Expenditure on power projects cannot be curtailed. 6. Minerals. We have to work out our mines of iron-ore, coal, manganese and other minerals. These minerals are required for our agricultural, industrial and all round development. The government has to incur huge expenditure in working out these mines. Development Expenditure on social and community Services The following expenses are incurred as developmental expenditure on social and community services. DEVELOPMETNAL
1. Medical
EXPENDITURE ON
2. Public health
SOCIAL AND
3. Education
COMMUNITY
4. Housing
SERCIVES
5. Civil amenities
6 Social and welfare programmes 1. Medical. Medically fit manpower s an asset to e very economy. Medically unsound working force is misfortune for himself. The organisation and even the nation. It is, therefore necessary that medical facilities should be made available throughout the country even in remotest rural areas; Making arrangement of medical facilities throughout the country needs huge expenditure from the government. 2. Public health. Health means a state of complete physical, mental and social soundness. Health helps indirectly the economics development by supplying active, energetic and healthy working force, which activates entries production process. The government is required to incur expenditure on control of communicable diseases, establishment of health care institutions expansion of health facilities, and expansion of medical education etc., 3. Education. Education these days is regarded as economic investment. Education increase the mental efficiency of the people, I t is said that primary education increase 40% productivity. Secondary education 10% and higher education 300%. We are victims of mass illiteracy, women education is far behind. The government is required to incur huge expedite on mass literacy formal education. Medical, agriculture and engineering education etc. 4. Housing. Housing is an important organ of socio-economic structure. Housing provides us refreshed and hardworking force. I order to provide houses for all, removal of slums and enable higher standard of living to people, government is required to incur expenditure. 5. Civic amenities. Supply of drinking water and sewerage system are very essential for us. Provision of park street lighting playground etc. are also necessary for us. It becomes the responsibility of every government to incur expenditure on the arrangement and provision of civic amenities to tall citizen. 6. Social and welfare programmes. Ot is a welfare state, so we have for frame our policies and plans in the interest and welfare of our people. It needs the provision of free education, medical facilities. Cultural programmes family welfare progemmes etc. for the social and economic welfare of our people. Non-Development public expenditure In addition n to developmental expenditures on economic and social act ivies the go vernment required to incur the following non-development expenditures also. 1. Defence. It is the prime duty of every government that it should defend the frontiers of its country frontiers of its country from external aggression. It requires a lot of expenditure on army, naval and air force equipments and military personnel. The government is also required to establish defence industries for producing defence equipments. 2. Administration. The government is required to maintain law and order. It has to maintain peaceful atmosphere in the country. In order to attain this objective, courts have been formed. The government has to incur substantial expenditure on administration. NON-
1. Defence
DEVELOPEMTNAL
2. Administration
PUBLIC
3. Police
EXPEDNITURE
4. Tax collection
5 . Interest on public debt 6 . Subsidies 7 . External affairs 3. Police. It is the duty of the government to maintain internal peace and tranquility . There should not be internal disturbance. The government has to incur expenditure on police also. 4. Tax collection. The central government and state governments levy various taxes. In order to collect taxes, the government has to incur a lot of expenditure on tax collection. 5. Interest on public debt. The government is also required to pay interest on public debts borrowed by it. 6. Subsidies. The governments grants subsidy to firms on consumer goods like cooking gas, fertilizers etc. Subsidies granted are the part of government expenditure. 7. External affairs. Every government has to maintain embassies and high commissions in other countries and incur substianal expedite. Structure of a government Budget. According to he provisions of the constitution (Article 112) the Government of India is required to lay an “ Annual Financial Statement’’ before both the houses of Parliament. This
is known as the Budget of the Central government. Similarly each State government is required to lay . Annual Financial Statement. Before the legislature of the state as per Article 202 of the Constitution. This is called the budget the state government. A government budget is divided in two parts. One part consists of estimated receipts and the other part contains estimated ex penditure. TYPES OF GOVERNMENT BUDGET Surplus Budget
Balanced Budget
Deficit Budget
Surplus Budget. Excess of estimated revenue of the year over the anticipated expenditure is known as budget a and family budget surplus budget is preferable, but in case of government surplus budget is not favored, because it shows that the government instead of spending for the welfare of t he people is busy in earning income and amassing wealth. As such these days government budgets are not surplus budget. Modern governments have assumed so much social, economic and political responsibilities that surplus budget of government is virtually impossible. Implication of surplus Budget Surplus Budget is a situation in which estimated revenue of the year exceeds the anticipated expenditure, The following are the implications. (i)
Surplus budget indicates the financial soundness of the government.
(ii)
Surplus budget has a negative implication, in terms of the welfare of the society. This means that government is busy in making wealth from the resources but it is not expanding for the benefit of poor section of the society.
(iii)
This budget is possible in an extreme form of capitalist society which is not existent in the modern world as most of the government spend significant of amount on social welfare. Balanced Budget
Balanced Budget is a situation, in which estimated revenue of the government during the year is equal to its anticipated expenditure. Balanced Budget is always preferable for individuals and family. Most of
the classical economists favored balanced budget, which was based on the golden policy of ‘live within means’ The policy of balanced budget was also favored, because minimum interface from the
government was desired in the economic activities. The policy of balanced budget was reviewed in the great depression of 1930s. when it was realized that the government can play an effective role in the recovery of the economy by its fiscal and monetary policies. It was also argued that if government expenditure exceeds its revenue it will generate additional demand which will accelerate the pace of economic growth. As such the policy of surplus budget was almost abandoned by all governments. Implication of Balanced Budget. In the case of balanced Budget the total expenditure remains equal to the total income. In other words, balanced budget is a situation in which estimated revenue o f the government during the year is equal to the anticipated expenditure. The following are the implications of balanced budget. ( i) Balanced budget indicates the minimum interference of the government in economic activities of the country. The markets are least regulated and demand and supply work on the basis of market situation. ( ii) In the case of blanch budget monetary and fiscal policy cannot be implemented as there is always a balance between revenue and expenditure. ( iii) Balanced budget indicates stable and stagnant economy where in growth initiatives cannot be taken due to defensive policy of the gover nment. Deficit Budget. Deficit Budget is an economic situation, wherein estimated government e xpenditure exceeds the anticipated revenue. After the great depression of 1930s surplus and balanced budgets were abandoned by the governments, because it referred to discouraging the economy from growth. In order to overcome the shocking impact of the great depression, it was felt that the policy of deliberate excessive expenditure by the government over its revenue (deficit budget) should be preferred as a measure to set the economy on the path of economic recovery. It was argued that how can the government spend more than its revenue. The remedy of this economic problem was found in the government spend more than its revenue. The remedy of this economic problem was found in the government spend more than its revenue. The remedy of this economic problem was found in the deficit financing, which was termed as financing of deliberately cr eated gap between public revenue and public expenditure or budgetary deficit. In order to incur heavy expenditure, the government must generate sufficient revenue. Now, let us discuss the generation or revenue by the government. Implication of Deficit Budget. Deficit budget is an economic situation, wherein e stimated government expenditure exceeds the anticipate revenue. The following are the implications of deficit budget: ( I ) Deficit budget results in deficit financing the government. Deficit financing means the addition flow of money in the economy to fun d the excess expenditure of the government. ( ii ) Deficit budget leads to an inflationary situation in the economy due to excess supply of money in the market which is chasing less quantity of goods and services.
( iii) This budget is a growth as well as welfare driven budget. Growth is achieved through normal level of inflation (price rise) in the economy. Welfare is achieved though government expenditure on health , education and utility services. BALANCING BETWEEN GOVERNMENT RECEIPTS AND EXPENDITURE We have discussed the sources of government revenue and expenditure. When we match the estimated revenue of the government with its anticipated expenditure. We may find the following possibilities. ( I ) Either estimated revenue may be equal to estimated expenditure- known as Balanced Budget. ( ii) Estimated revenue may not be equal to estimated expenditure-known as Budgetary gap. The Budgetary gap is classified as under: CLASSIFICATIONOF BUDGETARY GAP Budgetary Surplus
Budgetary Deficit
Budgetary Surplus It s a situation where the estimated revenue of the government exceeds its anticipated expenditure. Due to governments active involvement in the e conomic activities of the country budgetary surplus are practically non-existing. BUDGETARY DEFICTI Budgetary Deficit is a situation, wherein t he estimated expenditure of the government excee ds its anticipated revenue. These days every government is not only actively involved in t he economic activities but practically participates and governs the economic activities. Of the country. A responsible government will not accord full freedom to private sector to do whatever they like. Non-interference of the government in the economic activities will lead to haphazard unbalanced growth of the economy. Private sector words in its private interest It cannot build sound economic and social infrastructure for the rapid and stable economic growth. IT si, therefore, necessary that the governments should not only direct economic activities but [practically interfere and perform economic activities. All the governments have assumed these responsibilities. Ours is a socialist welfare state. We have democratic form of government, so we have adopted planned developmental economy. The balanced development democratic form government, so we have adopted planned developmental economy. The balanced development of every region and sector needs that the governments must frame effective plans and incur sufficient expenditure. Excessive expenditure over revenue shows budgetary deficit. Implications Budgetary Deficit. Implications of Budgetary Deficit Budgetary deficit is the policy of estimation of excessive expenditure by the government over its revenue deliberately. It is preferred as compared to surplus and balanced budget because it increase demand of commodities. Additional purchasing power generated by the deficit financing of the budgetary deficit works as a measure to set the economy on the part of economic recovery. Mild budgetary deficit is always preferable, because t accelerates the pace of economic growth smoothly. Too much budgetary deficit creates inflationary pressure on t he economy resulting in the decline of the purchasing power of money. In other words, it makes commodities dealer inflicting invariable burden
on middle income group and general masses. Budgetary deficit works as accelerator to the growth of the economy, whereas surplus and balanced budgetary lead to stagnation of the economy. Budgetary deficit works as accelerator to the growth of the economy, whereas surplus and balanced budget lead to stagnation of the e conomy. Planned budgetary deficit proposes measures of deficit financing which activates demand, production employment and overall activities in the economy. Types of Budgetary Deficit BUDGETARY DEFICIT Revenue Deficit
Fiscal Deficit
Primary Deficit
Revenue Deficit. Excess of estimated government expenditure over its receipts during the year on reve nue account is termed as revenue Deficit. The government receives revenue both on revenue account and capital account. At the same time expenses are also incurred on both revenue account and capital account. The excess of revenue expenses incurred on revenue received on revenue account is known as Revenue Deficit. In other words, revenue deficit refers to excess of revenue expenditure over revenue receipts. Revenue deficit indicates the indebtedness in the current budget on account of total revenue receipts of government and the expenses proposed in the Budget. Revenue deficit is calculated from total revenue expenditure and total revenue receipts. It can be calculated as under: Revenue Deficit
= Total Revenue Expenditure
-
Total Revenue Receipts
Budget estimates of the governments of India during the year 200-2001 shows revenue receipts and revenue expenditure as 2037 and 2811 billion rupees’. It means the revenue deficits amounted to Rs. 2811-2037 = 774 billion rupees. Significance of Revenue Deficit. Revenue deficit signifies that revenue receipts fall short or revenue expenditure. It also signifies that the government has to make up this deficit from capital receipts. i.e. through borrowing or sale of asset. Revenue deficit can be made up though borrowing or disposal of assets. During the year 2001-2002 the government proposed to make revenue deficit worth Rs. 12000 Crore by disinvestment i.e sale of shares of public enterprises. Measures to Contain Revenue Deficit There are two major factors which drive revenue deficit in the economy 1. Total Revenue Expenditures 2. Total Revenue Receipts 3. In order to contain revenue deficit the government can either increase the toal revenue receipt or decrease the toal revenue expenditure. Revenue receipts can be increased when government takes up productive activity which have potential of making goods profits. ON the other hand the revenue expenditure can be decreased by taking remedial measures such as elimination of waste expenditure and better controlled of day to day routine expenditure. Fiscal Deficit
The excess of all estimated government ex penditure during the year over the anticipated governemtn receipts of the year both on revenue and capital account except borrowings is termed as fiscal deficit. The total resources gap created by the excess of expenditures over the taol revenue generated by tax and non-tax revenue and capital receipts excluding borrowing is termed as Fiscal deficit. It can also be presented as under: Fiscal Deficit
: Total Budget expenditure ( - ) Revenue receipts ( - ) Capital receipts (excluding borrowings)
In the budget estimates of India for the ear 2000-2001 fiscal deficit amounted to Rs. 1113 billion rupees, It is nearly 33% of the total budget expenditure. Revenue receipts include tax revenue and non-tax revenue. Capital receipts include recovery of loans, others receipts (mainly from PSU disinvestment). Significance of Fiscal Deficit The significance of fiscal deficit is that it determines total borrowing requirements of the government. It also shows the dependence of the government on borrowings to meet its budget deficits. Fiscal; deficit is always injurious to the economy and leads to financial unsoundness. Fiscal deficit increase the liability of the government Repayment of lion together with interest further increases deficit. Payment of interest increases revenue deficit. The situation leads to more borrowings and more repayments of interest. Consequently the economy is caught in the vicious circle of borrowings. Measures to Contain Fiscal Deficit Fiscal deficit indicates excess government borrowing to me et budgetary deficit of the government In order to contain fiscal de ficit following steps can be taken: (i)
The government should try to avoids borrowings on capital accounts which will help the fiscal deficit. Borrowings effect both fiscal as well as revenue deficit due to the repayment of principle and interest component of the borrowing.
(ii)
Government should try to increase its tax collection which will increase the revenue receipt to contain the fiscal deficit. Primary Deficit
Primary deficit is fiscal deficit less interest payments. It can also be presented as under: Primary Deficit= Fiscal Deficit (-) Interest payments Signigicance Primary deficit indicates borrowings requiremens of the goveremtn to meet fiscsl deficit excluding interest payments. The parimary deficit in the budget of 2000-2001, amounted to 100 billion rupees which is about 3% of the total budget expenditure. The Budget estimates of the government of India for the year 200-2001 are presented herewith for better understanding of the Budget. Measures to Contina Primay Deficit
Primary deficit is miserly driven by interest payments out of the fiscal deficit. In order to contain primary deficit government should try to be less dependent on borrowings. Less borrowings will result in lesser payment of interest and hence better primary deficit situation. Debt. When government borrow money to finance the budgetary deficit it is called government debt. In order words, government have mostly relied on borrowings, giving rise to w hat is called government debt. The concept of deficit and debt are closely related. Deficit can be thought of as a flow which add to the stock of debt. If the government borrow continuously then it leads to the accumulation of debt and the government have to pay more and more by interest these interest payment themselves contribute to the debt.
BALANCE OF TRADE The term balance of trade means, the difference between ex ports and imports of visible material goods. We have been living in a wor ld, where international trade is a m ust; we have to export our surplus goods to other foreign countries. AT the same time, we import needed goods from abroad. The process of exports and imports is a continuing feature. The trade involves the payment also. AS such, we have to calculate the amount payable and receivable. We are also required to calculate the balance of trade in order to determine our economic status. In order to calculate the balance of trade, we will have to match and differentiate between our exports and imports. Special Features of Balance of Trade 1. Exports and imports. The elements of the balance of trade are exports and imports. This is why, we have to calculate total exports and total imports. The records regarding exports and imports are an available at the ports. 2. Visible goods. Balance of trade constitutes imports and exports of goods. The important features of these goods is that it must be visible. It means that these goods must have physical structure, size shape and form. These goods must be seen and touched, counted measured and weighted 3. Material goods. Goods constituting our imports and exports must be material. It means that non-material goods and services will not constitute our imports and ex ports. We can summarize that balance of trade consisting of imports and exports must be material and visible. TYPES OF BALANCE OF TRADE Favourable Balance
Unfavorable Balance
Equilibrium in
Of Trade
of Trade
Balance of Trade
1. Favourable balance of Trade. The situation, wherein our exports exceed imports is a situation of favourable balance of trade. In other words excess of exports over imports is termed as favourable balance of Trade. Favourable Balance of Trade = Exports of Goods > Imports of Goods 2. Unfavorable Balance of Trade. Excess of total value of goods imported over the total value of goods exported is termed as unfavorable or deficit balance of trade. It may also be expressed as under: Unfavorable Balance of Trade= Exports of Goods < Imports of Goods 3. Equilibrium in balance of trade. Equality between the total value of goods exported and total value f goods imported is termed as equilibrium in balance of trade. It may also be expressed as under Equilibrium Balance of Trade = Exports of Goods = Imports of Goods BALALNCE OF PAYMENT Balance of payment is the complete statement of the country’s receipts and payments in foreign
exchange. It is different from balance of trade, which is the difference between value of imports and exports only. Balance of payment is balance of trade plus various other receipts and payments on different accounts from abroad. In addition to imports and exports it takes into consideration the amount receivable or payable as regards cargo freight charges, port charges expenditure on account of
foreign visits for tours, education, medical treatment, business etc . purchase of fuel for ships and provision for crews, maintenance of embassies abroad, remittance of foreign nationals, foreign loans and the repayment of interest thereon, remittance of profit of foreign e nterprise and development grants etc., Items of Dealings in Balance of payments Dealings of following items are as under: ITEMS OF DEALING Visible Items
Invisible Items
Capital Transfers
1. Visible items. All types of physical goods imported and exports are known as visible items. These are visible items because their recor d is available with the port and they c an be seen and touched. 2. Invisible items. All services which are exported and imported, such as banking, insurance, travelling, transportation, investment income donation, communication constitute invisible items. 3. Capital transfers. Items consisting of capital receipts and capital payments are known as capital transfers. Types of Balance of Payment Account. The balance of aymetn is the difference between (exports of goods plus services plus capimtl transfers) less (imports of goods plus services plus capital transfers). If shows that balance of payments is a wider term and the balance of trade is its part. It is classified as: Types of Balance of payments Favourable Balance
Unfavorable Balance
Of payment
of payments
1. Favorable balance of payments. Excess of goods and services exported plus capital transferred to abroad over the goods and services imported and capital transfers from abroad is known as ffavoruable balance of payments. IT can also be expressed as: Favorable Balance of payments = Exports (Goods, services, and capital transfer)
Imports (Goods, services and capital transfers)
2. Unfavourable balance o payments. Excess of goods and services imported plus capital transfers from abroad over the goods and services to abroad exported plus is known as unfavourable balance of payments. It can also be expressed as: Unfavourable Balance of payments = Exports (Goods, services and capital transfers) < Imports (Goods, services and capita transfers) Forms/ Accounts of Balance of payments Balance of payment has the following three forms or accounts FORMATION ACCOUNTS OF BALALNCE OF PAYMENTS 1. Current Account
Capital Account
Other items
1. Current Account Balance of payment of a current account is a statement of actual receipts and payments in the short period. It includes imports and exports of both material goods and services. Items of current account are actually transacted. It can also be expressed as under: Balance of payments on Current Account = (Visible+Invisible Exports) -
(Visible + Invisible Imports)
A. Exports and Imports of Visible Items or Goods All visible and material goods which are exported and imported constitute items of current account. The record of these goods is available with the ports. B. Invisible Items or Non-Material Goods or Services These goods are invisible because their records is not available with the ports. These goods include the followings: 1. Transportation. Exports and imports of goods involves transportation also. Foreigners use domestic transports which is known as exports and use of foreign transports by native is termed as imports. The difference the value of transport used forms part of balance of payments. 2. Travelling. Tourists visit foreign countries. We may go to fore ign countries or foreigners can visit our countries in connection with the business, health, education , pleasure etc. The country visited by these travels constitute exports and imports and we have to pay rupee on account of these travels. This is why, travelling forms part of current account. 3. Services of the experts. Services of foreign experts are availed by all countries. The value of services received from abr oad are known as imports and value of services rendered to foreign countries are exports. The difference between the two forms part of balance of payment on c urrent account. 4. Investment income. Rent , interest, profit and dividend are also invisible items of our balance of payments. Receiving income from abroad is termed as receipt. In the same way income earned by the foreigners from the country is k nown as payments. The difference between the income receipts from abroad and income earned by foreigners from the country also forms part of balance of payment on current account. 5. Donation and gifts. Donation ,gifts etc. received from abroad by the natives are included under receipts and on the other hand donation, gifts etc., given to other countries are included as payments. Te difference between the donation, gifts receipts from abroad and donation, gifts receipts from of balance of payments on current account. 6. Services rendered by commercial undertakings . commercial undertakings such as shipping companies, banks, insurance companies etc. which belong to the rest of the world give their services and the country also gives her services her services of shipping, banking and insurance to the rest of the world, The different between the
payments and receipts of such services forms a part of payments on current account. 7. Government transactions. Government of every country provides the se rvices of embassies offices of high commissioners and other missions abroad and spends a lot on their maintenance. Such expenditure are termed as payments and earning from these maintenance known as receipts. The difference between the payments and receipts of such services forms a part of payments on current account. 8. Miscellaneous. The miscellaneous or invisible items such as commission, advertisement, royalties, patent fees, rent, membership fees etc., are provided to abroad and received from abroad. On the other hand the country takes/uses these items and makes payments. The difference between the receipt and payments of these invisible services forms part of payments on current ac counts. II Capital Account. All types of short term and long term international capital transfers, movement of gold, payments on private account of receipts and payments of government institutional and private loans, interest, profit, grants, etc., form part of capital account. As capital account is concerned with financial transfers. So they have no effect on income, output and employment of the country. Component. Items of Capital Account. The principal items or components of capital account are as follows: 1. Gold movement. Central bank of every country buy and sells gold from abroad. It means that exports and imports of t he gold by the central bank which makes the payments and receipts of amount of gold bought is reflected under” debit items”
and sales of gold are reflected under “ credit side’’. 2. Reserve, Monetary gold and SDR. Government’ foreign currency, assets, gold reserves of Central bank. SDR of the IMF and other similar capital transactions, etc. are included under ‘’ current items’’ and the payments on these transactions are reflected under “ debit items’’.
3. Movement in banking capital. Inflow of banking capital besides central bank is reflected under. ‘’ credit items’’ and outflow of banking besides central bank is reflected under ‘’ debit items’’.
4. Private foreign loan flow. Private sectors of the country received foreign loans from abroad. These receipts of foreign loans are included under ‘’ credit items’’ and such
private sectors of the country also pays the foreign loans to abroad country these repayment of foreign loan is included under. ‘debit items’. 5. Official capital transactions. Public sectors of the country receives foreign loans from international Monetary Fund. These receipts of loans are included under ‘’ Credit items’’ and the public sector al so pays the loans to International Monetary Fund which is included under “ debit items’’.
6. Miscellaneous . Besides the above items, central bank receives other kinds of governmental capital. These types of receipts are also included under ‘’ credit
items’’ and the central bank makes the payments for these governmental capital which are included under “ debit side”.
III. Other Items in the Balance of Payment The remaining items, which cannot be categ orized as current and capital are categorized as other items. These items are: 1.
Errors and omissions. Errors and omissions are likely to creep in due to under reporting, sampling, dishonesty, etc., so an allowance is made for these errors and shown under the head “Errors and Omissions”.
2. Official reserve transaction. Official reserve transactions are carried out by the government or Central Bank with a view to achieve certain economic policy objective. The effect of these transactions on balance of payment and the exchange rate is also taken3into consideration. These transactions are not autonomous. The example of such transaction is change in the domestic country’s official reserve assets. These reserves of the country are held in the
form of foreign currency securities gold and Special Drawing Rights (SDR). An increase in the reserve will appear as debit, because the purchase of assets will cause outflow. DESCRIPTION OF BALANCE OF PAYMENTS Structure of Balance of payment accounting. The important features of the Balance of payment Account is that the International Transactions are recorded on the basis of double entry system. Every transaction has its debit and corresponding credit of the same amount. The presentation of debit and credit items by convention is made by minus and plus. Signs. The debit is denoted by minus (-) and the credit is shown by the (+) signs. Transactions are classified in the following five categories.
CATEGORY –I (Goods and Services Account) Debits (-) A. Import of goods B. Import of services
Credits(-) A. Export of goods B. Export of services
CATEGORY –II (Goods and Services Account) Debits (-) Unilateral Transfers (Gifts) made CATEGORY –III (Long-Term Capital Account)
Credits(-) Unilateral Transfers (Gifts) received
Debits (-) A. Increase in short-term foreign assets owned by private citizens of home country. C. Decrease in long-term foreign assets owned by private citizen and governments.
Credits(-) A. Decrease in short-term foreign assets owned by private citizens of home country. B. Increase in lo0ng-term home country assets owned by foreign private citizens and governments.
CATEGORY –IV (Short-Term private Capital Account) Debits (-) A. Increase in Short-term foreign assets owned by private citizen of home country. B. Decrease in short-term home country assets owned by foreign private citizen.
Credits (+) A. Decrease in Short-term foreign assets owned by the private citizens of home country. B. Increase in short-term home country assets owned by foreign private citizen.
CATEGORY –V (Short-Term Official Capital Account) Debits (-) A. Increase in short-term assets owned by home country Government (official monetary authorities).
Credits (+)
