Indian Economy - Government Budget

Introduction

• In a mixed economy, Government plays an important role.

• On certain things, the government has an exclusive right, such as national defence, roads, government administration, etc. (these are known as public goods).

• Government’s allocation function relates to the provision of public goods and services by agencies of the government.

• Through its tax and expenditure policy, government attempts to bring about a distribution of personal income of households in a manner that is considered just and fair. It taxes the rich and designs schemes which benefits the poor.

Annual Financial Statement

• According to the Article 112 of the Indian Constitution, the Government at the centre needs to present annual financial statement before the Parliament. It is a statement of estimated receipts and expenditures of the Government of India in respect of each financial year, which runs from 1 April to 31 March.

• The Annual Financial Statement is also the main Budget document and is commonly referred to as the Budget Statement. The different types of budgets included in this are as follows −

  • Revenue Budget
  • Capital Budget

Revenue Budget

• The Revenue Budget illustrates the −

  • The Revenue (current) receipts (of the government) and

  • The Revenue expenditure (that can be met from these receipts).

Revenue Receipts

• Revenue receipts are receipts of the government which are non-redeemable, i.e., they cannot be reclaimed from the government.

• Revenue receipts are categorized as −

  • Tax Revenue.

  • Non-tax Revenues.

• Tax revenues consist of the proceeds of the taxes and other duties levied by the central government.

• Tax revenues are further classified into direct taxes (levied directly from the individuals as income tax) and indirect taxes (levied on goods and products within the country).

• Corporation tax contributes the largest share in revenue receipts, followed by income tax.

• Non-tax revenue of the central government largely comprises of −

  • Interest receipts on account of loans by the central government.

  • Dividends and profits on investments made by the government.

  • Fees and other receipts for services rendered by the government.

  • Cash grants-in-aid from foreign countries and international organizations.

Revenue Expenditure

• On the other hand, Revenue Expenditure largely includes −

  • The expenses incurred for the normal functioning of the government departments and various services.

  • Interest payments on debt incurred by the government.

  • Grants those are given to the state governments and other parties.

• Budget documents classify total expenditure into plan and non-plan expenditure.

• The plan revenue expenditure includes the central Plans (the Five-Year Plans) and central assistance for State and Union Territory plans.

• Non-plan expenditure includes interest payments, defence services, subsidies, salaries, and pensions.

• Subsidies are important policy instruments, destined to promote welfare in the society.

Capital Budget

• The Capital Budget is an account of the assets as well as liabilities of the central government; it takes into consideration changes in capital.

• The capital account is further categorized as follows −

  • Capital Receipts
  • Capital Expenditure (of the government).

Capital Receipts

• Capital Receipts include all those receipts of the government, which create liability or reduce financial assets.

• Main items of capital account are loans raised by the government from −

  • The public, which is known as market borrowings.

  • From the Reserve Bank and commercial banks.

  • Other financial institutions through the sale of treasury bills.

  • Loans received from the foreign governments and the international organizations.

  • Recoveries of the loans granted by the central government.

• Some other items of capital account are −

  • Small savings – such as Post-Office Savings Accounts, National Savings Certificates, etc.)

  • Provident funds and net receipts obtained from the sale of shares in Public Sector Undertakings (PSUs.

Capital Expenditure

• Capital Expenditure includes the expenditures of the government, which result in the creation of physical or financial assets or reduction in financial liabilities.

• Examples of capital expenditure are as follows −

  • Acquisition of land, building, machinery, equipment, investment in shares, and

  • Loans and advances by the central government to the governments of state and union territory, PSUs and other parties.

Budget Deficit

• When a government spends more than it receives by the way of revenue, it is known as the budget deficit.

• The difference between revenue expenditure and revenue receipts is known as the revenue deficit.

• The difference between the government’s total expenditure and its total receipts excluding borrowing is known as the fiscal deficit.

• The growth of revenue deficit as a percentage of fiscal deficit points to a deterioration in the quality of government expenditure involving lower capital formation.

• Government deficit can be reduced by an increase in taxes or/and reduction in expenditure.

• Public debt is burdensome if it reduces the future growth in terms of output.