Government and the Budget
A consolidated financial statement prepared by the government detailing expected public expenditure and public revenue during a financial year (1st April to 31st March). It outlines the structure of receipts (Revenue & Capital), expenditures, types of deficits, and the broader objectives of fiscal policy.
1. Structure of the Budget
The budget is fundamentally divided into two parts: Receipts and Expenditures.
Government Receipts
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1. Revenue Receipts:
Current incomes that neither create liabilities nor cause any reduction in assets.
- Tax Revenue: Direct Taxes (Income tax) & Indirect Taxes (Sales tax, Excise).
- Non-Tax Revenue: Commercial revenue, administrative fees, fines, escheat, profits of PSUs.
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2. Capital Receipts:
Receipts that either create liability or cause reduction in the assets.
- Borrowings (Domestic & External)
- Recovery of Loans
- Disinvestment (Resale of shares of PSUs)
Government Expenditure
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1. Capital vs. Revenue:
- Capital Exp: Creates assets (schools, roads) or reduces liability (repayment of loan).
- Revenue Exp: Neither creates assets nor reduces liability (salaries, maintenance, free health services).
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2. Plan vs. Non-Plan:
- Plan Exp: Incurred according to priorities laid down in five-year plans.
- Non-Plan Exp: Routine expenditures (police, defence, judiciary, water supply).
2. Direct vs. Indirect Taxes
A tax is a legal compulsory payment by people and firms to the government without reference to any direct benefit in return.
| Basis | Direct Taxes | Indirect Taxes |
|---|---|---|
| Impact | Levied on individuals and firms (e.g., Income Tax, Wealth Tax). | Levied on goods and services (e.g., Value Added Tax, Excise Duty, Customs). |
| Shift of Burden | Burden cannot be shifted. Impact and incidence are on the same person. | Burden can be shifted to buyers by increasing price. Impact and incidence are on different persons. |
| Nature | Generally progressive in nature. | Generally proportionate in nature. |
| Coverage | Limited reach as they do not reach all sections of society. | Wide coverage as they affect all sections of society who consume goods. |
3. Types of Budget Deficits
When government expenditure exceeds its receipts, it runs a deficit budget. Deficits indicate borrowing requirements.
Revenue Deficit
Excess of total revenue expenditure over total revenue receipts.
- Revenue Receipts
Fiscal Deficit
Excess of total budget exp. over total receipts excluding borrowings. Shows total borrowing requirements.
- Total Receipts (excluding borrowings)
Primary Deficit
Fiscal deficit minus interest payments. Shows borrowing needs excluding interest obligations.
- Interest Payments
The government finances deficits through three main ways:
- Borrowing from Public: Preferred method; does not increase money supply or prices.
- Withdrawing Cash Balances from RBI: Increases money supply and domestic prices.
- Borrowing from RBI/Foreign Govts: Also increases money supply and domestic prices.
4. Budgetary (Fiscal) Policy & Objectives
Fiscal policy involves raising government revenue (taxation) and increasing expenditure to meet socio-economic goals.
- 1. Promote Economic Growth: Setting up heavy industries (steel, fertilizers) and infrastructure (roads, railways, airports) that private sectors usually avoid due to huge investment requirements.
- 2. Reduce Inequalities: Taxing the rich more and spending more on the poor. Providing employment opportunities to help them earn.
- 3. Provide Employment: Setting up PSUs, giving subsidies/tax holidays to private sectors, encouraging cottage industries, and undertaking public works (roads, bridges).
- 4. Price Stability: Regulating supplies via ration and fair price shops. Subsidizing essential services (gas, water, transport) to make them affordable.
- 5. Correct BOP Deficit: Discouraging imports (though less popular now due to free trade) and encouraging exports via subsidies and incentives.
- 6. Effective Administration: Incurring expenditures on police, defence, legislatures, and judiciary to maintain law and order.