CHAPTER 7

GOVERNMENT BUDGET AND ECONOMY

 7.1 Concept of Government Budget

 7.2 Objectives of Government Budget
 7.3 Impact of the budget on the economy
 7.4 Components of the Budget
 7.5 Other types of Public Expenditure
 7.6 Difference between Development and Non-Development Expenditure
 7.7 Difference between Direct Tax and Indirect Tax
 7.8 Types of Budget
 7.9 Types of Budget Deficit

7.1 Definition –

Government budget is an annual statement of the receipts and expenditures of the

government as expected over the fiscal year which runs from April 1st to March 31st.
Define a government budget (Delhi 2009)

7.2 Objectives of the Budget –

1) Reallocation of Resources -
a) The government has to reallocate resources in line with social and economic
considerations if the market fails to do so, or does it inefficiently.
b) It tries to direct the allocation of resources in a manner such that there is a balance
between the goals of profit maximization and social welfare.
c) Production of goods which are injurious to health e.g. cigarettes, whisky etc. are
discouraged through heavy taxation. On the other hand, production of socially useful
goods e.g. khadi is encouraged through subsidies, tax concessions, the use of cleaner
energy is encouraged through subsidies etc.
d) Government can directly produce goods and services which are normally ignored by the
private sector due to lack of enough profits.

2) Redistribution of Income and Wealth –

a) The budgetary policy helps to redistributes income and wealth to reduce inequalities and
promote social justice.
b) It does so by spending on social security, subsidies, public work etc.
c) Government can reduce inequalities through its tax and expenditure policy.
d) The government pursues the policy of progressive taxation. It charges higher rate of tax
from higher income groups by imposing higher rate of income tax and higher excise rate
on goods and services purchases by the rich.
 e) Equitable distribution of income and wealth is a sign of social justice which is the
principle objective of any welfare state.

3) Economic Stability –
a) The government tries to prevent business fluctuations and maintain economic stability.
b) Budget is used as an instrument to combat the situations of inflation and deflation.
c) Inflationary gap is corrected by reducing government expenditure and increasing the
revenue. The expenditure is reduced by cutting expenditure on public works programmes,
as well as cutting expenditure on subsidies.
d) In the time of deflation, the government can reduce tax rates and increase its
expenditure to raise the level of aggregate demand in the economy.
e) Government tries to maintain high level employment and price stability.
f) Economic stability induces investment and increases the rate of growth and
development.

4) Management of Public Enterprises –

a) The budgetary policy of the government tries to increase the rate of growth through
public enterprises.
b) Government undertakes commercial activities in the areas of natural monopoly, e.g.
railways, electricity, heavy manufacturing etc.
c) They come under state regulation to prevent monopolistic tendencies which lower social
welfare.
Natural Monopoly
A natural monopoly is a situation where there are economies of scale over a large range of
outputs. A single firm can produce at a lower average cost than many competing firms.
Monopoly productions thus, happen to be the most profitable venture. Industries which are
potential natural monopolies are railways, electricity etc. They usually come under state
regulation because if left unregulated there will be a tendency of the monopolists to curtail
output in pursuit of profit thereby, lowering social welfare

1) How can a government budget help in reducing inequalities of income? (Delhi 2009)
2) Explain any 2 objectives of government budget. (AI 2009)
3) How can a government budget help in reallocation of resources in the economy? Explain.
(Foreign 2009, AI 2010, Delhi 2011, Foreign 2011, Delhi 2012)
4) How can government budget be helpful in altering distribution of income in an economy?
Explain. (Delhi 2010, Delhi 2011, AI 2011, Foreign 2012)
5) Explain the objective of stability of prices of the government budget. (Foreign 2010)
6) Explain the ‘economic stability’ objective of a government budget. (AI 2011, Foreign 2011,
AI 2012)
7)The government decides to give budgetary incentives to investors for making investment in
backward regions. Explain the two possible incentives and the reason for the same.(2015)
7.3 Impact of the budget on the economy-
1) Aggregate fiscal discipline-
It refers to a state of an ideal balance between revenues and expenditures of thegovernment.
It calls for having control over expenditure given the limited revenues of the government.

2) Allocation of resources –
a) The budget affects/impacts the economy at the level of allocation of resources which is
based on social priorities. Taxation and subsidies are used as instruments to discourage
and encourage allocation of resources in certain areas of production.
b) Heavy taxation discourages the allocation of resources in certain areas of production
which are harmful for society.
c) Subsidies on the other hand, encourage the allocation of resources in the areas of social
welfare.
The budget impacts on the economy by means of an effective and efficient delivery of
services by the government.
Effectivenessrefers to the achievement of the set targets through the provision ofgoods and
services.It measures the extent to which the goods and services the government provides achieve
its goals.

Efficiency refers to the cost per unit of goods and services provided. (It refers to the minimum
possible cost in rendering the goods and services)

7.4 COMPONENTS OF BUDGET/STRUCTURE OF BUDGET

The 2 broad components of a budget are -

I) Revenue budget
II) Capital budget
REVENUE BUDGET

REVENUE BUDGET

Revenue Receipts Revenue Expenditure

Tax Revenue Non tax Revenue

Receipts Receipts

Direct Indirect Commercial Administrative Revenue

Tax Revenue
Tax

Fees License Forfeiture Escheat Gifts Fines and

Fees And Penalties
Grants

7.4.1 REVENUE BUDGET -

Revenue budget includes –
A) Revenue receipts
B) Revenue expenditure

A. REVENUE RECEIPTS -

Those money receipts of the government are known as revenue receipts which satisfy two related
characteristics –
1. These receipts do not create any corresponding liability for the government.
Tax receipt for example is revenue receipt because it does not involve any corresponding
liability for the government. Tax is a unilateral or one sided compulsory payments to the
government
2. These receipts do not cause any reduction in assets of the government.
For example, fines paid to the government by the law breakers, license fee, donations
received by the government etc are revenue receipts.

In short revenue receipts of the government are those money receipts which do not either
create a liability or lead to reduction in assets.

Classification of Revenue Receipts -

Revenue receipts are further classified as -
1) Tax Revenue
2) Non Tax Revenue Receipts

1) Tax Revenue-
A tax is a legally compulsory payment made by a person or a firm to the government without
any reference to any benefit the payee may derive from the government.

Taxes can be of 2 types:

a) Direct taxes- These taxes are derived immediately on the property and income of
persons. They are paid directly by the consumers to the state. The burden of direct taxes
cannot be shifted to others. Therefore the persons on whom they are levied have to bear
it. Income tax, interest tax, wealth tax, corporation tax, gift tax are all examples of direct
taxes.
b) Indirect taxes- Indirect taxes are those taxes whose initial burden or impact is on one
person but he succeeds in shifting it to another person. These taxes are levied on goods
and services. They only affect the income and property of persons indirectly, through
their consumption of goods and services e.g. - sales tax, import duty, excise duty,
entertainment tax, service tax etc.

2) Non tax revenue-

Non tax revenue receipts are those which are received from sources other than taxes. They
maybe of the following types –
 a) Commercial Revenue-
 Commercial revenue is revenue received by the government in the form of prices paid for
the government supplied commodities and services i.e. revenues derived by the
government from their public enterprises.
 The government gets revenue in the form of profit from such enterprises as the prices
exceed the cost of production.
 E.g. postage, tolls, Indian railways, electricity etc. Another source of revenue is interest
earned on loans and dividends on investment made by the government.

b) Administrative revenue-
It is the revenue which arises on accounts of the administration function of the
government. The following are the different sources of the administrative revenues-
1) Fees-
It is payment to defray the cost of each recurring service undertaken by the government,
primarily in public interest, but conferring a measurable special advantage on the fee payer. In
other words fee is a payment to the government for the services that it renders to the people e.g.
college fees, passport fees.

Main features of fees are-

i) Fee is a compulsory payment if a person wants to avail of a service.
ii) Fee provides specific benefit to the payer but it also implies general advantage.
iii) Fee is not a payment for commercial service. It is a payment for administrative
and financial services.
iv) Ordinarily amount of fee is equivalent to the cost of services provided

2) License fees-

 The amount that government charges for allowing people to perform a given job, is
called license or permit fees. “License fees are charged to give permission for
something by the government.” Its examples are: driving license, import license.
 There is a difference between fees and license fees.
 A license fee is paid when a person is permitted to do some specific job by the
government. No service is provided to the license holder.
 On the contrary, in case of fee, the payer receives some service from the government.
 When the government is not willing to authorize some persons to do a particular job, it
refuses license to them. By issuing license to liquor vendors, government controls the
sale of liquor.

3) Fines and penalties-

 Fines and penalties are those payments which are made by the law breakers to the
government by way of economic punishment.
 The aim is to force people to be law abiding.
 It is determined by the government in an arbitrary manner, and not on the basis of
administrative cost.
  It is not an important source of revenue of the government.

4) Forfeiture-

Forfeitures of basic security or bonds are penalties imposed by courts for non compliance with
orders or non fulfillment of contract.
Escheat-

It refers to the claim of the government on the property of a person who dies without having any
legal heir or without leaving a will. Such a property has no claimant. State alone has the legal
right over it.

6) Gifts and grants-

 Gifts received by the government are also a source of revenue.

 In the event of some natural calamities like earthquake, floods, famines, war etc. citizens
of the country often give large gifts and donations to the government.
 Such gifts/grants are also received by the government from the rest of the world.
International organizations like WHO, UNESCO etc. also give grants for different
purposes.

B. REVENUE EXPENDITURE -

Revenue expenditures of the government are those expenditures which have the following 2
characteristics:

a) These expenditures do not create assets for the government. For example, expenditure by
the government on old age pensions, scholarships etc. do not create assets of any sort.
b) These expenditures do not cause any reduction of liability of the government. Expenditure
on payment of interest is a recurring expenditure which is treated as revenue expenditure
because it does not reduce liability of the payer and does not add to the assets of the
government.

(Note: Repayment of loans is NOT revenue expenditure as it leads to reduction in liabilities.

It is Capital Expenditure. But payment of interest is revenue expenditure as it does not reduce
liability of the payer nor does it create assets)

In short, revenue expenditure refers to estimated expenditure of the government in a fiscal

year which does not either create assets or cause a reduction in liabilities.
 REVENUE EXPENDITURE
(A Few Important Items)

Interest Expenditure Expenditure

Payments on Subsidies on Defence
7.4.2 CAPITAL BUDGET –

Capital Budget includes –

A) Capital receipts
B) Capital expenditure

A. CAPITAL RECEIPTS –

Those money receipts of the government are known as capital receipts which satisfy two related
characteristics –

a) These receipts create a corresponding liability for the government. Borrowings for
example are capital receipt because it creates liability for the government.
b) These receipts cause reduction in assets of the government. For example, recovery of
loans is a capital receipt as it leads to reduction in assets.

In short capital receipts of the government are those money receipts which either create a
liability or lead to reduction in assets.

Classification of Capital Receipts –

The capital receipts of the government are classified as under-

1) Recoveries of loans-
It includes recovery of loans granted by the central government to state and union territory
governments and other parties. It is a capital receipt because it reduces financial assets of the
government

2) Borrowings and other liabilities-

Borrowing creates liabilities and therefore funds raised from borrowings are treated as capital
receipts. The government borrows money from –
a) The general public also called market loans/ borrowings
b) The Reserve Bank of India
c) The Rest of the World

3) Other Receipts-
a) It includes receipts from other sources except the two listed above, such as
disinvestment.
b) Disinvestment means selling of shares of the public sector enterprises held by the
government. It involves transfer of ownership of public sector enterprises to the private
entrepreneurs.
c) It reduces the assets of the government and therefore the money receipts are treated as
capital receipts.
 CAPITAL RECEIPTS

Recovery of Borrowings and Other Receipts

loans Other Liabilities (Disinvestment)

B. CAPITAL EXPENDITURE

Those expenditures of the government are capital expenditures which-

a) Create assets for the government. For example equity of the domestic or multinational
corporations purchased by the government maybe citied as an example
b) Cause reduction in liabilities of the government. Repayment of loans certainly reduces
liability of the government. Accordingly this is to be treated as capital expenditure
In short capital expenditure refers to the estimated expenditure of the government in a
fiscal year which either creates assets or causes reduction in liabilities.

Examples of such expenditure are-

 Purchasing land and building
 Expenditure on machinery and equipment
 Investment in shares
 Loans advances to state and union territory government, government companies and
other parties.

CAPITAL EXPENDITURE
(A Few Examples)

Purchasing Expenditure on Investment in Loans by Central

Land and Machineries Shares Government to
Building and Equipments the State
governments

1) Why are borrowings a capital receipt? (Delhi 2009)

2) Why is repayment of loan a capital expenditure? (Delhi 2009)
3) Why are taxes received by the government not capital receipts? (AI 2009)
4) Distinguish between revenue receipts and capital receipts in a government budget. Give examples in
each case. (AI 2012, Foreign 2009, Delhi 2010)
5) Distinguish between revenue expenditure and capital expenditure. (Foreign 2009, AI 2010, Delhi
2012, Foreign 2012)
7.5 Other
6) Define Types
a tax. of Public
(AI 2010, DelhiExpenditure
2012) -
7.5.1 Plan and non-plan expenditure
7) Give 2 examples of non-tax revenue. (Foreign 2010)
8) Explain the 2 components of government budget. (Foreign 2010)
Plan Expenditure –

Plan expenditure refers to that public expenditure which represents current development and
investment outlays that arise. In other words it refers to that expenditure which is incurred by
the government to fulfill its planned development programmes. The assistance provided by
the central government for the plans of states and union territories is also a plan expenditure e.g.
expenditure on agriculture, power, communication, industry, transport, health and education,
atomic energy and public utilities.

Non plan expenditure -

This refers to all government expenditures which are beyond the scope of its planned
development programmes.
Expenditure other than the expenditure related to the current 5 year plan is treated as non plan
expenditure e.g. expenditure on maintenance of assets, expenditure in case of natural calamities
etc.

7.5.2Development and non-development expenditure-

Development expenditure-
Expenditure on activities which are directly related to economic and social development of
country is called development expenditure.

It includes loans given by the government to non departmental enterprises (like Air India, Indian
Airlines) , local bodies and other parties, expenditure on agriculture, industry, roads, canals,
generation of power, social welfare, scientific research etc.

Non development expenditure-

Expenditure on essential general services of the government is called non development

expenditure. It includes expenditure on defence, administration, collection of taxes, interest
payments, pension payments, famine relief, subsidies on food etc.
 DEVELOPMENT EXPENDITURE

Plan expenditure on Plan expenditure on Non Loans by the

Departmental Departmental Enterprises Government to Non
Enterprises of the of the Government e.g. Air Departmental
Government e.g. India, Indian Airlines Enterprises for the
railways, post and purpose pf development
telegraph

NON DEVELOPMENT EXPENDITURE

Expenditure Expenditure Expenditure Loans for Subsidies

on on Interest on Tax non on food
Defence payment by Collection by development and
the the purpose controlled
cloth for
Government Government
the
poorer
section of
society

7.6 Differences between Development and Non Development Expenditure

Development Expenditure Non Development Expenditure

1)Expenditure on activities which are 1)Expenditure on essential general services
directly related to economic and social of the government is called non
development of country is called development expenditure
development expenditure.

2) It adds to the flow of goods and services
in the economy
3)Expenditure on agriculture, industry,
roads, canals, generation of power, social
welfare, scientific research etc are
examples of development expenditure
2) It does not add to the flow of goods and
services in the economy
3) Expenditure on defence, administration,
collection of taxes, interest payments,
pension payments, famine relief, subsidies
on food etc. are examples of non
development expenditure
 7.7 Differences between Direct Tax and Indirect Tax

Points of Difference Direct Tax Indirect Taxes

1) Final Burden
2) Shifting of tax
3) Progressiveness
4) Examples
1) The final burden of direct
taxes falls on the person
on whom the tax is levied
and he makes the payment
to the government
2) Direct taxes cannot be
shifted to other persons
3) Direct taxes are
generally progressive.
Their real burden is more
on the rich
Income tax, interest tax,
wealth tax, corporation tax,
gift tax are all examples of
direct taxes
1) Indirect taxes are paid to
the government by one
person but their burden is
borne by another person
2) Indirect taxes can be
shifted to other persons
3) Indirect taxes are
generally regressive. Their
real burden is more on the
poor
Sales tax, import duty,
excise duty, entertainment
tax, service tax etc. are all
examples of indirect taxes

1) Why is income tax a direct tax? (Foreign 2009)

2) Define direct tax. (AI 2012)
3) Distinguish between direct tax and indirect tax. (Delhi 2009, Delhi 2010, Foreign 2010,
Foreign 2011,
4) Giving reasons classify the following into direct and indirect tax: (i) Wealth Tax (ii) Value
Added Tax (Delhi 2010)
5) Give 2 examples of direct tax. (AI 2010)
6) Define indirect tax. (Foreign 2012)

7.8 TYPES OF BUDGET –

1) Surplus Budget –

a) A surplus budget is one where the estimated revenues are greater than the estimated
expenditures of the government.
b) Suppose the only source of revenue for the government is taxes. An increase in taxlowers
the consumption. Therefore the aggregate demand also falls down by an amount equal to
MPC times the tax.
c) Government expenditure leads to an increase in the aggregate demand by an equal
amount.
 d) Since taxes exceed government expenditure, the decrease in aggregate demand is greater
than the increase.
e) Hence, the net effect is to reduce the aggregate demand.
f) As a result of this, surplus budget is advocated in the case of excess demand when there is
requirement to lower the aggregate demand
2) Balanced Budget -

a) A balanced budget is one where estimated revenues are equal to the estimated
expenditures of the government.
b) An increase in taxlowers the aggregate demand by an amount equal to MPC times the
tax.
c) On the other hand, government expenditure leads to an increase in the aggregate demand
by an amount equal to the expenditure.
d) Therefore the decrease in aggregate demand is less than the increase in aggregate
demand
e) As a net effect, aggregate demand increases by a slight amount.
f) This type of budget is advocated when the economy is close to achieving full employment
equilibrium which can thus be achieved.

3) Deficit Budget -

a) A deficit budget is one where the estimated revenues are less than the estimated
expenditure. In other words government expenditure is greater than government receipts.
b) An increase in taxlowers the aggregate demand by an amount equal to MPC times the
tax.
c) On the other hand, government expenditure leads to an increase in the aggregate demand
by an amount equal to the expenditure.
d) Therefore the increase in aggregate demand is greater than the decrease.
e) The net effect is, the aggregate demand increases by a marked extent.
f) This type of budget is advocated in case of deficient demand in order to increase the
aggregate demand.

Does Balanced Budget leave Aggregate Demand unaffected in the economy?

No. This is how it happens → Balanced Budget means Government Revenue = Government
Expenditure

Assume tax is the only source of revenue. Tax or Rs 100 = Expenditure of Rs 100 Expenditure
of Rs 100 increases AD by an equal amountof Rs 100 Tax of Rs 100 does not decrease AD
by Rs 100. Tax of Rs 100 decreases disposable income of the people by Rs 100

If MPC is assumed to be 0.5 then reduction in disposable income by Rs 100 would reduce
consumption (expenditure) by 0.5 x 100 = Rs 50 which is MPC times the tax. (or MPC times
decrease in income). Thus because of tax of Rs 100, AD would decrease by Rs 50 only.

Net increase in AD will therefore be equal to: Increase in AD due to government expenditure –
Decrease in AD due to tax
Rs 100 – Rs 50 = Rs50 Thus balanced budget is expected to increase AD

Accordingly it is a good measure to increase AD when economy is NOT at full employment

equilibrium but very close to it.
(Ability Zone – High Order Thinking Skill Question)
7.9 TYPES OF BUDGET DEFICIT –

Budget Deficit refers to a situation when budget expenditures of the government are greater than
the budget receipts.

It is the excess of total expenditure (Revenue expenditure and Capital expenditure) over
and above the total receipts (Revenue receipts and Capital receipts) of the government.
With reference to the budget of the government of India there are three types of budget deficit.
They are –
1) Revenue Deficit
2) Fiscal Deficit
3) Primary Deficit
1) Revenue Deficit -

Revenue Deficit is the excess of revenue expenditure over revenue receipts.

It does not include items of Capital receipts and Capital expenditure

Revenue Deficit = Revenue Expenditure – Revenue Receipts, when RE > RR

2) Fiscal Deficit -

Fiscal deficit is the excess of total expenditure (Revenue + Capital) over total receipts
(Revenue + Capital other than Borrowings)

Fiscal Deficit = Total Expenditure (Revenue + Capital) – Total Receipts other than borrowings
(Revenue + Capital receipts other than borrowings)

Fiscal deficit is in fact equal to the total borrowings and other liabilities of the government.

Capital Receipts includes 3 items

1) Recovery of loans
2) Other receipts (mainly disinvestment)
3) Borrowing and other liabilities
To find out fiscal deficit we deduct from total
expenditure items (1) and (2). So that item (3)
is reflected

3) Primary Deficit -

Primary Deficit is the difference between Fiscal Deficit and interest payment.

Primary Deficit = Fiscal Deficit – Interest Payment

Or
Fiscal Deficit = Primary Deficit + Interest payment

Fiscal deficit shows the borrowing requirements of the government to meet the expenditures
inclusive of interest payment.

Primary deficit shows the borrowing requirements of the government to meet the expenditures
exclusive of interest payment

(Note: The huge extent of interest payment can be estimated from the fact that while the fiscal
deficit in the Budget 2004 -2005 was 29% of the total budget expenditure, primary deficit was
only 4.4% of the total budget expenditure. Thus implying that fiscal deficit to the extent of 29%
was due to payment of interest in the budget 2003 – 2004. Payment of interest shows the extent
to which we are already in debt trap)
 Zero primary deficit means the government has to resort to borrowing only to fulfill its
earlier commitments of interest payments. It is not adding to the existing loans for the purpose
other than meeting its existing obligation of interest payment. It is a sign of fiscal discipline or
fiscal responsibility on the part of the government.

Re Revenue Deficit Fiscal deficit Primary deficit

Revenue Deficit is the excess Fiscal deficit is the excess It is difference between
of revenue expenditure over of total expenditure fiscal deficit and interest
revenue receipts. (Revenue + Capital) over payment
total receipts (Revenue +
Capital other than
Borrowings)
It reflects the need for It reflects the extent of It reflects the extent of
borrowings by the government borrowings by the borrowings by the
to manage its budgetary government when interest government when interest
expenditure. payment is accounted for. payment is not accounted
for.
It indicates the dependency on It indicates total It indicates fiscal
loans in near future borrowings of the irresponsibility of the
government government

1) Distinguish between revenue deficit and fiscal deficit. (Delhi 2009)

2) Give the meaning of revenue deficit, fiscal deficit and primary deficit. (AI 2009)
3) How is primary deficit calculated? (Delhi 2010)
6) What is meant by revenue deficit? (AI 2010)
7) Distinguish between fiscal deficit and primary deficit. (AI 2010)
8) Explain the concept of primary deficit in a government budget.

Example to Show the Estimation of Various Types of Budget Deficits

Items Rs (Crores)
1) Revenue Receipts 3,09,322
2) Revenue Expenditure 3,85,493
3) Capital Receipts 1,68,507
4) Capital Expenditure 92,336
5) Total Receipts (1 + 3) 4,77,829
6) Total Expenditure (2 + 4) 4,77,829
7) Recoveries of loans and other receipts 31,100
8) Borrowings and other liabilities 1,37,407
9) Interest payment 1,29,500

1) Revenue Deficit

Revenue Deficit = Revenue Expenditure – Revenue Receipts

= Rs 3, 85,493 Crores – Rs 3, 09,322 Crores = Rs 76,171 Crores

2) Fiscal Deficit

Fiscal Deficit = Total Expenditure (Revenue + Capital) – Total Receipts other than
borrowings (Revenue + Capital receipts other than borrowings)
= 4, 77,829 – 4, 77,829 + 1, 37,407 = Rs 1, 37,407 Crores
OR
Fiscal Deficit = Borrowings and other liabilities
3) Primary Deficit

Primary Deficit = Fiscal Deficit – Interest Payment

= Rs 1, 37,407 Crores – Rs 1, 29,500 Crores = Rs 7,907 Crores

Question Bank

1) A government budget shows a primary deficit of Rs 4,400 Crores. Expenditure on

interest payment is Rs 400 Crores. How much is the fiscal deficit
Answer: Fiscal deficit = Primary deficit + Interest payment
= 4,400 + 400 = Rs 4,800 Crores

2) In a government budget, Revenue deficit is Rs 50,000 Crores. Borrowings are Rs 75,000

Crores. How much is the Fiscal deficit
Answer: Fiscal deficit = Borrowings
= Rs 75,000 Crores

3) Calculate budgetary deficit from the following

1) Revenue Expenditure Rs 60.000 Crores
2) Capital Expenditure Rs 30,000 Crores
3) Revenue Receipts Rs 50,000 Crores
4) Capital Receipts Rs 25,000 Crores
(Ans: Rs 15,000 Crores)
4) Calculate Fiscal Deficit
1) Total Expenditure Rs 80,000 Crores
2) Total Receipts Net of Borrowings Rs 72,000 Crores
(Ans: Rs 8,000 Crores)

5) It is said that the fiscal deficit is a reflection on government borrowing. How?

Answer: Fiscal deficit refers to excess of government expenditure over its receipts, but exclusive
of borrowings. Thus fiscal deficit points to borrowing requirements of the government.

6) Is deficit budget a sign of government inefficiency?

Answer: No, in fact budgetary deficit may be a planned strategy of the government during
periods of depression when the government needs to accelerate the pace of expenditure in the
economy.

7) What are the Sources / Ways of financing Deficit –

Answer:
1) Monetary Expansion -It means printing new notes to the extent of deficit. It involves
government borrowings from the Central Bank (RBI). The government uses this money to
finance the deficit.
2) Borrowing from the Public –The second method of financing the deficit is borrowing by the
government from the public through market loans etc.

8) Categorize the following into Revenue expenditure and capital expenditure

(Give Reasons)
a) Subsidies – Revenue expenditure because it does not reduce liability or does not increase
the assets of the government.
b) Grants given to State Governments - Revenue expenditure because it does not reduce
liability or does not increase the assets of the government.
(As a matter of convention, all grants given by Central Government to the State Governments
and the governments of Union Territories are treated as Revenue Expenditure, even when
some grants may result in creation of assets)
c) Repayment of loans – Capital expenditure because it leads to reduction in liability
d) Construction of School building – Capital expenditure because it adds to the asset of the
government
e) Payment of Interest – Revenue expenditure because it does not reduce liability or does not
increase the assets of the payer.
f) Expenditure on purchasing land - Capital expenditure because it adds to the asset of the
government.
g) Loans by Central Government to State Government - Capital expenditure because it
adds to the asset of the government.

9) Categorize the following into Revenue receipts and capital receipts

(Give Reasons)
a) Recovery of loans – Capital Receipts as it leads to reduction in assets.
b) Corporation Tax – Revenue receipt as it neither creates liability nor leads to reduction in
assets
c) Dividends on investment made by the government - Revenue receipt as it neither creates
liability nor leads to reduction in assets
d) Sale of public sector undertaking - Capital Receipts as it leads to reduction in assets
e) Borrowings from the market/ Reserve Bank – Capital Receipts as it increases the liability
f) Disinvestment – Capital Receipt as it reduces the assets of the government.
g) Gifts and Grants received by the Government -Revenue receipt as it neither creates
liability nor leads to reduction in assets

10) What is a budget OR Define a government budget

11) What is meant by the fiscal year in India
12) Name the 2 parts of a government budget
13) Define (i) Deficit budget (ii) Surplus budget (iii) Balanced budget
14) Define – (i) Revenue budget (ii) Capital budget
15) What are the objectives of a budget
16) What is the difference between Revenue budget and Capital budget
17) What is meant by Revenue receipts? Explain the components of revenue receipts of the
government
18) Define (i) Tax (ii) Escheat (iii) License
19) Distinguish between (i) Direct and Indirect tax (ii) Development and
20) Non development expenditure (iii) Planned and Unplanned expenditure
21) What do you mean by Capital receipts? What are the main components of capital receipts?
22) What do you mean by Capital expenditure? What are the main components of capital
expenditure?
23) State the basis of classifying government receipts into revenue receipts and capital receipts.
Give examples of each.
24) State the basis of classifying government expenditure into revenue expenditure and capital
expenditure. Give examples of each.
25) What is the significance/ implication of deficit budget?
26) What is the significance/ implication of surplus budget?
27) What is the significance/ implication of balanced budget?
28) Define – (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit (iv) Budget deficit
29) How can a deficit be financed
30) Name the deficit that is equal to the total borrowings and other liabilities of the government
31) Does the balanced budget leave the aggregate demand unaffected?
32) Name the budget that is advocated in case of excess demand when there is requirement to
lower the aggregate demand. Give reasons for your answer
33) Name the budget that is advocated in case of deficient demand when there is requirement to
increase the aggregate demand. Explain your answer
34) Name the budget that is advocated when the economy is close to achieving full employment
equilibrium and when there is need to increase the aggregate by a little amount. Explain your
answer.
35) Balanced budget is recommended as a useful policy instrument when the economy is close to
the level of full employment, how?
 SUMMARY:

Characteristics of Revenue Receipts and Capital Receipts

Revenue Receipts Capital Receipts
These receipts do not create any These receipts create a corresponding
corresponding liability for the government. liability for the government.
Tax receipt for example is revenue receipt Borrowings for example are capital receipt
because it does not involve any corresponding because it creates liability for the government.
liability for the government

These receipts do not cause any reduction in
assets of the government.
For example, fines paid to the government by
the law breakers, license fee, donations
received by the government etc are revenue
receipts
These receipts cause reduction in assets of
the government.
For example, recovery of loans is a capital
receipt as it leads to reduction in assets

Characteristics of Revenue Expenditure and Capital Expenditure

Revenue Expenditure
Do not create assets for the government. For
example, expenditure by the government on old
age pensions, scholarships etc. do not create
assets of any sort.
Capital Expenditure
Create assets for the government.
For example ,equity of the domestic or
multinational corporations purchased by the
government maybe citied as an example

Do not cause any reduction of liability of the
government.
For example, expenditure on payment of interest
is a recurring expenditure which is treated as
revenue expenditure because it does not reduce
liability of the payer and does not add to the
assets of the government
Cause reduction in liabilities of the
government.
For example, repayment of loans certainly
reduces liability of the government. Accordingly
this is to be treated as capital expenditure
 Characteristics of Revenue Receipts and Revenue Expenditure
Revenue Receipts Revenue Expenditure
These receipts do not create any Do not create assets for the government.
corresponding liability for the government. For example, expenditure by the government on
Tax receipt for example is revenue receipt old age pensions, scholarships etc. do not create
because it does not involve any corresponding assets of any sort.
liability for the government.
These receipts do not cause any reduction in Do not cause any reduction of liability of the
assets of the government. government.
For example, fines paid to the government by the For example, expenditure on payment of interest
law breakers, license fee, donations received by is a recurring expenditure which is treated as
the government etc are revenue receipts revenue expenditure because it does not reduce
liability of the payer and does not add to the
assets of the government

Characteristics of Capital Receipts and Capital Expenditure

Capital Receipts Capital Expenditure
These receipts create a corresponding liability Create assets for the government.
for the government. For example ,equity of the domestic or
Borrowings for example are capital receipt multinational corporations purchased by the
because it creates liability for the government government maybe citied as an example

These receipts cause reduction in assets of the
government.
For example, recovery of loans is a capital receipt
as it leads to reduction in assets
Cause reduction in liabilities of the
government.
For example, repayment of loans certainly
reduces liability of the government. Accordingly
this is to be treated as capital expenditure