INDIAN ECONOMY FOR UPSC

PUBLIC FINANCE & FISCAL

POLICY PART 1

Nihit Kishore
nihit.kishore@gmail.com
+91-9654364250
 TODAY’S AGENDA
• What is Public Finance
• What is Fiscal Policy
• What is Budget
• Objectives of a Government Budget
• Budgeting Procedure in India (Art 112 – Polity)
• Different Types of Government Budget
• Deficit Financing & Objectives
• Types of Budgeting System
• Issues & Reforms for Budgetary Process in India
 WHAT IS PUBLIC
FINANCE ?
• Public Finance is the study of the role of the
government in the economy.
• It is the branch of economics which assesses the
government revenue and government
expenditure of the public authorities and the
adjustment of one or the other to achieve
desirable effects and avoid undesirable ones.
WHAT IS FISCAL
POLICY ?
• It is the means by which a government adjusts its
spending levels and tax rates to monitor and
influence a nation’s economy. It is the sister
strategy to Monetary Policy.
• Typically a government has a desire to maintain
steady prices, an employment level & a growing
economy. If any of these areas are out of sorts,
some type of fiscal policy may be in order.
• Eg. Recent Finance Ministry Initiatives

Fiscal Stimulus - An increase in public spending or a reduction in the level of taxation that
might be performed by a government in order to encourage and support economic growth.
 WHAT IS BUDGET ?
• A Government budget is an Annual Financial Statement (Art 112) showing item wise estimates of
expected revenue and anticipated expenditure during a fiscal year (Fiscal Year 2019-20 - 1st April
2019 – 31st March 2020)

Annual Financial Statement has the following heads

• Statement I – Consolidated Fund of India [Receipts and Expenditure: Revenue Account; Receipts and
Expenditure: Capital Account]
• Statement IA – Expenditure charged on the Consolidated Fund of India
• Statement 2 – Contingency Fund of India
• Statement 3 – Public Accounts of India [Receipts and Expenditure]
• Receipts & Expenditure of Union Territories without Legislature.
 Reallocation of Resources
Reducing Regional Disparities • Taxation & Subsidies
• Directly Producing Goods
& Services

Objectives
Economic Stability of a Govt Economic Growth
Budget

Management of Public Enterprises Reducing Inequalities in Income & Wealth

 BUDGETING PROCEDURE IN INDIA
Economics Aspect
• Preparation of the Budget (starts in Sep/Oct)
Dept of Eco Affairs (MoFinance)
• Presentation of the Budget (1st Feb
& Eco Survey – 1 day before)
• Enactment of the Budget ( Parliament Approval
• Execution/Implementation of the Budget
• Auditing of The Budget ( Committees)
Polity Aspect (Art 112)
• Introduction of the Budget in Lok Sabha
• General Discussion (3-4) days
• Scrutiny by Dept. Related Standing Committees
• Voting on Demand for Grants
• Passing of Appropriation Bill (Expenditure)
• Passing of Finance Bill (Income)
 DIFFERENT TYPES OF GOVERNMENT BUDGET
• Budgets are of three types: balanced, surplus and deficit budgets
(a) Balanced Budget: Estimated Govt. Receipts = Estimated Govt. Expenditure
Merits: (i) It ensures financial stability and (ii) It avoids wasteful expenditure.
Demerits: (i) Process of economic growth is hindered and (ii) Scope of undertaking welfare activities
is restricted.
(b) Surplus Budget: Estimated Govt. Receipts > Estimated Govt. Expenditure *Ideal for Developed
In times of severe inflation, which arises due to excess demand, a surplus budget is the appropriate
budget. But in situation of deflation and recession, surplus budget should be avoided.
(c) Deficit Budget: Estimated Govt. Expenditure > Estimated Govt. Receipts
Merits: (i) It accelerates economic growth and (ii) It enables to undertake welfare programmes of the
people, (iii) It is a cure for deflation as it checks downward movement of prices
Demerits: (i) It encourages unnecessary and wasteful expenditure by the government, (ii) It may lead
to financial and political instability, (iii) It shakes the confidence of foreign investors
 DEFICIT FINANCING
• Deficit Financing is defined as financing the budgetary deficit through public loans and creation of new money.

Former Planning Commission of India has defined deficit financing as;

"The direct addition to gross national expenditure through budget deficits, whether the deficits are on capital or on revenue account.”

Sources of Deficit Financing in India

1. Government withdraws money from its cash deposited in the Reserve Bank.

2. Borrows loan from the central bank and commercial banks and even state governments through Ad-hoc Treasury Bills.

3. Borrows from the general public in the form of Bonds and other securities.

4. Orders the RBI to print new currency notes. (Vicious Cycle)

Impacts of the Deficit Financing on the country

• Increase in inflation due to the increase in the supply of money in the economy.

• Decrease in average consumption level due to higher inflation.

• Adverse Impact on Saving:- Deficit financing leads to inflation and inflation affects the habit of voluntary saving adversely. In fact it is
not possible for the people to maintain the previous rate of saving due to rising prices.

• Adverse Impact on Investment: - Deficit financing effects investment adversely. When there is inflation in the economy trade
unions/employees demand higher wages to survive. If their demands are accepted it increases the cost of production which de-
motivates the investors.

• +ve – Govt usually borrows from RBI – Interest Paid to RBI actually comes back to the govt. in form of profit
 OBJECTIVES OF DEFICIT FINANCING
i. To finance defense expenditures during war
ii. To lift the economy out of depression so that incomes, employment, investment, etc., all rise
iii. To activate idle resources as well as divert resources from unproductive sectors to productive
sectors with the objective of increasing national income and, hence, higher economic growth
iv. To raise capital formation by mobilizing forced savings made through deficit financing
v. To mobilize resources to finance massive plan expenditure
vi. For granting subsidies
vii. Increase in aggregate demand
viii. Payment of Interest
ix. To overcome losses of Public Sector Enterprises
x. To Implement Anti-Poverty Programmes
If the usual sources of finance are, thus, inadequate for meeting public expenditure, a government may
resort to deficit financing.
TYPES OF BUDGETING SYSTEM
ISSUES & REFORMS FOR BUDGETARY PROCESS
IN INDIA
PREVIOUS YEAR QUESTIONS PRELIMS
 AGENDA FOR NEXT CLASS

• Components of Budget – Capital & Revenue

• Types of Deficits
• Fiscal Consolidation
• F.R.B.M Act 2003
• Current News
• Practice Questions

Thank You