The Arts Academy

Economics
Chapter 8. Public finance in India
By Anuja Inamdar

Q.1 Distinguish between.

1. Special assessment Special levy

1. Payment made by the citizens of a 1. Charges imposed the public
particular locality in exchange for authorities on the consumption of
certain specific facilities given to them those commodities, the consumption
by the public authorities is known as of which is harmful to the health and
Special assessment. well being of the citizens is called
Special levy.
2. Charges imposed by local bodies 2. Duties levied on opium, wine
on the residents of particular area for certain drugs and other kinds of
providing special facilities of water, intoxicants.
roads, power etc.
3. Objective of collecting special 3. Objective of imposing special levies
assessment is to earn revenue. on certain commodities is to
discourage to consumption of
harmful commodities.
4. This is not in the form of fines and 4. These may be in the form of fines
penalties. and penalties.

2. Development expenditure and Non – development expenditure

Development expenditure Non development expenditure
1. The government expenditure 1. The government expenditure
which gives productive impact which does not yield any direct
is called development productive impact, is called Non
expenditure. development expenditure.
2. Development expenditure 2. Non-development
results in the generation of expenditure does not help to
employment, an increase in increase employment or
production etc. production level.
3. Expenditure on Education, 3. Administration cost, war
industrial developmental expenses etc. are examples of
expenditure. non- development expenditure.

3. Public finance and Private finance

Public finance Private finance

 1. Public finance refers to income 1. Private finance refers to income
and expenditure of public and expenditure of individual and
authorities. private sector organisations.
2. The objective of public finance 2. The objective of private finance
is to offer maximum social is to fulfil private interest.
advantage.
3. Credit availability is more to 3. Credit availability is limited to
increase public finance. increase private finance.
4. The supply of public finance is [Link] supply of private finance is
more elastic. less elastic.
5. In case of public finance, 5. In case of private finance, an
government first determines the individual considers income first
volume and different ways of its and then determines the volume of
expenditure. expenditure.

4. Government revenue and Government expenditure

Government revenue Government expenditure
1. Government income refers to the 1. Government expenditure refers to
revenue of the government from the expenditure by government to
different sources including tax perform various functions and duties.
revenue, non-tax revenue,
administrative revenue etc.
2. Example, tax revenue including 2. Example, Revenue expenditure on
Direct and Indirect tax. health, education, defence and
administration.
3. Non tax revenue includes profit 3. Capital expenditure on roads,
from government enterprise, railways, dams, machinery and
administrative revenue like fees, fines public enterprise etc.
and penalties etc.
4. Generally government income 4. Government expenditure leads to
results in transfer of purchasing transfer of purchasing power from
power from people to government. government to people.
5. Surplus income with government 5. Massive expenditure indicates
indicates sound financial more welfare to people.
background.

5. Direct tax and Indirect tax

Direct tax Indirect tax
1. It refers to that tax which is paid 1. It refers to that tax which is
by a person on whom it is legally imposed on one person but paid by
imposed. the other.
2. A direct tax is paid by a person on 2. Indirect tax is imposed on one
whom it is legally imposed. It cannot person but paid by the other.
be transferred.
 3. Example, Income tax, Wealth tax 3. Example, Sales tax, Excise duty,
etc. Service tax etc.
4. Impact and incidence are on the 4. The impact and incidence may be
same person i.e. the tax per is also on different persons i.e. there is a
tax bearer. Tax burden cannot be shifting of the tax burden.
shifted.
5. Direct tax is either on the person’s 5. Indirect tax is on commodities and
income, wealth or property. services.
6. The tax is paid at the time earning 6. This tax is paid at the time of
income. spending income.

6. Revenue budget and Capital budget

Revenue Budget Capital budget
1. Revenue budget consist of : 1. Capital budget is consist of :
Revenue receipts and Revenue Capital receipts and Capital
expenditure expenditure
2. It explains how revenue is 2. It deals with capital aspect.
generated by the government and
how it is allocated among various
expenditure heads.
3. Revenue receipts consist of : 3. Capital receipts consist of :
Tax revenue and Non- tax revenue Borrowings, recovery of loans,
Disinvestments, small savings etc.
4. Revenue expenditure includes 4. Capital expenditure includes
developmental and non- expenditure on land and building
developmental expenditures of the machinery, investment in shares,
central government. loans granted by central government
to state.
5. Revenue receipts do not create any 5. Capital receipts create a liability of
liability of the government. the government.
6. Revenue expenditure does not lead 6. Capital expenditure leads to
to the creation of assets. creation of assets.

7. Internal debt and External debt

Internal debt External debt

1. It refers to borrowings of the 1. It refers to borrowings of the
government to raise fund within the government to raise fund outside the
country. economy.
2. In case of internal debt, domestic 2. In case of external debt, foreign
currency is used. currency is used.
3. It is less complex to manage 3. It is more complex to manage
internal debt. external debt.
 4. Example, borrowings from RBI, 4. Example, borrowings from foreign
nationalized banks and business government and international
organizations within a country. organization like IMF, World Bank
etc.

8. Obligatory functions of government and optional functions government

Obligatory functions of government Optional functions of government

1. Obligatory functions are those 1. Optional functions of government
functions which must be performed are those functions which may be
by government, by making adequate undertaken by government if funds
provision of resources. permit.
2. Obligatory functions are given first 2. Optional functions are given
priority, as they are compulsory second priority, as they are called
functions. discretionary functions.
3. Obligatory functions are mainly 3. Optional functions are performed
performed by public authority for the by central, state and local
protection of their citizens. government for promoting economic
activities and social welfare.

9. Tax revenue and Non- tax revenue

Tax revenue Non- tax revenue

1. Tax revenue refers to revenue 1. Non- tax revenue refers to revenue
received by the government through received by the government from
various taxes. various sources, other than taxes.
2. Tax revenue comes from direct tax 2. Non- tax revenue comes from fines
i.e. income tax, wealth tax and and penalties, fees, gifts, grants,
indirect tax i.e. GST. donations etc.
3. Tax is a major sources of revenue 3. Non-tax revenue is nota major
to the government. source of revenue of the government.
4. Tax revenue particularly direct tax 4. Non – tax revenue, particularly
is collected to reduce economic special levy, fines and penalties etc.
inequality. are collected to discourage the
citizens from violating the law.

10. Deficit budget and Balanced budget

Deficit budget Balanced budget

1. When the government revenue is 1. When the government revenue is
less than government expenditure, it equal with government expenditure, it
is called as Deficit budget. is called as Balanced budget.
2. Deficit budget would lead to 2. Balanced Budget would not affect
increase in aggregate demand. the aggregate demand in the economy.
 3. Deficit budget leads to flow of 3. The flow of revenue of the
money from the government to the government is equal to meet the
economy. expenditure of the government.
4. It is suitable for government when 4. It is not possible to introduce a
the economy suffers from depression. balanced budget under present
circumstances.
5. The policy of deficit budget would 5. The balanced budget policy is called
lead to increase in employment, “Sound Finance” where the
investment etc. government performs only minimum
functions.

11. Surplus budget and balanced budget

Surplus budget Balanced Budget

1. A surplus budget is that type of 1. Balanced budget is a type of budget
budget in which the estimated in which the estimated revenue of the
revenue is greater than the estimated government is equal to estimated
expenditure. government expenditure.
2. Government raises tax revenue 2. Government raises revenue to such
which is more than what is required an extent which is just sufficient to
for meeting the expenditure. meet the expenditure.
3. Surplus budget would lead to 3. Balanced budget would not affect
reduction in aggregate demand. the aggregate demand in the economy.
4. It is suitable for families and not 4. It is not possible to introduce a
favoured for government. balanced budget under present
circumstances.
5. The policy of Surplus budget would 5. The balanced budget policy is called
lead to unemployment and recession ‘Sound Finance’ where the
in the economy. government performs only minimum
functions.

12. Deficit budget and Surplus budget

Deficit budget Surplus budget

1. A deficit budget is the one in which 1. A surplus budget is the one in
estimated expenditure exceeds which estimated revenue are greater
estimated revenue. than estimated expenditure.
2. It leads to flow of money from 2. It leads to flow of money from
government to the economy and economy to government and lead to
increases aggregate demand. decrease in aggregate demand.
3. It is suitable for governments 3. It is suitable for individuals and
especially when the economy suffers families but not favoured for
from depression. government.
 4. The policy of deficit budget would 4. The policy of surplus budget would
lead to employment and revival of lead to unemployment and recession
economic activities. due to low investment.
5. Deficit budget is not desirable 5. Surplus budget is advocated during
during inflation. inflation to reduce demand and prices
by imposing high taxes.

Q.2 Explain Non-tax revenue sources of government.

Ans Public revenue received by the government administration, public

enterprises, gifts and grants etc. are called as Non-tax revenue.
These sources are different than the taxes.
The sources of Non-tax revenue are as follows:

1) Fees:
A tax is paid compulsorily without any return service whereas,
fees is paid in return for specific services rendered by the
government. For example, education fees, registration fees etc.

2) Prices of Public goods and services:

Modern government sells various types commodities and services
to all the citizens. A price is a payment made by the citizens to
the government for the goods and services sold to them.
Example, railway fares, Postal charges etc.

3) Special Assessment:
The payment made by the citizens of a particular locality in
exchange for certain special facilities given to them by the
authorities is known as ‘Special assessment.’
For example, local bodies can levy a special tax on the residents
of a particular area where extra/ special facilities of roads, energy,
water supply etc. are provided.

4) Fines and Penalties:

The government imposes fines and penalties on those who violate
the laws of the country. The objective of imposition of fines and
penalties is not to earn income, but to discourage the citizens from
violating the laws framed by the Government. For example, fines
are violating traffic rules. However, the income from this source
is small.

5) Gifts, Grants and Donations:

The government may also earn some income in the form of gifts by
the citizens and others. The government may also receive grants
from the foreign government and institutions for general and
 specific purposes. Foreign aid has become an important source
of development finance for developing country like India. However,
this sources of revenue is uncertain in nature.

6) Special levies :
This is levied on those commodities, the consumption of which is harmful to the
health and the well-being of the citizens. Like fines and penalties, the objective is
not to earn income but to discourage the consumption of harmful commodities
by the citizens. For example, duties levied on Wine, Opium and other
intoxicants.

7) Borrowings:
The government can borrow from the people in the form of deposits, bonds etc.
It also gets loan from foreign governments and organizations such as IMF, World
bank etc. Loans are becoming more and more popular source of revenue for the
government in the modern times.

Q.3 Explain various reasons for the growth of public expenditure.

Ans Public expenditure is that expenditure which is incurred by the public

authority ( Central, State and Local bodies) for protection of their citizens
for satisfying their collective needs and for promoting their economic and
social welfare. It is observed that there is a continuous growth in public
expenditure in a developing country like India.
Reasons are as follows:

1) Increase in the activities of the Government :

As mentioned earlier, the modern government performs many functions
for the social and economic development of the country. These functions
include spread of education, public health, public works, public
recreation, social welfare schemes etc. It is observed that new functions
are continuously being undertaken and old functions are being
performed more efficiently on a large scale by the government. This leads
to increase in public expenditure.

2) Rapid increase in population:

Population of developing countries like India is increasing fast. In 2011
census, it was 121.02 crores. As a result, the government has to incur
greater expenditure to fulfil the needs of the increasing population.

3) Growing Urbanization:
Spread of urbanization is a global phenomenon of the day. This leads to
increase in the government expenditure on water supply, roads, energy,
schools and colleges, public transport, sanitation etc.
 4) Increasing Defence expenditure:
In modern times, defence expenditure of the government is increasing
even in the peace time due to unstable and hostile international
relationships.

5) Spread of Democracy:
Majority of the countries in the world are democratic in nature. A
democratic form of government is expensive due to regular elections and
other such activities. This results in the increase in total expenditure
of the government.

6) Disaster Management:
Many natural and man-made calamities such as earthquakes floods cyclones
etc. are occurring more frequently now. The government incurs a huge amount
for disaster management.

7) Inflation:
During inflation, the government expenditure will also increase in purchasing
goods and services from the market for achieving economic and social
development. Normally prices show a rising trend and hence, the government
incurs increasing costs over time.

Q.4 Explain the importance of budget. (4 marks)

Ans 1) Union budget affects people and overall economy in a number of ways.
2) Taxes are the most interesting part of budget. Taxes determines the face of
businesses and individuals. Also, the level of disposable income depends on the
tax rates presented in the budget.
3) Government expenditure on defence, administration, infrastructure, education
and health care etc. affects the lives of citizens and overall economy.
4) Governments use the budget as a medium for implementing economic
polices.
5) Budgetary actions affect production, size and distribution of income and
utilization of human and material existence.
6) In modern economy, the scope and importance of public finance has
undergone an immense change since last 100 years.

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