GOVERNMENT BUDJET

AND ITS COMPONENTS

  Introduction
 Meaning of Government Budget
 Objective of Government Budget
 Components of Budget
 Revenue Receipts
 Capital Receipts
 Budget Expenditure
 Measures of Government Deficit

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 INTRODUCTION

Budgeting is creating a plan to spend your

money. Good budgeting is spending less than you
are earning as you plan for your financial goals.
Budgeting is the process of creating a plan to
spend and invest your hard earned money wisely
to meet your personal and financial goals in life.
In the modern world, every government aims at
maximization of the welfare of its country. It
requires a number of infrastructural economic
and welfare activities. All these activities require
huge expenditure to be incurred. This requires
appropriate planning and policy. Budget helps in
planning and framing policies.

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 MEANING OF GOVERNMENT
BUDGET

The government budget is an annual fiscal

statement depicting the revenues and spending for a
financial year that is often moved by the legislature,
sanctioned by the chief executive or president and
given by the Finance Minister to the country.
Budget is also known as the Annual Financial
Statement of the nation.

Just as your household budget is all about what

you earn and spend, in the same way the
government budget is a statement of its income and
expenditure. In the beginning of every year the
government presents before the Lok Sabha an
estimate of its receipts and expenditure for the
coming financial year. It plans its expenditure
according to its objectives and then tries to raise
the resources to meet the proposed expenditure.

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 IMPORTANT POINTS OF
GOVERNMENT
BUDGET

1. Budget is prepared by government at all

level i.e. central government, state
government as well as local government
prepare its respective annual budget.

2. Estimated expenditure and receipts are

planned as per the objective of government.

3. In India, Budget is presented in parliament on

such a day as the president may direct by
convention. It is presented on last working day
of February, each year.

4. It is required to be approved by the

parliament before it can be implemented.

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 BUDGET AT GLANCE 2018-2021

2018-2019 2019-2020 2019-2020 2020-2021

BUDGET REVISED BUDGET
ACTUALS ESTIMATES ESTIMATES ESTIMATES

1. Revenue 1552916 1962761 1850101 2020926

Receipts

2. Capital 762197 823588 848451 1021304

Receipts

3. Total 2315113 2786349 2698552 3042230

Receipts
(1+4)

4. Total 2315113 2786349 2698552 3042230

Expenditure
(10+13)

5. Revenue 454483 485019 499544 609219

Deficit (2.4) (2.3) (2.4) (2.7)
(10-1)

6. Effective 262702 277286 307807 402719

Revenue (1.4) (1.3) (1.5) (1.8)
Deficit
(14-12)

7. Fiscal 649418 703760 766846 796337

Deficit (3.4) (3.3) (3.8) (3.5)
[9-(1+5+6)]

8. Primary 66770 43289 141741 88134

Deficit (0.4) (0.2) (0.7) (0.7)
(16-11)

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 OBJECTIVES

THE MAIN OBJECTIVES OF A GOVERNMENT BUDGET

ARE:
ECONOMIC GROWTH:
To promote rapid and balanced economic growth so as to improve living
standard of the people.

REDUCTION OF POVERTY AND UNEMPLOYMENT:

To eradicate mass poverty and unemployment by creating employment
opportunities and providing maximum social benefits to the poor.

REDUCTION OF INEQUALITIES: Inequalities of income and

wealth are reduced through levying taxes and granting subsidies.
Government levies high rate of tax on rich people and lower rate in the
lower income group and also provides the latter with subsidies and
amenities. Economic progress in itself is not a sufficient goal but the goal
must be equitable progress.

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RELOCATION OF RESOURCES:

The reallocation of resources is necessary in order to achieve social and

economic objectives. The government allocate resources into areas where
private initiative is absent such as public sanitation, education, health etc.

PRICE STABILITY:
To maintain price stability and correct business cycles involving depression
characterized by falling output, prices and increasing unemployment.

MANAGEMENT OF PUBLIC ENTERPRISES :

To manage public enterprises which are of nature of national monopolies like
railways, electricity etc.

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 COMPONENTS OF GOVERNMENT
BUDGETS
The main components or parts of the government
budget are:

1. REVENUE BUDGET
This is a budget statement that has the revenue receipts of the
government i.e. revenue collected in the manner of taxes & receipts. It
additionally contains the items of expenditure met from such revenue.

A) REVENUE RECEIPT:
These are the incomes which are received by the government from various
sources in its ordinary course of governance. These receipts don’t produce a
liability or cause a reduction in assets. Revenue receipts can be further
classified as tax revenue and non-tax revenue.

A.I Tax Revenue: -

Tax revenue consists of the financial gain received from different taxes and duties
levied by the government. It’s a major source of public revenue. Every citizen is
bound to pay them, non-payment of these is punishable by law

There are 2 types of Taxes: Direct Tax and Indirect Tax

Direct Tax:
Direct tax is a type of tax where the incidence and impact of taxation fall on the
same entity.
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  In the case of direct tax, the burden can’t be shifted by the taxpayer to someone
else. These are largely taxes on income or wealth. Income tax, corporation tax,
property tax, inheritance tax and gift tax are examples of direct tax.
 They are imposed on individuals and companies.

Indirect Tax:
Indirect tax is a type of tax where the incidence and impact of taxation does not fall
on the same entity.
 In the case of indirect tax, the burden of tax can be shifted by the taxpayer to
someone else. Indirect tax has the effect to raising the price of the products on
which they are imposed. Customs duty, central excise, service tax and value
added tax are examples of indirect tax.

A.II Non Tax Revenue: -

Apart from taxes, governments additionally receive revenue from different non-tax
sources. The non-tax sources of public revenue are as follows:

 Fees: The government provides various sorts of services for which fees are ought to
be paid. E.g. fees for registration of property, births, deaths, etc.

 Fines and penalties: Fines and penalties are imposed by the government on citizens for
violating the rules and regulations.

 Profits from public sector enterprises: several enterprises are owned and managed by
the government. The profits received from them is a very important source of non-tax
revenue. For instance, in India, the Indian Railways, Oil and Natural Gas Commission,
Air India, Indian Airlines, etc. are owned by the Government of India. The profit
generated by them is a source of revenue for the government.
 Gifts and grants: Gifts and grants are received by the government when natural
calamities like earthquakes, floods, famines, etc. occur. Citizens of the country, foreign
governments, and international organizations like UNICEF, UNESCO, etc. donate
funds during times of natural calamities.
B. REVENUE EXPENDITURE –
Revenue expenditure refers to expenditure incurred from the routine, usual, and
traditional day to day running of state departments and provision of various services
to citizens. It includes both development and non-development expenditure of the
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Central government. Typically, expenditures that don’t result in the creations of
assets are considered revenue expenditure.

(I) Expenses included in Revenue Expenditure:

a. Expenditure by the government on the consumption of goods
and services.
b. Expenditure on agricultural and industrial development,
scientific research, education, health, and social services.
c. Expenditure on defense and civil administration.
d. Expenditure on exports and external affairs.
e. Grants are given to State governments even if some of them
may be used for the creation of assets.
f. Payment of interest on loans taken in the previous year.
Expenditure on subsidies.

(II) India’s Defense Expenditure: –

In 2020-21, the Defense expenditure of the central government of India was ₹3,37
lakh crore

2.CAPITAL BUDGET –

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This a part of the budget includes receipts & expenditure on capital
account projected for the succeeding year. The capital budget consists
of capital receipts & capital expenditures

(A) CAPITAL RECEIPTS –

 Capital receipts are receipts that create liabilities or reduce
financial assets. They also refer to incoming cash flows. Capital
receipts can be both non-debt and debt receipts. Loans from the
general public, foreign governments and the Reserve Bank of India
(RBI) form a crucial part of capital receipts.

 Capital receipts are loans taken by the government from the

public, borrowings from foreign countries and institutes, and
borrowings from the RBI. Recovery of loans given by the Centre to
states and others is also included in capital receipts. In the
balance sheet, capital receipts are mentioned in the liabilities
section. The capital receipt has a nature of non-recurrence.

Note: All capital receipts are tax-free, unless there is a proviso to tax it.
Capital receipts can be both non-debt and debt receipts.

I) Non-debt capital receipts

Non-debt receipts are those which do not incur any future repayment
burden for the government. Almost 75 per cent of the total budget
receipts are non-debt receipts.
Examples of non-debt capital receipts: Recovery of loans and
advances, disinvestment, issue of bonus shares, etc.
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2. Debt capital receipts
 Debt Receipts have to be repaid by the government. Around 25 per
cent of government expenditure is financed through borrowing. A
reduction in debt receipt (or borrowing) can be a big leap for the
economy's financial health. Most of the capital receipts of the
government are debt receipts

 Examples of debt capital receipts: Market loans, issuance of

special securities to public-sector banks, issue of securities,
short-term borrowings, treasury bills, securities against small
savings, state provident funds, relief bonds, saving bonds, gold
bonds, external debt, etc., are all example of debt capital receipts.

ITEMS INCLUDED IN CAPITAL RECEIPTS: –

 Loans raised by the government from the general public through the sale of bonds and
securities. They’re known as market loans.

 Borrowings by the government from RBI and other financial institutions through the
sale of Treasury bills

 Loans and aids received from foreign countries and different international organizations
like the International Monetary fund (IMF), World Bank, etc.

 Receipts from small saving schemes like the National saving scheme, Provident fund,
etc.

(B) CAPITAL EXPENDITURE –

Capital Expenditure refers to the expenditure which
either creates an asset or cause an in the liabilities of the
government. It is non-recurring in nature.

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  It adds to capital stock of the economy and increase its
productivity through expenditure on long period like metro
project or building a flyover.
 The expenditure must create an asset for the government, for
ex.: - school building construction is capital expenditure as it
leads to creation of assets. However, any amount paid as
salaries to teachers is not a capital expenditure.
 Examples: loan to states and union territories, construction of
building, road, flyovers, etc

TYPES OF CAPITAL EXPENDITURES:

There are normally two forms of capital expenditures:
(1) Expenses for the maintenance of levels of operation present within
the company
(2) Expenses that will enable an increase in future growth.

A capital expense can either be tangible, such as a machine, or

intangible, such as a patent. Both intangible and tangible capital
expenditures are usually considered assets since they can be sold
when there is a need.
It is important to note that funds spent on repair or in conducting
continuing, normal maintenance on assets is not considered capital
expenditure and should be expensed on the income statement
whenever it is incurred

SIMILARITIES IN CAPITAL RECEIPT AND REVNUE RECEIPT

1.Both receipts are a part of business activities.
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2.Both are necessary for the survival and growth of the company.
3.The source of business income.

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 COMPARSION CHART

BASIS FOR CAPITAL REVENUE

COMPARISON RECEIPT RECEIPT

Meaning Capital Receipts are Revenue Receipts

the income are the income
generated from generated from the
investment and operating activities
financing activities of the business.
of the business.

Nature Non-Recurring Recurring

Term Long Term Short Term

Shown in Balance Sheet Income Statement

Received in Source of income Income

exchange of

Value of asset or Decreases the value Increases or

liability of asset or increases decreases the value
the value of liability. of asset or liability.

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 PLAN AND NON-PLAN EXPENDITURE

1. PLAN EXPENDITURE:
Any expenditure that is incurred on programs which are detailed under
the current (Five Year) Plan of the Centre or centre’s advances to state
for their plans is called plan expenditure. Provision of such
expenditure in the budget is called Plan Expenditure.

Expressed alternatively, “plan expenditure is that public expenditure which

represents current development and investment outlays (expenditure) that arise due
to proposals in the current plan.” Such expenditure is incurred on financing the
Central plan relating to different sectors of the economy.

ITEMS OF A PLAN EXPENDITURE ARE

(i) expenditure on electricity generation,
(ii) irrigation and rural developments,
(iii) construction of roads, bridges, canals and
(iv) science, technology, environment, etc.

It includes both revenue expenditure and capital expenditure. Again,

the assistance given by the Central Government for the plans of States
and Union Territories (UTs) is also a part of plan expenditure. Plan
expenditure is further sub-classified into Revenue Expenditure and
Capital Expenditure which along with their components are shown in
the preceding chart.

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2. NON-PLAN EXPENDITURE

This refers to the estimated expenditure provided in the budget for

spending during the year on routine functioning of the government.
Non- Plan expenditure is all expenditure other than plan expenditure of
the govt. Such expenditure is a must for every country, planning or no
planning.

For instance, no government can escape from its basic

function of protecting the lives and properties of the people
and protecting the country from foreign invasions. For this,
the government has to spend on police, Judiciary, military,
etc. Similarly, the government has to incur expenditure on
normal running of government departments and on providing
economic and social services

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 .
DEVLOPMENTAL AND NON-DEVELOPMENTAL
EXPENDITURE
1. DEVELOPMENTAL EXPENDITURE
Developmental expenditure refers to the expenditure of the government which
helps in economic development by increasing production and real income of
the country. Some people call it productive expenditure because it helps in
increasing production and productivity of the economy.
Developmental expenditure on revenue is divided into developmental
expenditure on revenue account and developmental expenditure on capital
account.

2. NON DEVELOPMENTAL EXPENDITURE

It refers, to those expenditure of the government which does not directly help in
economic development of the country. Cost of tax collection, cost of audit,
printing of notes, internal law and order, expenditure on defense etc. are treated
as non-developmental expenditure.
Pension to retired govt. employees, non-developmental assistance to states are
also included in this category. Non-Developmental expenditure may be non-
developmental revenue, expenditure and non- developmental capital
expenditure.

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 Developmental Non-Developmental
Expenditure Expenditure

1. It does not directly help in

1. It helps in economic the economic development
development of the country of the country.
directly.
2. Defence expenditure,
2. Social and community police, pension, loan
services, economic services repayments, cost of tax
and developmental collection, non-development
assistance to states are assistance to states etc.
included in it. are included in it.

3. Developmental expenditure 3. It is not possible to fix the

has a definite objective to targets and achieve it under
achieve during the plan non-developmental
period. expenditure.

4. The share of developmental 4. The share of Non-

expenditure is gradually Developmental expenditure is
decreasing. gradually increasing

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 MEASURES OF GOVERNMENT
BUDGET DEFICIT

Deficit is the amount by which the expenses done in a budget

surpasses the earnings. The Government Deficit is the
amount of money in the budget set by which the government
spending surpasses the revenue earned by the government.
This deficit presents a picture of the financial health of the
economy. To minimize the deficit or the gap between the
expends and income, the government may reduce a few
expenditures and also rise revenue initiating pursuits.
There are several measures that apprehend government deficit,
and they have their own inferences for the economy, such as:

1. Revenue Deficit

2. Fiscal Deficit

3. Primary Deficit

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 REVENUE DEFICIT

Revenue deficit arises when the government’s revenue expenditure

exceeds the total revenue receipts. Revenue deficit includes those
transactions that have a direct impact on a government’s current
income and expenditure. This represents that the government’s own
earnings are not sufficient to meet the day-to-day operations of its
departments. Revenue deficit turns into borrowings when the
government spends more than what it earns and has to resort to the
external borrowings.
Revenue Deficit deals only with the government’s revenue
receipts and revenue expenditures.

Implications of revenue deficit are as follows:

(i) High revenue deficit shows accumulated and recurring expenses of

government such as expenses on defence, payment of interest, etc.
(ii) The revenue deficit is managed by borrowing or disinvestment.
Hence, high revenue deficit either increases government liability or
reduction of government assets.
(iii) High revenue deficit leads to inflationary situation in the economy, as
high government expenditure increases the aggregate demand of the
economy.
(iv) High revenue deficit implies high future burden of loan
and interest payments on the government

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 FISCAL DEFICIT

Fiscal Deficit is the difference between the total income of the

government (total taxes and non-debt capital receipts) and its total
expenditure. A fiscal deficit situation occurs when the government’s
expenditure exceeds its income. This difference is calculated both in
absolute terms and also as a percentage of the Gross Domestic
Product (GDP) of the country. A recurring high fiscal deficit means that
the government has been spending beyond its means.

The government describes fiscal deficit of India as “the excess of

total disbursements from the Consolidated Fund of India, excluding
repayment of the debt, over total receipts into the Fund (excluding the
debt receipts) during a financial year”.

Fiscal Deficit = Total expenditure of the government – Total

Income of the government

The implications of fiscal deficit are as follows:

1. Debt Trap:
Fiscal deficit indicates the total borrowing requirements of the government.
Borrowings not only involve repayment of principal amount, but also require
payment of interest. Interest payments increase the revenue expenditure, which
leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue
deficit, wherein government takes more loans to repay the earlier loans. As a
result, country is caught in a debt trap.

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2. Inflation:
Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal
deficit. RBI prints new currency to meet the deficit requirements. It increases the
money supply in the economy and creates inflationary pressure.

3. Foreign Dependence:
Government also borrows from rest of the world, which raises its dependence on
other countries.

4. Hampers the future growth:

Borrowings increase the financial burden for future generations. It
adversely affects the future growth and development prospects of the
country.

Sources of Financing Fiscal Deficit:

1. Borrowings:
Fiscal deficit can be met by borrowings from the internal sources
(public, commercial banks etc.) or the external sources (foreign
governments, international organizations etc.).

2. Deficit Financing (Printing of new currency):

Government may borrow from RBI against its securities to meet the
fiscal deficit. RBI issues new currency for this purpose. This
process is known as deficit financing. Borrowings are considered a
better source as they do not increase the money supply which is
regarded as the main cause of inflation. On the other hand, deficit
financing may lead to inflationary trends in the economy due to
more money supply.

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 PRIMARY DEFICIT
 Primary deficit refers to the difference between the current
year's fiscal deficit and interest payment on previous
borrowings. It indicates the borrowing requirements of the
government, excluding interest. It also shows how much of the
government’s expenses, other than interest payment, can be
met through borrowings.
 Primary deficit can be calculated by finding the difference
between current year’s fiscal deficit and interest payment on
the borrowings for the previous year.

Primary deficit = Fiscal deficit – Interest payments

Implications of Primary Deficit:

(i) Indicates how much government borrowing is going to meet
expenses other than interest payments. (ii) Reflects the extent to which
current government policy is adding to future burdens. (iii)Used as a
measure of fiscal irresponsibility.

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