Black Book

Budget and its Importance
EXECUTIVE SUMMARY
The project on “BUDGET AND ITS IMPORTANCE” provides the information and
knowledge about the government budget provided by the finance minister of the country.
It includes the main objectives and different types of government budget of our
country through which we can easily study our country budget.
The project also shows the process of Indian government budget. Lastly the project
consists the current year government budget of India.
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Chapter No. Particular Page No.
1. Introduction
1.1 Government Budget of India 3
1.2 Definition of Government Budget
1.3 History of Budget System in India
2. Research Methodology
2.1 Objective of Government Budget
2.2 Impact of Budget
2.3 Need and Importance of Government Budget
2.4 Components of Government Budget
2.5 Types of Budget
2.6 Types of Government Budget
3. Literature Review
4. Data Analysis and Interpretation
4.1 Government Budgetary Process
4.2 Government Spending
4.3 Union Budget 2019-20
5. Conclusion and Suggestions
5.1 Conclusion
Bibliography and Website
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Chapter-1
Introduction
A budget is a financial plan for a defined period, often one year. It may also include planned sales volumes
and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. Companies,
governments, families and other organizations use it to express strategic plans of activities or events in
measurable terms.
A budget is the sum of money allocated for a particular purpose and the summary of intended expenditures
along with proposals for how to meet them. It may include a budget surplus, providing money for use at a
future time, or a deficit in which expenses exceed income.
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 fundamental step in achieving financial literacy, and by
extension, reaching financial security and freedom. 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. It should not be a
mathematical exercise that we think we have to endure; rather, it is the result of self-assessment of our
relationship with money and a necessary road map to steer us toward a higher standard and quality of living.
Budgeting is balancing your expenses with your income now and for the rest of your life.
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1.1 Government Budget of India
A government budget is an annual financial statement presenting the revenues and spending for a financial
year that is often passed by the legislature, approved by the chief executive or president and presented by
the Finance Minister to the nation. The budget is also known as the Annual Financial Statement of the country.
This document estimates the anticipated government revenues and government expenditures for the ensuing
(current) financial year. For example, only certain types of revenue may be imposed and collected. Property
tax is frequently the basis for municipal and county revenues, while sales tax and/or tax are the basis for state
revenues, and income tax and corporate tax are the basis for national revenues.
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Meaning –
“A government budget is an annual financial statement showing item wise estimates of expected revenue and
anticipated expenditure during a fiscal year.”
1.2 Definitions of Government Budget

According to Tayler, "Budget is a financial plan of government for a definite period".
According to Rene Stourm, "A budget is a document containing a preliminary approved plan of public
revenues and expenditure".
Just as your household budget is all about what you earn and spend, similarly the government budget is a
statement of its income and expenditure. In the beginning of every year, government presents before the Lok
Sabha an estimate of its receipts and expenditure for the coming financial year.
The government plans expenditure according to its objectives and then tries to raise resources to meet the
proposed expenditure. Government earns money broadly from taxes, fees and fines, interest on loans given to
states and dividend by public sector enterprises. Government spends mainly on (i) securing and providing
goods and services to citizens, (ii) on law and order and (iii) internal security, defence, staff salaries, etc. In
India there is constitutional requirement to present budget before Parliament for the ensuing financial year.
The financial (fiscal) year starts on April 1 and ends on March 31 of next year. For example, fiscal or budget
year 2010-11 is from April 1, 2010 to March 31, 2011. Obviously, the budget is the most important information
document of the government because government implements its plans and programmes through the budget.
Government estimate of its revenue and expenditure is known as Government Budget. While framing budgets
of the country, the government decides the heads of expenditure and the amount likely to be spent on these
heads, Theses heads may be developmental and non-developmental also. In order to decide the total
expenditure the economy is divided and sub-divided into various sectors and regions. While framing budgets
the government estimates the expenditure on various economic and social activities. The expenditures on
different heads is decided by predetermined priorities. AT the same time the government estimates the
expected revenue though different sources. The sources of revenue may be tax sources and non-tax sources.
As such, governments budget is a statement showing item wise estimated receipts and estimated expenditure
under various heads during a fiscal year beginning on April of the year and ending on March 31 of the next
year. Initially begets are prepared for every sector, regions, departments and heads. Finally, different sub-
budgets are merged with one national budget, known as Government budget.
Initially begets are prepared for every sector, regions, departments and heads. Finally, different sub-budgets
are merged with one national budget, known as Government budget.
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1.3 History of Budget System in India
The Budget was first introduced in India on 7th April 1860 from East-India Company to British Crown. The
first Indian Budget was presented by James Wilson on February 18, 1869. Mr. Wilson was the Finance
Member of the India Council that advised the Indian Viceroy.
The word "Budget" was derived from the Middle English word "bowgette", which came from Middle French
"bougette-meaning a leather bag. The Indian budget is presented in Parliament on a date fixed by the President.
The Budget speech of the finance minister normally has two parts. Part A deals with general economic survey
of the country while Part B relates to taxation proposals.
First Indian Budget
The Budget was first introduced in India on 7th April 1860 from East-India Company to British Crown. The
first Indian Budget was presented by James Wilson on February 18, 1869. Mr. Wilson was the Finance
Member of the India Council that advised the Indian Viceroy. He was Scottish businessman, economist, and
Liberal politician. He founded The Economist and the Standard Chartered Bank.
First budget of the Republic of India
Mr. Chetty was succeeded by John Mathai. Mr. Mathai in 1949-50 delivered the most lucid Budget Speech as
he decided not to read out all the details telling members that a White Paper with all details were being
circulated. He then gave a small lecture on inflation and economic policy. It was the first Budget for an actually
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united India since it included the financial statements for the former Princely States and where the biggest
news was the news of forming of Planning Commission and the need for having five-year plans.
Main elements of the budget are:
 It is a statement of estimates of government receipts and expenditure.
 Budget estimates pertain to a fixed period, generally a year.
 Expenditure and sources of finance are planned in accordance with the objectives of the government.
 It requires to be approved (passed) by Parliament or Assembly or some other authority before its
implementation.
Chapter-2
Research Methodology
2.1 Objectives of a Government Budget
It should be kept in mind that rapid and balanced economic growth with equality and social justice has been
the general objective of all our policies and plans. General objectives of a government budget are as under:
(i) Economic growth:

To promote rapid and balanced economic growth so as to improve living standard of the people Economic
growth implies a sustained increase in real GDP of the economy, i.e., a sustained increase in volume of goods
and services. Public welfare is the main guide.
(ii) Reduction of poverty and unemployment:

To eradicate mass poverty and unemployment by creating employment opportunities and providing maximum
social benefits to the poor. In fact, social welfare is the single most important objective. Every Indian should
be able to meet his basic needs like food, clothing, housing (roti, kapda, makaan) along with decent health
care and educational facilities.
(iii) Reduction of inequalities/Redistribution of income:
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To reduce inequalities of income and wealth, government can influence distribution of income through levying
taxes and granting subsidies. Government levies high rate of tax on rich people reducing their disposable
income and lowers the rate on lower income group.
Again, government provides subsidies and amenities to people whose income level is low. Again, public
expenditure can be useful in reducing inequalities. More emphasis is laid on equitable distribution of wealth
and income. Economic progress in itself is not a sufficient goal but the goal must be equitable progress.
Redistribution of income:
Equalities in income distribution mean allocating the income distribution in such a way that reduces income
inequalities and also there is no concentration of income among few rich. It primarily requires that rate of
increase in real Income of poor sections of society should be faster than that of rich sections of society. Fiscal
instruments like taxation, subsidies and public expenditure can be made use of to achieve the object.
(iv) Reallocation of resources:

To reallocate resources so as to achieve social and economic objectives Again, government provides more
resources into socially productive sectors where private sector initiative is not forthcoming, e.g., public
sanitation, rural electrification, education, health, etc. Moreover govt. allocates more funds to production of
socially useful goods (like Khadi) and draws away resources from some other areas to promote balanced
economic growth of regions. In addition, government undertakes production directly when required,
(v) Price stability/Economic stability resource:

Government can bring economic stability, i.e., control fluctuations in general price level through taxes,
subsidies and expenditure. For instance, when there is inflation (continuous rise in prices), government can
reduce its expenditure. When there is depression, government can reduce taxes and grant subsidies to
encourage spending by the people.
(vi) Financing and management of public enterprises:

To finance and manage public enterprises which are of the nature of national monopole’s like railways, power
generation and water lines etc.
2.2 Impact of the budget
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A budget impacts the society at three levels, (i) It promotes aggregate fiscal discipline through controlled
expenditure, given the quantum of revenues, (ii) Resources of the country are allocated on the basis of social
priorities, (iii) It contains effective and efficient programmes for delivery of goods and services to achieve its
targets and goals.
2.3 Need and importance of a government budget
(1) Redistribution of income &Wealth: - Budget of the government shows its comprehensive exercise on the
taxation and subsidies. The government uses fiscal instruments like taxation and subsidies to improve the
distribution of income & wealth in the economy equitable distribution of income & wealth is a sign of social
justice which is the principle objective of a welfare state like India.
(2) Planned approach to government activities: - Government activities have increased tremendously which
needs mobilization of large resources to meet the increased requirement of government expenditure. There has
to be a definite planning for estimated revenue and proposed expenditure for the proper conduct of government
activities.
(3) Economic stability: - Free market forces are bound to general trade cycles also called as business cycle.
These refer to the phases of recession depression and boom in the economy. The government of the country is
always committed to save the economy from business cycles. Budget is used as an important policy instrument
to tackle the situations of deflation & inflation and to achieve the state of economic stability.
(4) Allocation of resources: - Through the budgetary policy the government of a country allocates the resources
in a manner so that there is a balance between the goals of profit maximization and social welfare. Production
of goods which are injurious to health is discouraged through heavy taxation on the other hand production of
socially useful goods is encouraged through subsidies.
(5) Public accountability: - Government budget has the purpose of public accountability of funds. Budgets
proposal are discussed in the parliament and the parliament exercises control over the government budget
through different committees like Public account, the estimate committee and a committee on public
undertakings.
(6) Instrument of economic policy: - Government budget is not only a statement of estimated revenue and
expenditure of the government but it is a powerful instrument to be used as economic policy of the government.
It is helpful in removal of inequality, economic instability etc.
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(7) Index of government functioning: - Through government budget we can easily make out the methods of
government functioning. A proper planning regarding taxes and subsidies shows the efficiency of the
government and durance of corruption and other types of malpractices. It is considered to be a mirror of the
performance of the government budget.
2.4 Components of Government Budget
The main components or parts of government budget are explained below.
1. Revenue Budget:
This financial statement includes the revenue receipts of the government i.e. revenue collected by way of taxes
& other receipts. It also contains the items of expenditure met from such revenue.
(a) Revenue Receipts ↓

These are the incomes which are received by the government from all sources in its ordinary course of
governance. These receipts do not create a liability or lead to a reduction in assets.
Revenue receipts are further classified as tax revenue and non-tax revenue.
i. Tax Revenue: -
Tax revenue consists of the income received from different taxes and other duties levied by the government.
It is a major source of public revenue. Every citizen, by law is bound to pay them and non-payment is
punishable.
Taxes are of two types, viz., Direct Taxes and Indirect Taxes.
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Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden can not
be shifted to some one else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes.
There is no direct benefit to the tax payer.
Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person
through their consumption expenditure. Here the burden can be shifted to some other person. E.g. Custom
duties, sales tax, services tax, excise duties, etc. are indirect taxes.
ii. Non-Tax Revenue:-

Apart from taxes, governments also receive revenue from other non-tax sources.
The non-tax sources of public revenue are as follows
 Fees- The government provides variety of services for which fees have to be paid. E.g. fees paid for
registration of property, births, deaths, etc.
 Fines and penalties- Fines and penalties are imposed by the government for not following (violating)
the rules and regulations.
 Profits from public sector enterprises- Many enterprises are owned and managed by the government.
The profits receive from them is an important source of non-tax revenue. For example, 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 to the government.
 Gifts and grants- Gifts and grants are received by the government when there are natural calamities
like earthquake, floods, famines, etc. Citizens of the country, foreign governments and international
organisations like the UNICEF, UNESCO, etc. donate during times of natural calamities.
 Special assessment duty- It is a type of levy imposed by the government on the people for getting some
special benefit. For example, in a particular locality, if roads are improved, property prices will rise.
The Property owners in that locality will benefit due to the appreciation in the value of property.
Therefore, the government imposes a levy on them which is known as special assessment duties.
iii. India's Revenue Receipts :-

The tax revenue provides major share of revenue receipts to the central government of India. In 2006-07 tax
revenue (direct + indirect taxes) of central government was Rs. 3,27,205 crores while non-tax revenue was Rs.
76,260 crores.
(b) Revenue Expenditure ↓

i. What is Revenue Expenditure?
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Revenue expenditure is the expenditure incurred for the routine, usual and normal day to day running of
government departments and provision of various services to citizens. It includes both development and non-
development expenditure of the Central government. Usually expenditures that do not result in the creations
of assets are considered revenue expenditure.
ii. Expenses included in Revenue Expenditure-
In general revenue expenditure includes following-
 Expenditure by the government on consumption of goods and services.
 Expenditure on agricultural and industrial development, scientific research, education, health and
social services.
 Expenditure on defence and civil administration.
 Expenditure on exports and external affairs.
 Grants given to State governments even if some of them may be used for creation of assets.
 Payment of interest on loans taken in the previous year.
 Expenditure on subsidies.
iii. India's Defence Expenditure-

In 2006-07, Defence expenditure of the central government of India was Rs. 51,542 crores.
2. Capital Budget:
This part of the budget includes receipts & expenditure on capital account projected for the next financial year.
Capital budget consists of capital receipts & Capital expenditure.
(a) Capital Receipts ↓
i. What are Capital Receipts?

Receipts which create a liability or result in a reduction in assets are called capital receipts. They are obtained
by the government by raising funds through borrowings, recovery of loans and disposing of assets.
ii. Items included in Capital Receipts-
The main items of Capital receipts (income) are-
 Loans raised by the government from the public through the sale of bonds and securities. They are
called market loans.
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 Borrowings by government from RBI and other financial institutions through the sale of Treasury bills.
 Loans and aids received from foreign countries and other international Organisations like International
Monetary Fund (IMF), World Bank, etc.
 Receipts from small saving schemes like the National saving scheme, Provident fund, etc.
 Recoveries of loans granted to state and union territory governments and other parties.
(b) Capital Expenditure ↓

i. What is Capital Expenditure?
Any projected expenditure which is incurred for creating asset with a long life is capital expenditure. Thus,
expenditure on land, machines, equipment, irrigation projects, oil exploration and expenditure by way of
investment in long term physical or financial assets are capital expenditure.
Difference between Revenue Receipt and Capital Receipt -
The main difference between revenue receipts and capital receipts is that in case of revenue receipts govt. is
under no obligations to return the amount. But in case of capital receipts which are borrowings govt. is under
obligations to return the amount along with the interest.
Difference between Capital Expenditure and Revenue Expenditure -
A basic difference between capital and revenue expenditure is that the former is incurred on creation or
acquisition of assets whereas the latter is incurred on rendering services. For instance expenditure on
construction of a hospital building is capital expenditure but expenditure on medicines, salaries of the doctor’s
etc. For rendering services by the hospital is revenue expenditure.
2.5 Types of Budget
1. Union Budget- It is the budget prepared by central government for the country as a whole. This budget is
presented in two parts.
(1) Railway budget and (2) Main Budget.
2. State Budget- It is repaired by state govt. such as one budget of Punjab govt. UP govt. etc.
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3. Plan Budget- It is a document which shows the budgetary provisions for important Projects, programmes
and schemes included in the central plan of the country. Non plan Budgets relates to the budgetary provisions
other than the plan expenditure.
4. Performance budget- It presents the main projects programmes and activities in the light of specific objective
and an assessment of the previous year budgets and achievement.
5. Supplementary budget- Budget estimates of the coming year are based on the forecast with regard to revenue
and expenditure. It is not always possible to foresee and provide for all emergencies such as riots, curfew,
natural calamities or political instabilities which requires extra expenditure. In these circumstances
government presents in the parliament a supplementary budget to deal with the expenditure related to
emergencies.
6. Vote on account budget- Under article 116 of the Indian constitution the budget can be split up during the
year. The reason may be political in nature. The existing government may or may not continue for the whole
year on the account of the fact that elections are due then government prepares a lame duck budget this is
called vote on account budget.
7. Zero base budget- The government of India commenced Zero based budgeting 1987-88. It is a particular
technique for the preparation of budget. It involves fresh evaluation of every item of expenditure on the
government budget assuming it as a new budget.
2.6 Types of Government Budget
Recall, a budget is defined as an annual statement of the estimated receipts and expenditure of the government
over the fiscal year. Budgets are of three types: balanced, surplus and deficit budgets—depending upon
whether the estimated receipts are equal to, less than or more than estimated receipts, respectively its three
types are explained hereunder.
(A) Balanced Budget:
A Balanced Budget is a situation in which estimated revenue of the government during the year is equal to its
anticipated expenditure.
Government’s estimated revenue = Governments proposed expenditure.

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For individuals and families, it is always advisable to have a balanced budget.
Most of the classical economists advocated balanced budget which was based on the policy of “live within
means”. According to them, government’s revenue should not fall short of expenditure.
They also favoured balanced budget because they believed that the government should not interfere in the
economic activities and should just concentrate on the maintenance of internal and external security and
provision of basic economic and social overheads. To achieve the government has to have enough fiscal
discipline so that its expenditures are equal to revenue.
Thus still 1930, generally accepted norm was that of “sound finance” which implied that a public authority
should balance its budget. But the great depression of 1930s proved that balanced budget was not a guarantee
of stability and full employment. It was realized that the government can play an effective role in the recovery
of the economy. This is because if the government’s expenditure exceeds its revenue, it will generate additional
demand which will accelerate the pace of economic growth.
Hence budget should not be regarded as an account to be balanced but as a stabilizing influence on the
economic life of the community and as a tool to achieve macro-economic goals.
This new approach to budgetary policy owes more to Keynes than to anyone else. It was he who replaced the
norm of “Balanced Budget” with the norm of “Functional Finance”. Others have carried forward and improved
the ideas he launched.
Today almost all countries of the world have abandoned the policy of balanced budget. Especially with the
increase in public expenditure, unbalancing the budget is the order of the day.
Also, it is easy to balance both the sides of anticipated revenue and the proposed expenditure while framing
a budget, but in reality it is very difficult to achieve it because what is anticipated and what is expected may
not be realize d.
(B) Unbalanced Budget:
The budget in which income and expenditure are not equal to each other is known as an unbalanced budget.
Unbalanced Budget is of two types
1. Surplus budget
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2. Deficit budget
1. Surplus budget:
A surplus budget is a situation in which estimated revenues of the government during the year is greater than
its anticipated expenditure.
Governments expected revenue ˃ Governments proposed expenditure.
OR
Governments proposed expenditure ˂ Government’s expected revenue
Surplus budget shows the financial soundness of the government. When there inflation, the government can
adopt the policy of surplus budget as it will reduce aggregate demand.
Increase in revenue by levying taxes on people reduces their disposable income, which otherwise would have
been spent on consumption or saved and devoted to capital formation. This in turn reduces the demand for
goods and services, thereby bringing down the prices.
Since government spending will be less than its income. Aggregate demand will decrease and help to reduce
the price level.
However, in modern times, when governments have so many social, economic and political responsibilities,
it is virtually impossible to have a surplus budget and not advisable also. This is because a surplus budget will
mean that government, instead of spending for the welfare of the people, is busy in earning income and
amassing wealth.
Hence a surplus budget is practically non-existent.
2. Deficit budget:
A deficit budget is a situation in which estimated expenditure of the government during the year is greater
than its expected revenue.
Government’s estimated expenditure ˃ Governments expected revenue.
OR
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Governments expected revenue ˂ Government’s estimated expenditure
According to Prof Hugh Dalton, “If over a period of time expenditure exceeds revenue, the budget is said to
be unbalanced”.
During depression, the government can adopt the policy of deficit budget as it will reduce aggregate demand.
In this case the government incurs excess expenditure which increases the level of employment. This leads to
increase in the demand for goods and services, thereby leading to revival of the economy.
When the government incurs a budget deficit it is financed by borrowing. The government borrows from the
public by issuing government bonds. This gives rise to government or public debt.
Such deficit amount is generally covered through public borrowings or withdrawing resources from the
accumulated reserve surplus. In a way a deficit budget is a liability of the government as it creates a “burden
of debt” or it reduces the stock of reserves of the government.
In developing countries like India, where huge resources are needed for the purpose of economic growth and
development it is not possible to raise such resources through taxation, deficit budget is the only option.
In underdeveloped countries deficit budget is used for financing planned development and in advanced
countries it is used as a stability tool to control business and economic fluctuations i.e. to solve the problem of
recession and depression which occurs mainly due to lack of effective demand. This is because, an increase in
the total expenditure incurred on wages salaries, social security etc. tends to increase the personal disposable
income of the people. As a result the aggregate demand for consumer goods will increase. Increase in total
expenditure tends to expand the aggregate economic activity in the economy.
A very high deficit in the budget is not preferable as it creates inflationary pressures on the economy.
Economist are now generally of the opinion that fiscal policy should be used as a tool to achieve full
employment and stability in the economy. This depends upon the extent to which government can vary the
difference between its income and expenditure.
In general, budget deficit is very common. Today almost all countries of the world follow the norm of deficit
budget instead of surplus or balanced budget.
Types of Deficit in the Budget

There are three types of deficit in the budget
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1. Revenue deficit- The excess of revenue expenditure over revenue receipts is called revenue deficit. Thus,
Revenue deficit =revenue expenditure – Revenue receipts.
It implies that resources have to be borrowed from other sectors of economy to cover this deficit. It may lead
either to borrowing or sale of government asset thus high revenue deficit give a warning signal to the
government either to curtail its expenditure or increase its revenue.
2. Fiscal deficit- Fiscal deficit is the excess of total expenditure over revenue receipts(revenue and capital
receipts) excluding borrowing.
Fiscal deficit = Total expenditure –Revenue receipt –Capital receipts (excluding borrowing)
Fiscal deficit therefore is a compressive measure of the implications for in economy. It has serious implication
for economy. The government has to borrow to meet this deficit a major part of fiscal deficit is financed by
the deficit financing (printing extra currency notes). It leads to rise in the prices.
3. Primary deficit- The excess of fiscal deficit over payments of interest is called primary deficit. Thus,
Primary deficit = Revenue deficit –Interest payments
Primary deficit shows how much of the government borrowing is going to meet expenses other than interest
payment. A lower primary deficit indicates that the interest payment has forced the govt. to borrow. Thus it
indicates the real position of govt.
Deficit Financing
Meaning:
Deficit financing is defined as financing the budgetary deficit through public loans and creation of new money.
Deficit financing in India means the expenditure which in excess of current revenue and public borrowing. the
government may cover the deficit in the following ways.
1. By running down its accumulated cash reserve from RBI.
2. Issue of new currency by government it self.
3. Borrowing from reserve bank of India and RBI gives the loans by printing more currency notes.
Objectives of Deficit financing –
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1. To finance war- Deficit financing has generally being used as a method of financing war expenditure. During
the war time through normal methods of raising resources. It becomes difficult to mobilize adequate resources.
Therefore, government has to adopt deficit financing.
2. Remedy for depression- In developed countries deficit financing is used as on instrument of economic policy
for removing the conditions of depression. Prof. Keynes has also advocated for deficit financing as a remedy
for depression and unemployment.
3. Economic development- The main objective of deficit financing in an under developed country like India
is to promote economic development. The use of deficit financing in fact becomes essential for financing the
development plan especially in underdeveloped countries.
4. Mobilization of Resources- Deficit financing is also used for the mobilization of surplus, ideal and unutilized
resources in the country.
5. For granting subsidies- In a country like India government grants subsidies to the producers to encourage
them to produce a particular type of commodity, granting subsidies is a very costly affair which we cannot
meet with the regular income this deficit financing becomes must for it.
6. Increase in aggregate demand- Deficit financing loads to increase in aggregate demand through increased
public expenditure. This increase the income and purchasing power of the people as a consequence there is an
increase availability of goods and services and the production and employment level also increase.
7. For payment of interest- Loan which are taken by the govt. are supposed to be repaid with their interest for
that government needs money deficit financing is an important tool to get the income for the repayment of
loan along with the interest.
8. To overcome low tax receipts.
9. To overcome the losses of public sector enterprises
10. For implementing anti poverty programme.
Adverse effects of Deficit Financing
Deficit financing is not free from its defects. It has its adverse effect on economy. Important evil effects of
deficit financing are given below.
1. Leads to inflation- Deficit financing may lead to inflation. due to deficit financing money supply increases
& the purchasing power of the people also increase which increases the aggregate demand and the prices also
increase.
2. Adverse effect on saving- Deficit financing leads to inflation and inflation affects the habit of voluntary
saving adversely. Infect it is not possible for the people to maintain the previous rate of saving in the state of
rising prices.
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3. Adverse effect on Investment- Deficit financing effects investment adversely when there is inflation in the
economy trade unions make demand for higher wages for that they go for strikes and lock outs which decreases
the efficiency of Labour and creates uncertainty in the business which a decreases the level of investment of
the country.
4. Inequality- In case of deficit financing income distribution becomes unequal. During deficit financing
deflationary pressure can be seen on the economy which makes the rich richer and the poor, poorer. The fix
wage earners are badly effected and their standard of living detoriates thus no gap b/w rich & poor increases.
5. Problem of balance of payment- Deficit financing leads to inflation. A high price level as compared to other
countries will make the exports more expensive and thus, they start declining. On the other hand rise in
domestic income and price may encourage people to import more commodities from abroad. This will create
a deficit in balance of payment and the balance of payment will become unfavorable.
6. Increase in the cost of production: - When deficit financing leads to the rise in the price level the cost of
development projects also rises this means a larger dose of deficit financing is required on the port of
government for completion of these projects.
7. Change in the pattern of investment- Deficit financing leads to inflation. During inflation prices rise and
reach to a very high level in that case people instead of indulging into productive activities they start doing
speculative activities.
Is Deficit Financing Inflationary?

Deficit financing may not necessarily be inflationary there are certain conditions under which deficit financing
may not lead to inflation. With increase in money supply due to deficit financing prices do rise but rise in price
will only be temporary for about a period. As flow of goods and services increase prices will began to fall.
deficit financing is an important device for financing development plans for underdeveloped countries and
accelerate their rate of economic development. But If deficit financing is not kept with in limits It may give
rise to prices, distorted investment and unequal and unjust distribution of income. Therefore, it is essential that
deficit financing is kept within limits and its impact on prices and costs are softened through various controls.
Public Debt
Meaning:
Public debt refers to the loans raised by government from within or outside the country. Every govt. has to
borrow when its expenditure exceeds its revenue. The borrowing or taking loans by the government Is known
as public debt.
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Comparison between Public and Private Debt -
1. Compulsion- The government can compel the people or institution in a country to lend funds to it in case of
war, economic crises or any other emergencies but no private individuals can force or compel another private
individual to lend them money
2. Repudiation- Under abnormal conditions the govt. can refuse the payments of loan taken by it from people
but the private individuals cannot do so under any circumstances.
3. Time Period- The government can borrow from public for longer periods because it is a permanent
institution and people have faith in it. Private individual can barrow for short period of time due to risks
involved on the part of the lender.
4. Rate of interest- Because of its high credit worthiness government can borrow at lower rate of interest but
it is not so in case of private borrower who has to pay a very high rate of interest because risk is involved in
it.
5. Sources- The government can take loan within the country and also from abroad but a private borrower can
borrow only from within the country.
6. Mode of Payment- The government repays its loan by taxiing the people but in case of private debt the
borrower has to repay loan out of his own saving.
7. Effect on the economy- Public debt makes its effect on production distribution of income and wealth in
country but private loans make no such effects due to its micro nature.
Need for public debt -
In recent time government have been barrowing huge sums both internally and externally for the following
reasons.
1. Deficit budget- The government may borrow to cover budgetary deficit on account of large expenditure
incurred on administration and for financing unforeseen events like floods famines epidemics.
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2. To finance war- Modern wars are very costly they cannot be financed unwarily through taxation thus public
debt becomes necessary.
3. Natural calamities- Natural calamities like earthquake, flood, famines etc. lead to increase in government
expenditures in order to provide relief to the victims. It necessitates huge public barrowing by the government.
4. Economic development- Public debt is considered a very important tool for the development of a country.
Both developed and developing countries borrow for economic development. Developing countries do not
have sufficient resources to finance their plan they therefore borrow not only from within the country but also
from foreign sources for the development of agriculture, industry, power, transport communication etc.
Developed countries also borrow to modernized their infrastructure facilities like roads, railways power plant
etc.
5. To finance Public enterprise- Every country whether a socialist economy or missed economy runs certain
public enterprises like railways, postage and telegrams, power work et. Which require large funds The
government can meet them only through public borrowing rather than by taxation.
6. To check economic stability- Government borrows to stabilize, to control inflationary conditions. The govt.
borrows to take away excess money supply from the public. Since public borrowing is voluntary. This is a
better method then raising taxes. Because loans from public do not increase the cost of production. Public
borrowing also helps to lift the economy from depression. During depression ideal funds lying with the bank
govt. borrows in order to spend on public work programmers.
7. To provide foreign exchange- In case of deficit in the balance of payment. Foreign exchange is needed to
correct it. In such a condition government borrow from foreign countries as well as from international financial
institution in the form of foreign exchange.
8. Soft Revenue option- With increase in public expenditure government needs a lot of fund. Taxation is a
source of income for the government but it cannot be increased at a very high rate to meet the expenses because
it pinches a lot to the people. Therefore, many a limes government chooses soft loan option of meeting its
increasing expenditure by raising loans and thereby saving itself from public opposition.
Sources of Public debt -
There are two main sources.

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(1) Internal (2) external

(A) Sources of internal debt- It refers to govt. loans floated in capital markets within the political boundaries
of the country. the main sources of internal borrowing are:
i) Individuals.
ii) Banking & non-banking institutions.
iii) Central Bank.
(B) Sources of external debts-

It refers to govt. loans floated in foreign capital market. The main sources are.
i) Foreign governments.
ii) International Monetary agency like world bank IMF, International finance corporation international
development association.
Structure or classification of Public debt-
(1) Internal & external debt
(2) Productive & unproductive debt
Productive debt is defined as a loan, which is used for project which yields an income to the government like
railways, construction, irrigation, power etc.
Unproductive debt is defined as that loan which does not yield any income to the govt. like debt for natural
calamities and to finance war etc. this debt is also known as dead weight debt.
(3) Redeemable & Irredeemable debt
Redeemable debt refers to that loan which govt. promises to pay off at some future date. The interest on this
loan is paid by the government regularly half yearly or annually. When the debt matures the govt. pays back
the principal amount to the lender.
Irredeemable debt is that loan in which the principle amount is never returned by the government although the
interest is paid regularly for the period of its duration.
(4) Short term and long-term debt
Short term debt is defined as that debt which may mature within a period of 3 to 4 months. This debt is like
treasury bills & advances from central bank. Interest on such loans is generally low.
Long term loans are repaid in a long period say roughly after 10 years or more. Usually such debt bears a
higher rate of interest.
(5) Funded and unfunded debt
Funded debt is a long-term debt whose payment is made at least after a year. In order to repay a debt fund is
created in which some money is deposited by the government and the debt is paid out of this fund at the time
of maturity.
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Unfunded debt is for short period or less than a year. The govt. does not create any separate fund to repay the
debt. Treasury bills are unfunded debt.
(6) Voluntary & compulsory debt
Voluntary debt is defined as that debt which is paid without any legal enforcement in this the people voluntarily
or willingly subscribe to govt. loans. In fact ,all public loans are voluntary.
Compulsory debt are those debt which are forcibly taken by the government. Such loans are taken only during
wars and national emergencies.
(7) Marketable and Non-Marketable debt
Marketable debt is defined as one in which the securities are negotiated in open market. for example, all types
of securities sold in the secondary market
Non- Marketable loans are such loans where securities cannot be sold in the stock exchange market, for
example, PPF, PF, NSC etc.
Gross debt and Net debt

Gross debt consists of the total amount of all the debt out standing at any time
Net debt is balance amount of gross debt after exclusion of sinking fund and other assets meant for repayment
of debt.
Debt Redemption or Debt Management-

Redemption of public debt means repayment of debt. Public debt is to be repaid by the government within the
time limit fixed for its repayment. The various methods of debt redemption are.
(1) Repudiation of debt- it means refusal to pay a debt all together. The government refuses to pay the interest
as well as the principle amount. This method of debt redemption is not practical because the government
reputation may be at stake the consequences of this method may be dangerous. Debt repudiation is not popular
in modern times. Russia did so in 1971.
(2) Debt conversion- In this method the debt with high interest rate is converted into new debt when the market
rate of interest falls. The government borrows at low rate of interest and repays the past debt even before it
matures. The lender is free to take his money back or get his loan converted into a fresh loan. However,
conversion can be successfully carried out, if the credit of the government is good.
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(3) Budgetary surplus- A policy of surplus budget may be followed annually for clearing of public debt
gradually instead of creating a fund for its repayment on maturity. But in recent years due to rapidly increasing
public expenditure, surplus budget is a rare phenomenon
(4) Terminal annuity- Under this method the physical authorities clear off. Part of public debt on the basis of
terminal annuities into equal annual installments including interest along with the principle amount. This is
the easiest method similar to sinking fund. According to this method, the burden of debt goes on diminishing
and by the time of maturity, it is already fully paid off.
(5) Refunding- In this method. There is issue of new bonds and securities by the government in order to repay
the matured loans. Refunding is the process by which the maturing bonds are replaced by new bonds. A major
drawback of this method is that the govt. would be tempted to postpone its obligations of debt redemption and
the total burden of debt would continue to increase in future.
(6) Sinking fund- In this system the government establishes a separate fund known as sinking fund. A fixed
amount of money is credited by the government to this fund every year. By the time one debt matures. There
is enough amounts in fund to pay off loans along with the rate of interest. In practice sinking funds are not
accumulated, Government do not create such fund if even if they create they utilize it for the other purposes
whenever they are in need of funds.
(7) Capital levy- It refers to a very heavy tax on property and wealth. It is a once for all taxes imposed on the
capital assets above the certain value. In fact, capital levy is advocated immediately after the war to repay the
unproductive war debts.
(8) Reduction of rate of interest- sometimes the govt. takes statuary decision to reduce the rate of interest.
Payable on its public debt. The creditors are forced to accept the reduced rate of interest. This method is
normally used by the govt. during financial crisis.
(9) Additional provision of taxation- In this method new taxes are imposed to collect revenue. It is a method
of redistribution of income by transferring it from the tax payer into the hands of bonds holders.
Debt Trap: It refers to a phenomenon where the government of a country has to raise fresh loan just in order
to pay the interest charged on the earlier loan borrowed by govt. and it is very difficult to repay to the amount.
The govt. is trapped in vicious circle of borrowing.
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Burden of public debt –
It tells both internal & external debt may be direct money burden, indirect money burden, direct real burden
and indirect real burden.
i. Direct Money Burden- It refers to the amount of money to be raised to meet the revenue requirements. In
case of internal public debt there is no direct money burden because in this case money changes hands only.
But in case of external debt money burden is heavy.
ii. Indirect money burden- When government spends the loans it results in the creation demand for certain
commodities as a consequence the prices of goods and services rise imposing additional burden on the society.
iii. Direct Real burden- It is in the form of reduction in economic welfare and this strains and stresses tax
payers.
iv. Indirect Real burden- The indirect real burden of a debt is also felt through the ultimate effects on
production when the govt. imposes taxes to repay loans and interest it discourages the willingness of the tax
payers to work more & save more, thus it adversely affect the production in a country and the indirect real
burden of a tax will be heavy.
Positive effects of Public Debt -
1 Mobilization of resources- Public borrowing is very helpful in implementing 5-year plans and various other
projects. with the help of borrowing govt. can easily make various types of plans to mobilizes the resources
efficiently.
2 Increase in the productive capacity- With increase in barrowing productive capacity of a country can easily
be increased. Borrowing is very much helpful in using capital intensive techniques to increase the productive
capacity of a country.
3 To promote Investments- Public borrowing helps in promoting investments, borrower fund can be utilized
for strengthening infrastructure and promoting economic development of country.
4 Developmental expenditure- Barrowing can be used to meet the developmental expenditure like roads,
communication system, railways telecom, finance etc.
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5 Obtaining foreign exchange- Borrowing in the form of foreign exchange can be used to meet developmental
activities. For development purpose govt. tries to acquire money capital, raw material from foreign countries.
It can then only be possible if we have good stock of foreign exchanges with us.
Adverse effects of public debt -
1) Inflationary impact- With increase in the public borrowing money supply in the market also increases which
increases the prices of the commodity.
2) Additional tax burden- To repay the old loans. Government has to impose new taxes on people which will
be extra tax burden on the people and it pinches a lot.
3) Adverse effect on saving and investment- for the repayment of loan when government imposes new taxes
on the people there will be adverse effect on saving and investment b/c more saving & more investment means
more tax.
4) Effects on distribution of income- Public debt may sometime effect distribution of income among people.
Govt. raises loans from higher income group people and the return of it is also given to them only. Thus rich
becomes richer and poor becomes poorer.
5) Unproductive debt- a part of the loan taken by the government is used to meet the non-developmental
expenditure which never helps in increasing the production in the country. Thus, it is called dead weight debt
which is very difficult to repay.
6) Debt servicing burden- The annual interest paid by the government in lieu of debt increase is known as debt
servicing burden. There is very large increase in debt servicing burden in every country in modern times which
has very dangerous consequences.
Public Revenue
Meaning:
It deals with the income & expenditure of the public authorities and with the adjustment of one to the other.
Scope of Public Finance -
 Public Revenue – Income of government.
 Public Expenditure
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 Public Debt
 Financial administration –It includes budget.
 Economic stabilization & Fiscal Policy.
Importance of Public finance -

 Public finance helps us in understanding the functioning of the economy.
 It helps in understanding the changed concept of the state
 Useful in understanding the fiscal policy
Difference between Public & Private finance

• Meaning
• Scope Public finance has wide scope, private finance has narrow scope .
• Public finance based on social welfare and private finance is based on the welfare of the private individuals
only.
Public Revenue – The income of government from all sources is called public revenue or public income
Sources of Public Revenue –

(i) Taxes - A Tax is a compulsory payment imposed on the people or company by government to meet the
expenditure incurred on providing common welfares to the people
(ii) Commercial Revenue - Revenues which are derived by government from public enterprises by selling
their goods & services are called commercial revenues. They are also known as prices as they come in the
form of prices of goods & services provided by the government. They include the following.
 Postage.
 Railway faire
 Irrigation charges
 Prices paid for liquor in gov. stock etc.
It is not a very good source of the income of government
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Sr.No. Price Tax

1. It is not a compulsory payment it is It is a compulsory contribution to
paid by person who purchases be paid by every tax payer upon
goods and services sold by whom at is imposed
government.
2. It gives direct benefit to the person It does not give a directly benefit to
who pays it for buying goods and tax payer.
services.
3. Price is paid for goods and services It is used for the common benefit of
which are purchased by the all people whether they pay tax or
consumer not.
(iii) Administrative Revenue - It includes fee, fines. Special assessment and escheat
 Fees –It is a payment which is paid to you for special services rendered by them it sis only paid by
those people who receive special benefits from the services rendered by government com.
 License Fee –It is a payment not to perform a service but to grant a permission by a government. The
registration fee for motorcycle, license for keeping guns are some example of license fee.
 Fines & Penalties –They are not important source of revenue. A fine refers to the punishment imposed
for the violation of law Example – Motorists are charged for violating traffic rules & regulation
 Special Assessment -Some times government undertake certain improvements such as construction of
road, provision of drainage, Street lightning etc. they offer common benefits to society as a result of
such improvements the values of these properties rise and imposition of changer in proportion to
increase wealth is called special assessment.
 It may be termed as special tax but it is not same as tax. It is levied after the benefits have been
conferred upon the payers while tax has no guarantee of benefit. It is diff from fees, fees are the
payments for certain services rendered by government while special assessment lived for unrest in
one's property from some particular Services of government.
 Forfeiture –It refers to penalties imposed by courts for the failures of individual to appear in the courts,
to complete contracts as stipulated.
 Escheat – Under the right of escheat the govt. May acquire the property, bank balances etc. of a person
without having any legal successor or without writing a will this is also not an important source of
revenue.
 Taxes –A tax is a compulsory payment imposed on the person or the companies by the govt. to meet
the expenditure incurred on providing common benefits to the people
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Characteristics of Taxes-
• Compulsory Contribution: - Tax is a compulsory payment made by the people to govt. no one can refuse the
payment of tax to the government.
• Personal obligation- Tax is a personal obligation on the tax payer. It becomes his duty. To pay the tax if he
comes under the taxable capacity
• General welfare- Tax is a payment made by taxpayer which is used by the government for the benefit of all
the citizen.
• No Quid pro Quo- A tax is not levied for any specific services rendered by the govt. to the taxpayer and
individual cannot ask for special benefit from the state in return for the tax payer by them thus the tax payer
cannot claim something equivalent to the tax paid from govt. Which means there is no quid or quo in case of
taxes?
• Regular Payment- Tax is payable regularly by the tax payer as determined by the tax department.
Objective of Taxes/Importance/Significant-
A. Collection of Revenue -
The modern government performs a large no. of functions for the welfare of societies for which they need
income this income can be earned by the government only through taxes which are considered as the main
source of revenues. Of government.
• Regulation of consumption & Production-
Taxation policy regulates consumption and production of country. They are used to discourage production and
consumption like require, pan masala etc. they are also effective in diverting the resources from production of
non-essential commodities to essential commodities.
• Protection to domestic industry-
Custom duties are used to reduce the imports of those goods which are domestically available and thereby
encourage the domestic industry. These taxes protect the domestic industry from cut-throat foreign
competition, this will also have favourable effect on the countries balance of revenue.
• Reducing income inequalities-
Taxes are used for reducing inequalities of income and wealth in a country by the following ways.
1. Progressive taxation on income would be great help in this regard it means imposing heavy taxes on rich
and low taxes on poor.
2. Inequality of income can also be reduced by imposing heavy taxes of luxury goods and by giving tax
concision on essentials goods which are purchased by the people.
• Increasing the rate of capital formation-
The mains purpose of taxation in poor country is go promote capital formation and economic development.
The revenue collected through taxes by government can be utilized for the development of agriculture and
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industry and it can be used for providing infrastructural facilities like transport & communication power etc.
on this entrepreneur can be motivated to set up industry in backward regions of the country thus investment
level goes up.
• Price stability-
It is the prerequisite for economic development to take place taxes play a very important role for maundering
price stability in the times of inflation taxes reduced the purchasing power of people which result to fall in
aggregate demand in economy and thereby helps in controlling prices. On the other hand, taxes can be reduced
during deflection increase the aggregate remand.
• Development of backward region-
For the development of backward region govt. gives tax concessions to the entrepreneur for setting up
industries in these regions.
• Economic growth-
Tax collected by govt. can be used in promoting economic development of country. It can also be used for
increasing the productive capacity of diff. sectors of economy. Which with definitely improve the growth rate
of economy also.
Types of Taxes -
• Proportional Tax-
In this type of tax all incomes are taxed at the uniform rate. and it is not linked with the income of tax payer it
is a simple tax system and dose not have any harmful effects on willingness to work and save but it is not
based on principle of equality and revenue collected through this tax is very less.
• Progressive tax-
Tax is said to be progressive when the rate of tax increases as the taxpayers' income increases. Acc. to Dalton
in progressive taxes the higher the income the tax payer has higher proportionate tax to pay. Progressive tax
is based on principle of equity and it reduces the inequality of income & health in helps in controlling inflation
also. On the other hand, it has some disadvantages like there is a harmful effect on willingness to work and
save. On case of progressive taxation tax evasion is common this case.
• Regressive Tax-
It is one in which the rate of tax decreases as the tax payers' income increases. It is just opposite of progressive
taxes regressive tax are adjust and inequitable. They do not the principle or equity and they promote
inequalities of income in the surety.
• Digressive Taxation-
Under this system the rate of tax increases up to action limit but after that a uniform rate is charged. It is
formulated on slab system in this case higher income group people have to make will sacrifice as compared to
lower income grow up people this is the case of income tax in India as well.
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Now the question arises out of above stated categories of tax systems which is the best the answer would be
we have to select the tax system which will distribute tax system most equitably Regressive & digressive
taxation can not be accepted on the ground of equity but there has been heated. Controversies regarding
proportional and progressive taxation however most of the economists are in favour of progressive taxation
system.
Direct Taxes -
Direct Taxes are those under which burden falls on the same person on whom it is imposed, i.e. impact and
incidence falls on the same person. e.g.: - income tax, wealth Tax, Property Tax etc.
Merits of Direct Taxes -

• Equitable- Direct Taxes are based on the principle of equity or ability to pay. The burden of a direct tax is
equitably distributed on different people & institutions as they are progressive in nature. Which means as
income increases the rate of income tax also increases
• Certainty- Direct taxes are certain the tax payer knows how much tax is due from him and when and how
can he adjust his income and expenditure. The govt. also knows fairly well the amount of revenue coming to
it
• Economical- Direct Taxes are economical in the sense that the cost of collection of these taxes is relatively
low in the case of income tax it is deducted at the source from salary of people. No separate staff is needed for
tax collection.
• Elasticity- Direct Taxes are flexible and thus satisfy the canon of elasticity. The govt. can increase or
decrease rate of direct taxes according to the requirement of economy. In case of war natural calamities or
emergency the state can raise the rate of these taxes in order to have larger tax revenue and during depression
rate of tax can be decreased.
• Civic consciousness- Direct Taxes inculcate the spirit of civic responsibilities among tax payers. Since tax
payers provide funds from their own pockets to the govt., they take been interest in seeing that these funds are
properly utilized. This public awareness plays an important tool in checking the wastage of public expenditure.
• Simplicity- Direct Taxes are very simple on nature it is easy to calculate and understand these taxes.
• Reducing inflationary pressure-. Direct taxes are anti inflationary in nature they help in controlling inflation
by moping up the excessive purchasing power of community.
• Reduces inequalities- as we know the direct taxes are progressive in nature and therefore rich people are
subjected to higher rates of taxation, while poor people are exempted from direct tax obligation. Hence these
taxes help to reduce inequalities in income.
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Demerits of Direct Taxes -

• Unpopular- Direct Taxes pinch to the tax payer because they have to pay them directly out of their income
or salaries, they cannot be shifted on to others thus they are very much unpopular among tax payers and are
generally opposed by the tax payers.
• Inconvenient- These taxes are also inconvenient in nature because the tax payer has to submit the statement
of his income along with the source of income from which it is derived, which is generally subject to
complications. Moreover, the payment of these taxes in lump sum is not as convenient to the tax payers as the
frequent payment of small amount of indirect taxes. Hence these are said to be inconvenient to the tax payers.
• Possibility of injustice- In practice it is difficult to asses the income of all the classes accurately. Hence the
direct taxes may not fall with equal weight on all classes, Moreover the rates of direct taxes are arbitrarily
fixed by the govt. and they may not be determined on the basis of ability to pay.
• Evasion- A direct tax is said to be a tax on honesty, it is not evaded only when the tax payer is honest,
otherwise it can be evaded through fraudulent practices. Hence it is found that it can be evaded if the taxpayer
decides to become dishonest.
• Discourages Saving & investment– Direct Taxes adversely affect saving & taxes when people know that
with increase in income & wealth, they will have to pay a large portion of their income in the form of taxes.
They all be reluctant to save & invest more this way direct taxes adversely affect the will to work save &
invest.
• Narrow in Scope- Direct taxes or generally imposed on rich people low income group cannot be approached
through these taxes. In this way direct taxes have their limited applicability.
Indirect Taxes -
The tax which is initially imposed on one person and paid by another. In case of indirect taxes impact and
incidence fall on 2 different people for e.g.- custom duty Sale Tax, Vat, etc.
Merits of Indirect Taxes-
• Connivance- Indirect Taxes are more convenient than direct taxes they are paid in small amount and at some
intervals. they are generally included in price of the commodity & hence not much burden is felt by tax payer.
• Wide coverage- These taxes reach to the all income groups low, middle, high they are imposed on all type
of commodities thus they have a wide coverage & every consumer pays to the state. Ex-checker acc. to his
ability to pay thus they are equitable also to some extent.
• Elastic- Indirect taxes are also elastic in nature the govt. Can reduce or increase the rate of taxes, acc. to the
requirements. The govt. can obtain adequate tax revenue by increasing tax rate on those commodities which
are highly in demand & they have inelastic demand however, this will go against common of equality.
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• No evasion- Indirect Taxes are difficult to be evaded as they are in included in price of the commodity as a
person can evade an indirect tax only when he decides not to purchase a taxed commodity
• Diversity- Indirect Taxes satisfy the canon of diversity. They can be imposed on verity of commodities and
services. Thus govt. can earn continuous and sufficient revenue from indirect taxes
• Direct the consumption of commodities- Indirect taxes check the consumption of harmful goods like wine
tobacco & other such substances. The state imposes heavy duties on such articles of consumption which are
injurious to health & efficiency of people as a result, their price rise & consumption is reduced.
De-merits of indirect Taxes-

• Regressive & unjust- Indirect Taxes on necessities, which are consumed by poor are regressive in nature.
The rich & poor are required to pay the same amount of tax on such commodities like matchbox, soap,
toothpaste, blades etc. but the burden is heavy on poor than on the rich, thus they do not satisfy the canon of
equity.
• Inflationary Impact- Another demerit of indirect taxes is that they feed inflation. Imposition of these taxes
tends to raise the price of commodities there by leading to higher cost to higher wages and again to higher
prices, thus price wage cost spiral sets in the economy.
• Uneconomical- These taxes are uneconomical because the cost of collection is very high the state has to
appoint many tax collectors to check the accounts and stock of producer, wholesalers & retailers in order to
find out whether they are paying taxes or not.
• Uncertain- The Revenue from indirect taxes is uncertain because it is not possible to estimate accurately the
effect of such taxes on demand for products. When the commodity is taxed its market price rises which results
in lower demand so it is quite difficult to anticipate the income from indirect taxes.
• Discourages Saving- Indirect Taxes discourage saving as they are included in price so people will spend
more on consumption expenditure, hence saving reduces.
• Lack of civic consciousness- A person who purchase a commodity does not know that he is paying a tax to
government in price of commodity, therefore such taxes do not inculcate civic consciousness among majority
of tax payers who are ignorant of the fact that they are contributing something the state treasury .
Difference between Direct & indirect taxes
Sr. No Basis Direct Tax Indirect Tax
1. Meaning Direct taxes are those under The tax which is initially
which burden falls on the same imposed on one person and paid
person on whom it is imposed by another. In case of indirect
i.e. impact and incidence falls taxes impact and incidence fall
on the same person. on 2 different people.
2. Shifting of tax They can not be shifted. They can be shifted.
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3. Impact and They fall on the same person. It falls on two different people.
Incidence
4. Civic conscious It inculcates civic It does not inculcate civic
consciousness. consciousness.
5. Income and They are imposed on income of They are imposed on
Expenditure the tax payer. expenditure of tax payer.
6. Nature of tax They are compulsory in nature. They are not compulsory in
nature.
7. Examples Wealth tax, Income tax, Sales tax, vat, Custom duties,
Property tax, etc. etc.
Canons of Taxation / Principles of Taxation / Characteristics of good tax system:

A good tax system should follow certain principles which become its characteristics thus a good tax system is
based on certain principles which are known as canons of taxation. Adam Smith was probably the first
economist who stated the general principles of taxation or rules of taxation. They are even now considered as
the Characteristics of taxation of good tax system. According to Adam Smith father of economics there are 4
main cannons of taxation which are as fallows
1. Canon of Equality- The cannon of equality equity or justice is most important cannon of taxation. It means
that every person should pay tax according to his ability and not the same amount. it also means that every
body should not pay at the same rate rather every tax payer should pay the tax in proportion to his income.
The rich should pay more than the poor whose income is less.
2. Canon of Certainty- According to smith there should be certainty in taxation because uncertainty breeds
corruption. The certainty aspects of a tax are
• Certainty of effective incidence i.e. who shall bear the tax burden.
• Certainty of tax amount payable in a certain time period
• Certainty of Revenue to the government how much govt. shall have estimated collection of revenue during
a given time period.
3. Canon of economy- every tax should satisfy the canon of economy in two ways
• It should be economical for the state to collect it
• It should be economical for the tax payer it means he should have sufficient money left with him after paying
the tax
4. Canon of convenience- According to Adam Smith every tax ought to be levied at the time or in the
manner in which it is `more likely to be convenient for the contributor to pay it .it implies that taxes should be
imposed in such a manner and at the time which is the most convenient for the tax payer e.g. the best time for
the collection of land revenue is the time of harvest.
Some other writer like Bastable added a few more canons of taxation to the Adam Smith's four canons of
Taxation these are
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5. Canon of productivity- The productivity of a tax may be observed in two easy in the first place a tax must
yield a sufficient revenue for the maintenance of the government. Secondly, the taxes should obstruct and
discourage production in the short as well as in the long run.
6. Canon of Elasticity- Taxation should be elastic in nature this canon implied that the yields of the taxes may
be increased or decreased according to the changing needs of the govt. The govt. resources can be raised in
emergencies like war floods droughts etc quickly only when the tax system is elastic. Taxes on property and
commodities are not so elastic as income tax.
7. Canon of Simplicity- this canon suggest that tax system should be easily understandable to tax payer i.e.,
its nature, its aim, time of payment, methods and basis of estimation should all be easily followed by each tax
payer. However, it is not very easy to observe this canon in the modern tax system, which has become quite
complex in nature.
8. Canon of expediency- Acc to this cannon a tax should be based on sound principles so that it requires no
justification from the side of government. the possibility of imposition of taxes should be taken from different
angles, i.e. its reaction upon tax payers .some times it may be desirable and may have most of the
characteristics of a good tax system but the govt. may not find it expedient to impose it,e.g. progressive
agriculture income tax is very much desirable in India, but it has not been imposed so far in the manner it
should have been imposed.
9. Canon of diversity- There should be variety of taxes a single tax. Would neither meet the revenue
requirement of state nor satisfy the canon of equity thus there should be a variety of taxes so that all citizens
should contribute towards state revenue according to their ability to pay.
10. Canon of co-ordination- In a democratic country taxes are imposed by central, state and local government.
It is therefore very much desirable that there is co-ordination between different taxes that are imposed by
different taxing authorities. it is very much needed considering the interest of tax payer and the govt. both .
Main Sources of Revenue of central government

1.Tax Revenue
• Income Tax (on income of the individual as well as joint Hindu families)
• Corporation Tax (on income of the companies both domestic and foreign companies operating in India)
• Interest Tax (on the gross interest income of the financial institutions like Bank)
• Expenditure Tax (expenditure incurred in luxury hotels and restaurants)
• Wealth Tax (total wealth of individuals and Hindu undivided families)
• Custom Duty (import and export duty)
• Central excusive Duty (duties on industrial products)
• Service Tax (on services provided by hotels, telephones, port services etc.)
2. Not Tax Revenue
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(i) Interest received (on loans given by central govt. to other government.)
(ii) Dividends & Profits
• Barrowing both from internal & extra source.
• Income from Railways
• Post & Telegram
• Commercial & non-commercial under
• Grants in Aid (from foreign countries as well as from international organizations).
Sources of Revenue of State government

Tax Revenue.
• Land Revenue
• Tax on agriculture resources
• Estate duty
• Excise duty on liquors, OPM and other nonce
• Motor Vehicle Tax
• Entertainment Tax
• Electric city Duties
• Taxes on profession
• Toll Tax
• Taxes on income
• Non -Tax Revenue
• Borrowing within country and loans from govt. of India
• Incomes from govt. undertaking, owned by State govt.
• Royalties from mines, forest, etc.
• Grant in Aid from central govt.
• Interest received.
• Dividends from public sector undertaking
• Administrative receipts
VAT-
The value added Tax is a Tax on the Value added to a commodity or service at each stage from production to
retail stage
MOD VAT-
The modified value-added scheme allows the manufacturer to obtain instant and complete reinvestment of the
excise duty paid on the components of the commodity.
Specific Tax-
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Taxes which are levied on the basis of specific qualities or attributes such as Weight, size, volume etc are
called specific taxes.
Ad. Valorem Tax-
Taxes which are imposed. Acc to the value of commodity are known as advalorem taxes. For eg. - import
duty.
CEN VAT: -
Central Value added Tax was introduced in 2000-2001 and 20001 2002 budgets by replacing. The 3 advalorem
rates with a single rate of 16%
Impact of a Tax- The impact of a tax is upon the person who pays it in the first instance in other words the
person who pays the tax to govt. in first instance bears its impact.
Shifting of a Tax-
The process of passing on the money burden of a tax to another person is called shifting of a tax.
Incidence of a Tax-
It refers to the money of tax on the person who ultimately pays it. In the words of Dalton. The incidence of a
tax is upon those who bear the direct money burden of tax.
Difference between impact and incidence

Impact of Tax Incidence of Tax
1.It refers to initial burden of the tax. 1.It refers to the ultimate burden of tax.
2.It is upon the person who pays it in the 2.It is felt by the person who actually
first instance. bears the burden of tax.
3.It can be easily shifted. 3.It can not be shifted.
Factor Pricing
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There are four factors of production which are land, labour, capital and entrepreneur. These factors of
production get reward for their services in the form of rent, wages, interest and profit. A basic problem which
a producer faces with it is how the share of different factors of production in the total product be determined?
This is called the problem of distribution. There are two types of income distributions:
1. Personal Distribution: It refers to the distribution of national income among various individuals. It implies
the distribution of income according to the size of income received by different individuals irrespective of
sources of income.
2. Functional Distribution: It deals with the distribution of income among four factors of production for
services or functions performed by them. The most important theory for functional distribution is the marginal
productivity theory of distribution. It helps in the distribution of all factor payments like rent, wages, interest
and profit.
Rent:
In simple words rent is a regular payment for the use of land, furniture and machine. In economics, rent is used
in a very narrow or restricted sense and is referred to the price paid for the services of land and other free gifts
of nature. There are two view points regarding rent
1. Classical View: According to David Ricardo” Rent is that part of the produce of the earth which ism paid
to the land lord for the use of the original and indestructible power of the soil”. Main points of rent according
to Ricardo’s definition are;
(a) Rent arises on land only because of its inelastic supply
(b) A tenant makes the payment to the land lord for the original and indestructible powers of the soil.
(c) The fertility of land will determine the amount of rent.
2. Modern View: Economic rent is defined as any payment made to the factor of production in excess of the
minimum amount necessary to keep the factor of production in its present employment. Thus RENT= Actual
earning –Transfer earning.
Transfer earning is the amount which a factor of production must earn in its present occupation to prevent it
from transferring to another occupation. It is also known as opportunity cost.
Actual earning on the other hand is what the factor of production earns in its present employment.
Some different concepts of rent are:
1. Economic Rent: According to prof. Boulding “Economic rent may be defined as payment made to a factor
of production in excess of the minimum amount necessary to keep the factor in its present occupation”
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2. Gross Rent: It is the rent which is paid for the services of land and capital invested on it. It includes the
following:
(a) Payment for the use of land
(b) Interest on capital invested on it
(c) Wages for the services of land lord for supervising the investment in land.
3. Contractual Rent: It is the payment made to the land lord by tenants under a contract through agreement
between the two. Or is the total rent which is agreed upon between land owner and user of land on the basis
of some contract which may be verbal or written. It may be more or less than the economic rent.
4. Scarcity Rent: It applies to all the factors of production whose supply is less elastic. Scarcity rent arises due
to the scarcity of factors of production.
5. Differential or Situational Rent: It refers to the rent arises due to the difference in the fertility of land .This
type of rent arises under extensive cultivation. The surplus enjoyed by more fertile land over and above the
less fertile land is known as differential rent. More fertile land is known results in more production thus they
pay more rent. It is enjoyed by intra marginal land and not by marginal land.
6. Quasi Rent: The concept of quasi rent was developed by prof. Marshall. According to him quasi rent is the
surplus earned by man made factors of production whose supply is inelastic or fixed in the short run but elastic
in the long run. Factors like machines, buildings. Whose supply is inelastic in the short run earn rent which is
termed as Quasi rent i.e. something like rent on land but not the same.
The supply of land always remains fixed both in the short run and long run. But the supply of man-made
factors is inelastic in the short run. Their supply can fully be changed in the long run. Thus, man-made factors
of production earn rent only in the short run which disappears in the long run. If demand for these factors
increases in the short run, supply being constant the price will rise consequently they will start getting
additional payment called quasi rent.
As we know price must cover the variable cost in the short run, but in the long run it has to cover both fixed
cost as well as variable cost. In short run variable cost must be recovered otherwise producers would stop
producing. Whatever a firm earns over and above the variable cost is earned received by the fixed factors of
production. Therefore, quasi rent is measured by the excess of total revenue earned in short run over and above
the total variable cost. Symbolically Quasi rent= TR- TVC. It can be explained with the help of following
graph also
Similarities between Rent and Quasi Rent -

1. Both rent and quasi rent have an element of surplus income.
2. Rent and quasi rent arise due to inelastic supply of factors of production.
3. Both rent and quasi rent arise due to increase in demand.
Wages:
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The payments which are made for the productive services of labour. Labour in economics is all kind of mental
and physical exertion taken for the sake of earning money.
Kind of Wages:
Money Wages: Wages paid and received in term of money are called money wages or nominal wages It
includes monetary payments only.
Real Wages: It refers to the basket of goods and services which the labour is able to purchase with the given
income. Thus, the amount of goods and services a given money wage can buy in the market at any particular
time is called real wage. Infect real wage is the amount of purchasing power received by workers through his
money wages.
Piece Wages: These are wages paid according to the number of units produced of a commodity by the worker.
Time Wages: These are the wages paid for the services of labourer’s according to the time spent.
Wages in Kind: When the labourer is paid in terms of goods rather than cash is called wages in kind.
Factors determining real wages:
(i) purchasing power (ii) working hours (iii) no. of leaves (iv) vacations (v) working conditions(vi) chances of
promotion(vii) housing facility (viii) medical facility (ix) conveyance free education for children (x)
Theories of Wages: There are two theories of wages -
1.Mariginal Productivity theory of Wages: According to this theory each worker is paid wages equal to its
marginal productivity.
2. Modern Theory of Wages: Under the conditions of perfect competition both in labour and product markets
wages are determined by the forces of demand and supply.
Collective Bargaining:
Collective bargaining is defined as a situation in which conditions of employment are determined by the
agreement between the representatives of trade union on one hand and the representatives of employees
association on the other. In other words when trade union bargains with the employers’ association for wage
determination .It is called collective bargaining.
Needs for Collective Bargaining: Collective bargaining is needed for the following reasons:
1.To enable the employer to secure cooperation expected from workers and for keeping cordial relations
between employers and employees.
2. To save the workers from exploitations in the hands of employees.
3. Mutual negotiations become essential for the solutions of the problem
4. Collective bargaining puts a check on the one-sided decisions of the employers
5 It is needed for maintaining a peaceful industrial atmosphere.
Interest:
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Interest is the payment for the use of money or for the use of loan able funds. It means interest is the reward
for the use of capital but it is not the income of the whole capital .It is the income of only that part of capital
which is used for lending purpose.
Types of Interest:
1.Net Interest: It is the price paid for the use of capital only. It is the payment which is made by the borrower
to the lender purely for the use of money capital.Net interest is also known as pure interest.
2.Gross Interest: It signifies the total payment made by the borrower to the lender of the capital. It includes
rewards like rewards for risk, for management, for inconvenience, other than net interest. Thus; GROSS
INTEREST= NET INTEREST+REWARD FOR MANAGEMENT+REWARD FOR RISK+REWARD FOR
INCONVINIENCE
Components of Gross Interest: Gross interest includes the following components:
(i) Net interest: It is the price paid for the use of money capital for a particular period of time
(ii) Rewards for risk taking: When a lender lends some amount of money to the borrower he has to bear risk
to some extent. According to prof. Marshall these risks can be divided into two:
(a) Personal Risk: These are those risks which arise due to credibility and economic positions of the borrowers.
(b) Business Risk / Trade Risk: These are those risks which arise due to business fluctuations in which money
is invested. In small scale business and small trading activity risk is greater than the big corporate companies.
Higher the risk higher will be the rate of interest and vice versa
(iii) Reward for Management: The lender is required to spend some amount of money for maintaining accounts
of loans and recovery of loans etc. They have to spend some money to buy stationery ,stamps etc. They have
to pay wages to the staff working for them for this lender charges extra amount from the borrower in the form
of management rewards.
(iv) Reward for Inconvenience- The lender while giving loans has to suffer many inconveniences like physical
and mental exertion for undertaking money lending business .Thus the lender charges some extra money to
get himself compensated for inconvenience. Greater the inconvenience higher will be the reward for it.
Profit:
Profit is the reward given to the entrepreneur for his services. Every entrepreneur incurs various expense for
producing goods and services and by selling them he gets revenue. The difference between TR and TC is
called profit. In a technical form profit implies the positive residual of an entrepreneur after deducting TC
from TR Thus Profit= TR-TC
Types of Profit -
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(a) Gross Profit: It is the difference between TR and explicit cost. It is that part of the income of a businessman
which is available to him after all payments made the contractually hired factors of production. Thus, Gross
Profit = TR – Explicit cost
Components of gross profit
1. Reward for factors of production contributed by entrepreneur himself
2. Rent on entrepreneur’s own land: Generally, when an entrepreneur starts a business, he uses his own land
and building. Thus, the imputed rent on his own land and building will be included in the gross profit.
3. Wage Income: These are the wages for the services of the family members of the entrepreneur.
4. Interest on Own Capital: When the entrepreneur uses his own capital the interest on such capital in an
imputed form will be a part of gross profit.
5. Depreciation Charges: Depreciation is known as consumption of fixed capital. It refers to the fall in the
value of fixed assets due to the normal wear and tear .Thus depreciation charges should be deducted from
gross profit to arrive at net profit.
(b) Net Profit: Net profit is that part of profit which is calculated by deducting the implicit cost and the
depreciation charges from the gross profit.
Thus, Net profit = Gross profit –depreciation – implicit cost of production
Net profit is also known as pure profit.
(c) Normal Profit: It is the minimum profit which is required by entrepreneur to remain in the business. This
reward for the entrepreneur forms the part of the cost of production as the price is calculated on the basis of
these costs. Thus, Net Profit = TR=TC OR AR =AC
(d) Super Normal Profit / Abnormal Profit: The profit which is earned over and above the normal profit is
known as supernormal profit. These profits are usually available to the entrepreneur only in the short run.
Super normal profit = TR...> TC OR AR> AC.
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Chapter-3
Literature Review
The budgeting system of every organization provides those saddled with the responsibilities of managing such
organization the basis to determine how to source, allocate and utilize funds to support logical decision making
and achieve organizational goal. Through the budgetary system, organizations have planned activities which
are effectively quantified into monetary terms and definite periods.
In the views of Charles (1997) a budget is a quantitative expression of plan of action and an aid to co-
ordination and implementation. This suggest that budgets are designed to carry out a variety of functions;
planning, evaluating performance, coordinating activities, implementing plans, communicating, motivating
and authorization, thus punctuating the basic element of a result oriented budgetary system. Pandey (2001)
posits that a budget is a comprehensive and co-ordinated plan expressed in financial terms for the operations
and resources of an enterprise and for some specific period in the future. According to him, the basic elements
of a budget are would include the following:
• It is a comprehensive and co-ordinated plan.
• It is expressed in financial terms.
• It is a plan for the firm’s operation.
• It is a future plan for a specified period.
In the view of Olafusi (1998) sums up budgeting in a write-up for the “Nigerian Accountant”, when he defined
budgeting as an indispensable tool for effective performance, by which costs are assigned to specific tasks that
are planned within a definite time period. To Parker (1997), budgeting is a faith accompli in economic
discourse, because resources are scarce relative to need for them. Thus, an overall perspective of budgeting is
such that, it can be viewed as an instrument that provides a benchmark for the measurement and control of
performance, while it equally provides feedback information, which facilitates ability to take corrective
measures, based on its relativity to the nature and types of planning.
In the view of Cope (1994) the term budget as a comprehensive plan expressed in financial terms by which
an operating programme is effective for a given period of time (usually one year) including estimates of the
services, activities and projects comprising the programme, resultant expenditure requirement and the
resources usable for their support. Onuorah (2005) however holds the view that budgeting spells out
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management plan in quantitative terms. According to him, it also helps to evaluate organizational plans, while
at the same time performing two vital management functions namely:
• The formulation of a comprehensive future plan of action;
• It compares actual result with predetermined plan, thus, planning and control (which are two primaries
functions of management) are also essential features of the budgeting process.
In the views of Lucey (1988) as it relates to the discourse, a budget is the annual process of funds
allocation, which should be seen as stages in the progressive fulfilment of the long-term objectives of the
organizations. Accordingly, the budgeting process steers the organization towards the long-term objectives
defined in the corporate plan.
An analysis of the above propositions on the concept of budget reveals that although they have different
interpretations, they all have a common element. In essence, a budget is a predetermined statement of
management policy during a given period, which provides a standard for comparison with the results actually
achieved. It involves an estimation of income and expenditure over a period of time, thus the act of preparing
a plan and quantifying it financially is known as budgeting. A budget is generally the organization’s
expectation in the future and it basically involves planning (which involves the control and manipulation of
relevant variables - controllable and non-controllable) and reduces the impact of uncertainty. It makes
management active to influence the environment in the interest of the enterprise. A budget expresses the plan
in formal terms and helps to realize the firm’s expectation. It is a comprehensive plan in the sense that all
activities and operations are considered when it is being prepared.
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Chapter-4
Data Analysis, Interpretation & Presentation
4.1 Government Budgetary Process in India

There are four stages of budgetary process
1.Introduction to Budgetary Process.
2.Preparation of Budget in India.
3.Enactment of Budget.
4.Execution of Budget.
1.Introduction to Budgetary Process:
The budgetary process in any country involves four different operations, viz.:
(i) The preparation of the budget, i.e., the formulation of estimates of revenue and expenditure for the
ensuring financial year.
(ii) The enactment of the budget, i.e., its approval by the legislature in the form of finance bills and
appropriation bills.
46
(iii) The execution of the budget, i.e., enforcement of the finance and appropriation bills; in other words,
collecting the taxes and incurring the expenditure as authorised by the Parliament,
(iv) The legislative control of the budget, i.e., supervision and control of financial operation by audit
on behalf of the legislature.
2. Preparation of Budget in India:

Preparation of the budget involves the following operations which follow in the order as given below:
(i). Preparation by the Disbursing Officers
(ii). Scrutiny and Review of Estimates by Controlling Officers
(iii). Scrutiny and Review by the Accountant-General and the Administrative Department
(iv). Scrutiny by the Ministry of Finance
(v). Approval by the Cabinet.
(i) Preparation by the Disbursing Officers:

The work in connection with the preparation of the Budget begins 6 to 8 months before the commencement of
the next financial year. Since the Indian financial year begins from 1st of April every year, the work of budget
preparation starts in the month of August-September.
The Accountant-General sends prescribed form for estimates of revenue, and expenditure separately to the
Heads of various departments the month of July or August.
The Heads of Departments send those forms to the disbursing officers-heads of the local offices who prepare
the preliminary estimates. The task of preparing the estimates is the most important one. In the words of Mr.
P.K. Wattal it is not a simple arithmetical exercise in striking out averages of previous years and putting in a
safe figure which would not look exactly like repetition of the last year’s performance.
Behind figures lay insistent realities of administration. The circumstances of no one year are exactly similar
to those of the previous year and yet they are not quite dissimilar. One has, therefore, to use his judgment in
estimating the similarities and dissimilarities and making due allowance for each.
Every care should therefore be taken in the preparation of the estimates. While preparing the estimates
the local officers are to fill in four columns of the prescribed form:
(a) Actual of the previous year,
47
(b) Sanctioned estimates for the current year,
(c) Revised estimates for the current year, and
(d) Budget estimates for the next year.
These estimates are prepared by the Heads of offices in three parts, namely, Part I, Part II A and Part II B. Part
I relates to revenue and to standing charges like permanent establishment, travelling allowances, etc. Part II A
relates to continuing schemes, e.g., purchase of raw material, etc. Part II B relates entirely to new schemes of
expenditure.
Sometimes there remains much difference between the budget estimates and the actual amount spent or
required to be spent. This is mainly due to two important factors. Firstly, the estimates are prepared some 18
months earlier, and secondly, Indian economy is a gamble in monsoon and the estimates are prepared much
before the advent of monsoons.
(ii) Scrutiny and Review of Estimates by Controlling Officers:

The local officers send the estimates to their prospective controlling officers or Heads of Departments for
scrutiny and review. The scrutiny is purely of an administrative type. The controlling officer has to judge the
relative importance of the proposals from the various branches and sections of his department for new
expenditure in the light of the possible grant for the department as a whole.
He has, therefore, to accept some of them and reject others. Then he consolidates the estimates for the whole
department and by the beginning of October, these forms go into the hands of the Budget Officers.
(iii) Scrutiny and Review by the Accountant-General and the Administrative Department:
After the estimate forms have left the desks of the controlling officers. Part I of the estimates which relates to
revenue and to standing charges like permanent establishment, travelling allowance, etc., is submitted to the
Accountant-General and the General Administration Departments for scrutiny and review.
The General Administration Departments exist in State Governments. Besides the general review, the
Accountant-General’s Office is also required to prepare estimates under debt, deposit and remittance heads.
By the middle of November, these estimates go to the Budget Department of the Ministry of Finance.
(iv) Scrutiny by the Ministry of Finance:

The estimates received from the various departments are scrutinized by the Ministry of Finance and after
revision and modification, are consolidated together into the Budget of the Government as a whole.
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In the words of Mr. P.K. Wattal, “the scrutiny applied by the Finance Department is different in character from
that applied by the administrative department. The administrative department is responsible for the policy of
the expenditure or its necessity or general propriety. But the Finance Department is mainly concerned with
economy and is therefore entrusted with the duty of keeping the demand of the departments, within the fund
available. The unresolved differences of opinions between the administrative departments and the Finance
Department are submitted to Government (Cabinet) for decision.”
The scrutiny of the estimates by the Ministry of Finance is thus from the financial point of view, i.e., of
economy, or availability of funds.
The operation of the scrutiny by the Ministry of Finance in regard to new expenditure, e.g., over a new
social service or the extension of an existing activity in new direction, is fully revealed from the nature
of following questions it applies on them:
(i) Is the proposed expenditure really necessary?
(ii) If so, how have we so long done without it? Why now?
(iii) What is done elsewhere?
(iv) What will it cost and where from is the money to come?
(v) Who will go short as a consequence of it?
(vi) Are new developments likely to render it unnecessary? And so on.
The Ministry of Finance then prepares an estimate of income and expenditure of the Government of India. On
the basis of the estimated expenditure, proposals regarding fresh taxes are made in the budget. In other words,
the budget is divided into two parts-the Income side and the Expenditure side.
(v) Approval by the Cabinet:

The Finance Minister examines the budget estimates somewhere in January and in consultation with the Prime
Minister prepares his financial policy with regard to taxation, etc. After that has been done, the budget is
submitted to the Cabinet for joint consideration.
It is so done, because it is the Cabinet which is responsible for laying down the general course of policy. When
the Cabinet has approved the budget, it is ready for being introduced in the Parliament.
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3. Enactment of the Budget:

In the Parliament, the budget goes through five stages, namely- (i) introduction (ii) the general discussion (iii)
the voting of demands for grants (iv) the consideration and passing of the appropriation bill, and (v) the
consideration and passing of the taxation proposals, i.e., the Finance bill.
(i) The Introduction of the Budget:

The Budget session of the Indian Parliament commences in the mid-February. The Budget is presented to the
Parliament in two parts, the Railway Budget and the General Budget. The Railway Budget exclusively deals
with the receipts and expenditure of the railways and it is separately presented to the Parliament by the Railway
Minister.
The General Budget deals with estimates of all the departments of the Government of India excluding
Railways and is presented to the Parliament by the Finance Minister. The procedure followed in the case of
Railway Budget and the General Budget is the same.
First is presented the Railway Budget. This is followed by the General Budget which is presented by the
Minister of Finance in the Lok Sabha usually at 5 P.M. on the last day of February. The copies of the Budget
together with the Financial Statement are printed and circulated to all the members for their reference.
(ii) General Discussion:

According to Rule 130 of the Rules of Conduct of Business of Parliament, ‘no discussion of the budget shall
take place on the day on which it is presented to the Parliament.’ The Speaker, therefore, fixes a date on which
general discussion on the Budget is to take place. Such a date is generally fixed one week after the presentation
of the Budget and about four days are allotted for the purpose.
Discussion covers all items of expenditure including those that are charged on the Consolidated Fund of India
and are excluded from the vote of the Parliament. It relates to the general principles or policy underlying a
review and criticism of the administration of the various Ministries.
The discussion is more of political rather than of financial nature and major part of the time is allowed to the
opposition to review the work of the Government for the year and ventilate the grievances of the people.
At this stage, no motion is moved nor is the Budget submitted to the vote of Parliament. It may be mentioned
here that the general discussion on the budget takes place in both the Houses of Parliament simultaneously.
The Finance Minister makes a general reply at the end of the discussion.
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(iii) The Voting of Demands:

The Demands for Grant are referred to the Standing Committee of the concerned Ministry for thorough
consideration. It was in 1993 that the Parliament took decision to set up Department related Standing
Parliamentary Committees to scrutinize the Demands for Grants of various ministries departments before these
are discussed and voted in the House.
The functions of these committees are:

(a) To consider the Demands for Grants of the concerned ministries and make a report on the same to the
Houses.
(b) To examine bills pertaining to the concerned ministries.
(c) To consider annual reports of ministries and make reports thereon, and
(d) To consider national basic long term policy documents presented to the Houses.
There are twenty four committees; eight are chaired by the members of the Rajya Sabha and the remaining 16
by the members of Lok Sabha. Each committee consists of 31 members 21 members from Lok Sabha and 10
from Rajya Sabha. After the scrutiny by the committees, the Demands come before the Lok Sabha for its
consideration.
The Lok Sabha proceeds to the voting of demands for grants not charged on the Consolidated Fund of India.
The voting of demands is the exclusive privilege of the Lok Sabha and the Rajya Sabha does not take part in
it. While voting the demands for grants, the Lok Sabha sits as House and not as the Committee of the Whole
House as is the practice of the House of Commons in Great Britain.
The total number of days allotted for the voting of demands is 26 as in Britain. It is evident from the short time
given that many of the demands are voted without any discussion at all.
What happens is that the Speaker in consultation with the Leader of the House fixes a time limit for particular
demands or group of demands and for the entire expenditure, part of the budget and as soon as the time-limit
for any demand is reached, it is immediately put to vote irrespective of the fact whether the discussion on it is
complete or not.
Similarly, on the last day allotted for the voting of the demands, at 5 P.M. the Speaker puts all the demands
which remain outstanding to vote and disposes them whether they have been discussed or not. Due to
Parliamentary system of government, the reduction of any item of the budget in opposition to the wishes of
the Cabinet tantamount to a vote of no confidence.
51
What, therefore, happens in the House during the demands for grants is not a discussion of the heads of items
of the budget from the financial point of view, but a general ventilation of grievances against the administration
of particular departments of the government. As each head of expenditure comes up for discussion, some
member rises and moves a token cut of one rupee or a hundred rupees in its estimates.
Then he proceeds to criticize the administration of the department to which it relates. The Minister concerned
has to defend the administration against all criticism that is leveled against it by the opposition.
At the end of the discussion of each demand, the demand is put to the vote of the House in the following form
“That a sum not exceeding Rs. be granted to the President (or the Governor) to defray the charges, which will
come in the course of payment during the year ending March 19—in respect of (subject of the demand)”.
A demand when duly voted becomes a grant. It may be remembered that the House can only reject or reduce
a demand but cannot increase it. If more money is needed for expenditure, it is authorized by way of
Supplementary grants or may be spent out of Contingency Fund.
(iv) Passage of the Appropriation Bill:

The next stage is the passage of the Annual Appropriation Bill into a statute. All the demands voted by the
Lok Sabha and the expenditure charged on the Consolidated Fund of India are put together and incorporated
in a Bill called the Annual Appropriation Bill.
Article 114(1) of the Constitution provides that after the grants have been made, there shall be
introduced a Bill to provide for the appropriation out of the Consolidated Fund of India of all moneys
required to meet:
(a) The grants so made by the House of the People, and
(b) The expenditure charged on the Consolidated Fund of India but not exceeding in any case the amounts
shown in the statement previously laid before Parliament.
An Appropriation Bill is accordingly introduced in the Lok Sabha. The allotment of time for the different
stages of the Bill is determined by the Speaker. The debate is restricted to those points only which have not
been already discussed during the debates on estimates.
The Bill follows the same procedure in the House as any other Bill except in this that no amendment to the
grants as voted by the House previously, or altering its destination, or to the Consolidated Fund Charges can
be proposed in either House. After being passed by the Lok Sabha, it is certified by the Speaker as money bill
and sent to the Rajya Sabha.
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The Rajya Sabha has neither the power of amending nor rejecting the Appropriation Bill. It can only discuss
and make recommendations within 14 days to the Lok Sabha, which may or may not accept them. Even if the
Lower House rejects the suggestions made by the Upper House, the bill will be considered as passed by both
the Houses in the form it was passed by the Lower House.
In case the Upper House does not make recommendations within the above specified period and remains silent,
even then the bill will be deemed to have been passed by the Upper House on the expiry of that period.
The Appropriation Bill is then sent to the President for his assent. It is just formality because the President
cannot return a money bill for reconsideration. An Appropriation Act embodies the authority given by the
Parliament with the assent of the President to the Government to withdraw money from the Public Fund and
spend it as authorized in the Act.
Without such an authority, the Government cannot incur any expenditure and the Comptroller and Auditor-
General of India would hold a payment as unauthorized or illegal if it were made without authorization in the
Appropriation Act Article 114(3) lays down that “no money shall be withdrawn from the Consolidated Fund
except under appropriation” and hence the passage of the Appropriation Act constitutes an important process
in Budget enactment.
(v) Passage of the Finance Bill:
The Appropriation Act authorizes the Government to appropriate money from the Consolidated Fund but it
has not so far been provided wherefrom the money for expenditure would come. Provision is therefore made
for collecting the required money by way of taxation. For this purpose a Finance Bill is placed before the
House.
This bill incorporates the financial proposals of the Government for the ensuing year and is placed before the
Parliament at the same time as the Budget. The procedure followed is that of money bill and it is only in Select
Committee that the Bill is considered in details and amendments are moved. After the presentation of the
Committee Report, clause by clause consideration of the bill follows.
The scope of amendments is restricted to proposals for the reduction or abolition of a tax. The financial
proposal becomes operative as soon as the Budget is presented under the Provisional Collection of Taxes Act,
1931. The Finance Bill must be passed before the end of April and after having been passed, the Government
is authorized to collect the taxes.
With the passage of the Appropriation Bill and the Finance Bill, the enactment of the Budget is complete. The
budget contains the ordinary annual estimates which constitute the bulk of the annual receipts and charges.
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To meet expenditure on circumstances unforeseen at the time of budget there are other four kinds of
grants which the Lok Sabha may be asked to make, viz.:
(1) Supplementary Grants,
(2) Votes on Account,
(3) Exceptional Grants and Votes on Credit.
(1) Supplementary Grants:

If the amount authorized by the Appropriation Act of the year is found to be insufficient for any service or if
expenditure on some new service becomes necessary or if expenditure incurred on any service exceeds the
amount provided for in the budget the President is authorized under Article 115 of our Constitution to cause
to be laid before the Parliament a supplementary financial statement embodying the supplementary grants
which is passed according to the usual procedure followed for the passage of appropriation bill.
(2) Votes on Account:

Under Article 116 (1) (a) of the Constitution, the Lok Sabha has power to make any grant in advance in respect
of the estimated expenditure for a part of any financial year pending the passing of the Appropriation Act.
As the voting of expenditure for a particular financial year is not completed till the month of April, it becomes
necessary for the Lok Sabha to make provision for defraying the expenditure likely to be incurred till the
voting is over. This provision in advance of pending the passage of the Appropriation Act is known as ‘votes
on Account’.
It may, however, be mentioned that demands for grants on account are restricted to such services as have
received the sanction of the Parliament. Usually, it is not used for the new services. The estimated requirements
broadly represent one-twelfth of the whole year’s gross requirements except in exceptional cases where it can
be more also if the expenditure is not uniformly spread over the year.
(3) Exceptional Grants and Votes on Credit:

Article 116(b) reads:
The House of the People shall have power “to make a grant for meeting an unexpected demand upon the
resources of India when on account of the magnitude or the indefinite character of the service the demand
cannot be stated with the details ordinarily given in an annual financial statement.” The same Article in clause
(c) states.
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The House of the People shall have the power “to make an exceptional grant which forms no part of the current
service of any financial service”. The expenditure on such unforeseen events can be met from advances made
by the President out of the Contingencies Fund of India. These advances will have to be authorized by the
Parliament later.
4. Execution of the Budget:

After the enactment of the Budget, the next step in the budgetary process is its execution. The execution of the
budget is the responsibility of the executive because the grants of money are made by the legislature to it.
The two important principles involved in the execution of budget are:

(i) That it must conform to the terms of the Appropriation and Finance Acts; and
(ii) That there must be a high degree of honesty, integrity and efficiency.
The process of execution of the budget involves the following operations:

(A). Assessment and Collection of Funds:
Before the taxes are collected, they have got to be assessed. Assessment means the act of determining as to
how much amount is to be collected from different individuals according to the authority given by the
legislature. Assessment, therefore, involves the preparation of a list of persons liable to pay the tax and also
determining how much each has to pay according to the prescribed rates.
The executive has to devise a suitable machinery and procedure for assessing the amount that is due to the
Government from an individual or an association. While devising such a machinery care should be taken to
prevent the evasion of taxes.
Having made the necessary assessment, the officers of the Government proceed to collect the sum of money
due to the Government from the various persons. The mode of collection varies according to the nature of the
tax. In certain cases, for example of customs, payment has to be made on the spot. In other cases, bills may be
sent to the assesse and he may be asked to pay the amount in the nearest treasury.
In some cases, deduction of the tax may be made at the sources as is done in the case of income tax which is
deducted from the pay of the salaried employees. Lastly, in some cases, the agents or officials of the
Government may approach the tax payer directly and demand payment from him and the collection thus made,
they may subsequently deposit in the treasury.
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The Department of Revenue of the Finance Ministry exercises overall control and supervision over the direct
and indirect taxes levied by the Government of India through the two statutory Boards, viz., the Central Board
of Direct Taxes, and the Central Board of Excise and Customs.
Sometimes the question arises whether the tasks of assessment and collection of revenue should be entrusted
to the same officials or to different sets of officials.
The supporters of the former view hold that:

(i) There would be more of honesty and fair play under the system.
(ii) It will ensure greater control over collection of money to the Government.
(iii) It will also facilitate the work of audit, because when the same service has the duty of assessing and
collecting the taxes, it becomes easy to check one of these operations against the other.
But the system is defective in as much as:

(i) The two activities are different in nature and hence need different forms of organisations.
(ii) If the same officials are to do both the jobs, they shall be heavily burdened.
(iii) It will be more expensive and it shall involve unnecessary duplication of records, etc.
The best method will, therefore, be that both the functions should be concentrated in a single service, but there
may be two sections in the organisation to deal with the two phases of the problem. In India this system is
followed.
There is in the Centre as well as in the States a Revenue Department under the charge of the Finance Minister.
There are also Boards under the Minister and they carry on the functions of assessment, supervision of
collection and adjudication of revenue disputes.
(B). Custody of Funds:

All revenue that is collected has to be placed in safe custody.
This involves two main considerations, namely:

(i) There should be no possibility of embezzlement and misappropriation.
(ii) There should be ensured convenience and promptness of payment.
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In former days, huge stocks of Public money were maintained in the Treasury in specially constructed strong
boxes. But with the development of the Banking system, now there is little need for the Government to keep
treasury for the custody of its funds.
Moreover, it is not necessary to carry on all the financial transactions through cash money as most of the work
may now be done through cheques as payment by cheque minimizes the chances of foul play and
embezzlement.
In most of the countries, therefore, the Central Bank carries all the money transactions on behalf of the
Government as does the Bank of England in London But in a country like India where the banking facilities
are not sufficient, it is not possible to have such a centralized system for receiving money and for making
payments on behalf of the Government.
The Reserve Bank of India and where there is no branch or agency of the Reserve Bank, the State Bank of
India, however, conduct the Treasury business of the Government of India. But since the branches of the
Reserve Bank and State Bank do not yet exist at all places, the Government has still to maintain over 1,200
sub-treasuries and over 300 District treasuries to supervise over them.
(C). Disbursement of Funds:

Disbursement is the process of withdrawal of money from the Treasury for payments of various liabilities.
This is based on British system. Every care should be taken in the work of disbursement against illegal and
inaccurate withdrawals or payments. Particular control is, therefore, exercised by the Ministry of Finance over
expenditure.
The legislature makes the grants to the Government as a whole, technically to the President and not to
individual departments. The Ministry of Finance designates the Head of each administrative department as a
controlling officer in respect of the expenditure occurring in his department. These officers in turn allocate
grants to the disbursing officers-heads of offices working under them.
The work of communicating grants to the controlling and disbursing officers is taken up immediately after the
enactment of the budget. Expenditure against appropriation is controlled by dividing grants into primary units
of appropriation, for example, the pay of officers, establishments, contingencies, etc.
These appropriations are sometimes further divided for purposes of financial control. The basic unit of
expenditure control is the sub-head. The disbursing officer is allotted certain sub-heads of appropriations. He
alone can withdraw money from the treasury.
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A great responsibility falls on the disbursing officer. He has to satisfy himself before withdrawing the
money:
(i) That the expenditure has been sanctioned by a general or special order of the authority competent to sanction
such expenditure;
(ii) That the expenditure to be incurred is within the limits of the appropriation granted by the legislature; and
(iii) That payment of the claims is just.
(iv) That the claims have been examined from the point of view of administration and in case of engineering
work also of technical sanction.
He has also to keep the accounts of the various transactions and to make a report about them to the Head of
the department and to the Accountant-General. The treasurer, i.e., the officer in charge of the Treasury is also
to be equally vigilant while making the payments.
He has to see whether the warrants of payment, the challan or a cheque is signed by a competent authority or
not and further he has to keep a record of all receipts and payments.
The power of control of expenditure of the Head of the department is not finished with allocation of money
grants to the disbursing officers. He exercises continuous control over the expenditure in his department. The
disbursing officers are required to submit monthly accounts to the controlling officers of their departments.
The controlling officer gets these accounts classified and consolidated under the various sub-heads and can
thus get an accurate and up-to-date picture of the financial position of his department as a whole. He also sends
a copy of these accounts to the Accountant General’s office and the Finance Ministry.
The departmental accounts are reconciled with those of Accountant General on the basis of fortnightly
accounts received by him from the treasuries. All this enables the controlling officer to watch the flow of
expenditure in his department against the budgetary grants and to apply the necessary control over
extravagance or carelessness.
It may be noted that the controlling officers are sometimes authorized by the Finance Department to allow re-
appropriations from one minor head to another minor head. But the Finance Department can allow re-
appropriation from one major head to another major head or to a wholly new head only with the approval of
the legislature which has to be taken by way of Supplementary grants.
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(D). Accounting:
Accounting means keeping a systematic record of financial transactions. A good accounting system is
indispensable for adequate budgetary control. It is only through systematic accounts supported by vouchers
and receipts that the legality and honesty of the transactions as also the fidelity of the officers handling the
funds can be determined.
Secondly, it is through accounts only that it can be ascertained whether provisions of the budget as voted by
the legislature have been properly implemented or not, i.e., how much has been spent and for what purpose
and whether within the budgetary limits or not.
Thirdly, accounts furnish the valuable information needed regarding financial conditions and operations for
policy determining and programme making.
Francis Oakey in his book titled Principles of Government—Accounting and Reporting, rightly defines the
term Accounting “as the science of producing promptly and presenting clearly the facts relating to financial
conditions and operations that are required as a basis of management.”
In the words of Dr. L.D. White, “The primary functions of a system of accounts are to make a financial record,
to protect those handling funds to reveal the financial condition of the organisation in all its branches, to
facilitate necessary adjustments in rates of expenditure, to give information to those in responsible position on
the basis of which plans for future financial and operating programmes can rest and to aid in the making of an
audit.”
He further says, from the point of view of the department head or the chief executive early and accurate
accounting reports are necessary in order to direct the course of work and future expenditures. They also
provide the essential record to demonstrate the appropriate and legal use of funds making certain that each
sub-division of an organisation is actually using money for the purpose for which it was appropriated.
The accounts and the supporting financial documents provide the evidence on the basis of which spending
officer justifies his expenditure either to finance Director or to the auditor.
(E). Audit:
The last stage in the execution of the budget is audit. The term, audit, has been defined as “the process of
ascertaining whether the administration has spent or is spending its funds in accordance with the terms of the
legislative instrument which appropriated the money” It is a means of enforcing accountability.
The Audit Department is headed by the Comptroller and Auditor-General. His functions are not merely to
ensure that the appropriations made by Parliament have not been exceeded by the executive without a
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supplementary vote or that the expenditure conforms to rules but also to satisfy himself on behalf of Parliament
as to its ‘wisdom, faithfulness and economy’.
The Comptroller and Auditor-General acts as an agent of the Parliament. The Parliament itself, too, exercises
control over expenditure through its three important financial committees-The Public Accounts Committee,
the Estimates Committee, the Committee on Public Undertakings.
4.2 Government Spending
Definition: Government expenditure refers to the purchase of goods and services, which include public
consumption and public investment, and transfer payments consisting of income transfers (pensions, social
benefits) and capital transfer.
What Does Government Expenditures Mean?
A government spends money towards the supply of goods and services that are not provided by the private
sector but are important for the nation’s welfare. Government spending goes to the nation’s defense,
infrastructure, health and welfare benefits.
Furthermore, governments subsidize startup industries or industries that cannot propel their operations with
funding by the private sector, such as transportation or agriculture. The transfer payments for pensions is not
a flexible instrument of fiscal policy, while unemployment benefits depend on the cycle of the economy,
i.e. recession or expansion. Conversely, income transfers to private firms in the form of financial and fiscal
incentives reinforce investment activity and employment. In this sense, government spending enables the
redistribution of income.
Total government spending is important for the economic activity of a nation. First, it affects the rate of growth
and the level of production in the private sector. Secondly, in the developed economies, the state controls a
significant part of the total economic activity. So, given the significant differences between the economies in
terms of economic growth, a key question is the possible influence of the state in these differences.
Of course, in some countries, government expenditure fails to meet the criteria for improved social benefits.
This is mainly the outcome of under- or over-utilizing the nations’ economic resources. For instance, the road
network is one of the key pillars of government expenditure. Although the benefit from the existence of the
road network is not always immediately visible, four more minutes of additional movement per day per
employee may not sound like a significant amount of time, but it adds two working days per year.
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4.3 Union Budget of 2019-20
Major Highlights; Finance Minister Piyush Goyal presents Interim Budget 2019-20
Finance Minister Piyush Goyal presented the Interim Budget 2019-20 on February 1, 2019. It was the last
Budget of the Modi Government before the 2019 Lok Sabha elections.
This year, the government presented the Interim Budget, also known as ‘Vote on Account’ as it is close to the
end of its term. An interim budget is usually passed by the Lok Sabha without discussion.
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As per the Interim Budget or Vote on Account, the government seeks the approval of Parliament to meet its
expenditure for the first four months (January-April) of the fiscal year with no changes in the taxation
structure, until a new government takes over and presents a full Budget of the year in July 2019.
Interim Budget 2019 proposed a 10-point vision for 2030
 Physical and social infrastructure.
 Digital India.
 pollution free nation with green Mother Earth.
 Expanding rural industrialisation.
 Clean Rivers with safe drinking water to all Indians.
 Coastline and ocean waters powering India’s development and growth.
 Space programme – Gaganyaan.
 Making India self-sufficient in food and organic farming.
 Healthy India - Ayushman Bharat Scheme.
 Minimum Government Maximum Governance.
Note: India looks forward to become a USD 5 trillion economy in the next five years and a USD 10 trillion
economy in next eight years.
India has become fastest growing economy –
 By 2024, India will have housing for all, free from corruption, communalism and nepotism.
 India has now become the 6th largest economy in the world.
 Inflation has been brought down to 4.1 percent; average inflation stands at 4.6 percent.
 The fiscal deficit has been brought down to 3.1 percent.
 The Current Account Deficit has also been brought down.

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 India attracted maximum Foreign Direct Investment (FDI) in 2018-19, amounting to USD 239 billion.
This has been possible through rapid liberalisation of FDI policy.
 In last 5 years (2014-2018), India witnessed structural reforms by introducing Goods & Services Tax
(GST) and other taxation reforms.
Banking Reforms –
 A number of measures have been undertaken for clean banking in recent years such as through the
Insolvency and Bankruptcy Code (IBC).
 Re- capitalisation of PSU banks was done.
 Recently, the Prompt Corrective Action (PCA) restrictions was removed from three banks, namely-
Bank of India, Maharashtra Bank, and Oriental Bank of Commerce (OBC).
Steps against Corruption -
 India saw a corruption-free government in recent years through measures such as transparency in
operations.
 Transparency was achieved through Real Estate (Regulation and Development) Act, 2016 (RERA),
Benami Transactions (Prohibition) Act, 1988 and Fugitive Economic Offenders Act.
 The government conducted the transparent auction of natural resources such as coal.
Swachh Bharat Mission –
 As a tribute to Mahatma Gandhi’s 150th birth anniversary in 2019, the NDA Government launched a
holistic programme ‘Swachh Bharat Mission’ in 2014. The programme has been converted into a
movement.
 Under the mission, 98 percent rural sanitation coverage has been achieved.
 5.45 lakh villages have been declared Open Defecation Free (ODF).
 India will be celebrating the 150th birth anniversary of Mahatma Gandhi in October 2019.
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What are the Income Tax reforms announced in Interim Budget 2019?
Poor and backward classes -
 Rs 60000 crore were allocated for the Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGA).
 10 percent reservation granted to the economically backward among the general category.
 Rs 19000 crore were allocated for Pradhan Mantri Gram Sadak Yojana for construction of more rural
roads.
 Over 1.53 crore houses were constructed in the last five years under the Pradhan Mantri Awas Yojana
(PMAY).
 By March 2019, every household will have electricity under the Saubhagya yojana.
 The Aspirational Districts Programme is providing targeted development to the 115 most backward
districts of the country.
Health Sector –
 India launched the world’s largest healthcare programme, Ayushman Bharat- Pradhan Mantri Jan
Arogya Yojana to provide medical treatment for 50 crore people. As many as 10 lakh people have
been benefitted so far under the scheme.
 Many poor people are able to get affordable medicines through the Jan Aushadhi Kendra.
 There are 21 All India Institute of Medical Science (AIIMS) functioning currently in India. Of these
21, 14 AIIMS were set up under the present government.
 The 22nd AIIMS will come up in Haryana.
Agriculture –
 Government undertook various initiatives to boost farmers income. It ensured that the Minimum
Support Price (MSP) is at least 50 percent of the produce and introduced pro-farmers policy.
 Rs 750 crore was allocated for the Rashtriya Gokul Mission.
 It announced set up the ‘Rashtriya Kamdhenu Aayog' for production and productivity of cows.
 A separate ‘Department of Fisheries’ will be created to boost the fisheries sector.
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 Under the Kisan Credit Card scheme (KCC), 2 percent interest subversion will be given for farmers
pursuing animal husbandry and an additional 3 percent interest subversion will be given for those who
repay the loan in time.
 Farmers, affected by the severe natural calamities, will be provided the benefit of interest subvention
of 2 percent and prompt repayment incentive of 3 percent for the entire period on timely repayment of
their loans.
Pradhan Mantri Kisan Samman Nidhi (PM- KISAN)

Considering that the declining prices of agricultural commodities and food inflation led to reduced returns for
farmers, the Government felt the need for structured income support for farmers to procure seeds and labour
and introduced a new scheme was for farmers’ welfare.
The Scheme ‘Pradhan Mantri Kisan Samman Nidhi’ will provide assured income to small and marginal
farmers. Vulnerable farmers with 2 hectares of land will be given Rs 6000 per year. The amount will be
transferred directly into their account in 3 equal installments.
The complete expenditure of Rs 75000 crore for the scheme will borne by the Union Government. Over 12
crore farmer families will be benefitted under the scheme. It will implemented, with effect from December
2018.
The budget allocated Rs 95000 crore for the agriculture sector (Rs 75000 for scheme + 20000 crore as per
revised estimate of current year).
Wages, Salaries and Pensions
 The membership of Employees' Provident Fund Organisation (EPFO) has gone up by 2 crore in five
years.
 In last five years, all classes of workers saw a 42 percent increase in wages.
 The seventh pay commission recommendations were implemented swiftly.
 The New Pension Scheme (NPS) has been liberalised.
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 Maximum ceiling of the bonus given to the labourers has been increased from Rs 3500 to Rs 7000 per
month and the maximum ceiling of the pay has been increased from Rs 10,000 to Rs 21,000 per month.
 The ceiling of payment of gratuity has been enhanced from Rs 10 lakhs to Rs 20 lakhs.
 In the event of death of a labourer during service, the amount to be paid by EPFO has been increased
from Rs 2.5 lakh to Rs 6 lakh.
 The Employees State Insurance (ESI) cover limit has been increased to Rs 21000 from Rs 15000 per
month.
 The minimum pension was also increased to Rs 1000.
'Pradhan Mantri Shram-Yogi Maandhan': Mega pension scheme for unorganised sector –
 Considering that half of the GDP comes from the unorganised sector, Finance Minister announced the
launch of the mega pension scheme for the unorganised sector workers with income of less than Rs
15,000.
 Under the scheme, the workers will be able to earn Rs 3000 after attaining the age of 60 years.
 The budget allocates the expenditure of Rs 500 crore for the scheme.
 A worker joining the pension yojana at 18 years, will have to contribute Rs 55 per month only.
Women Development –
 The government stood up to into manifesto and provided the promised clean fuel for cooking under
the Ujjwala Yojana. The government has already given 6 crore free LPG connection.
 More than 70 percent of beneficiaries of Pradhan Mantri Mudra Yojana are women.
 Pradhan Mantri Matru Vandana Yojana for pregnant women has provided financial support to
women while empowering them to participate in work.
Youth Development –
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 Various scheme of the government has led to the youth development in the country. These schemes
are Pradhan Mantri Mudra Yojana, Startup India, and Stand Up India.
 The 16.53 crore loans have been disbursed under Pradhan Mantri Mudra Yojana and Rs 7.23 lakh
crore have been disbursed through the scheme.
MSME Sector –
 A scheme of sanctioning loans upto 'Rs 1 crore in 59 minutes' has been launched. GST-registered
MSME units will get 2 percent interest rebate on incremental loan of Rs 1 Crore.
 Job seeker has become job giver.
 25 percent of sourcing for government projects will be now from the MSME sector, of which three
percent will be from women entrepreneurs.
 MSMEs can now sell their products on the Government eMarketplace (GeM), a one-stop-shop to
facilitate online procurement of common use goods.
Another Announcement –
 A Welfare Development Board will be created for nomadic and semi-nomadic community. A
Committee under NITI Aayog will be formed to identify these committees.
 National artificial intelligence portal will be developed soon.
Defence Sector –
 The government has already disbursed Rs. 35000 crore under One Rank One Pension (OROP).
 Military Service Pay has also been hiked substantially.
 The Defence Budget will cross Rs 3 lakh crore for the first time in 2019-20.
Infrastructure Sector –
 India's aviation industry has seen a high in the past. India now has more than 100 operational airports
with the inauguration of the Pakyong airport in Sikkim.
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 Due to 'UDAAN Scheme', ordinary citizens are also travelling by air now.
 India has become the fastest highway developer in the whole world with almost 27 km of highway
built everyday.
 Projects stuck for decades like the Eastern Peripheral Highway around Delhi or the Bogibeel rail-
cum-road bridge in Assam and Arunachal Pradesh have been completed.
 The construction of rural roads has also tripled. Around 15.8 lakh out of a total 17.84 lakh habitations
have been connected with pucca roads under PMGSY. PMGSY allocated Rs 19,000 crore in 2019-20.
 The flagship programme of Sagarmala along the coastal areas of the country will develop ports for
faster handling of import and export cargo.
 For the first time, container freight movement has started on inland waterways from Kolkata to
Varanasi.
 The Indian Railways has experienced the safest year in its history. All unmanned level crossings on
broad gauge network have been completely eliminated.
 The introduction of the first indigenously developed "Vande Bharat Express" will give the Indian
passengers world class experience with speed, service and safety.
 The capital support from the budget for railways is proposed at Rs 64,587 crore in 2019-20 (BE).
 The railways’ overall capital expenditure programme is of Rs 1,58, 658 crore.
 The people of North East have also received significant benefits of infrastructure development.
Arunachal Pradesh came on the air map recently and Meghalaya, Tripura and Mizoram have come on
India’s rail map for the first time.
 The allocation for the North Eastern Areas is being proposed to be increased by 21 percent to Rs
58,166 crore in 2019-20 over 2018-19.
Digital India –
 India is now leading the world in consumption of mobile data.

 The monthly consumption of mobile data increased by 50 percent in the last five years.
 The cost of data and calling in India is possibly the lowest in the world.
 More than 3 lakh service centres employ over 12 lakh people today under the Digital India push.
 The government now aims for 1,00,000 digital villages in the next five years.
 The number of mobile manufacturing companies increased from 2 to 268 in past five years, thereby
generating more jobs in India.
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Entertainment –
 Single window clearance for film shootings is being extended to Indian film makers. Earlier, it
was available only for foreign film makers only.
 Goyal also mentioned Hindi movie ‘Uri’ in the speech.
Financial Reforms –
 Around 34 crore Jan Dhan accounts were opened during 2014-18.

 The Budget speech also mentioned the government's big financial decision of demonetisation. The
move succeeded in eliminating the black money. Demonetisation and other moves were able to bring
back Rs 1,36,000 crores of cash to banks.
 More than one crore people filed income tax returns post demonetisation.
 Over 338000 shell companies were detected and their directors were disqualified.
Fiscal Expenditure –
 The Interim Budget pegs the Fiscal Deficit at 3.4 percent.

 Total expenditure rises from revised estimates Rs 24,57,235 crore in 2018-19 to Rs 27,84,200 crore in
2019-20, a rise of Rs 3,26,965 crore.
 Capital Expenditure for 2019-20 is estimated to be Rs 3,36,292 crore.
 Centrally Sponsored Schemes (CSS) are proposed were allocated with Rs 3,27,679 crore in 2019-20
as against Rs 3,04,849 crore in 2018-19 revised estimates.
 Allocation for National Education Mission is being increased from Rs 32,334 crore in 2018-19 revised
estimates to Rs 38,572 crore in 2019-20.
 Allocation for Integrated Child Development Scheme (ICDS) is being increased from Rs 23,357 crore
in 2018-19 revised estimates to Rs 27,584 crore in 2019-20.
Taxation Reforms –
 The direct tax collection has been increased substantially. The number of returns filed have increased
from 3.79 crore to 6.85 crore, showing 80 percent growth in tax base since four years. In 2018-19,
99.54 percent of the income-tax returns were accepted as they were filed.
 From now on, all returns will be processed in 24 hours and refund will be initiated at the earliest.
69
 The entire process will be done in the back-end so that a tax payer need not interact with an official,
thus, reducing time.
 With the efforts of the GST Council, the Goods & Services Tax (GST) resulted in increased tax base
and increased collection.
 Cinema goers who were subjected to multiple taxes up to 50 percent are mostly paying much lower
tax at 12 percent now.
 Exemptions from GST for small businesses has been doubled from Rs 20 lakh to Rs 40 lakh.
 Businesses comprising over 90 percent of GST payers will be allowed to file quarterly return soon.
 The GST collection for January 2019 is estimated at Rs 1.03 lakh crore.
 The government abolished the duties on 36 capital goods. Indian Customs is introducing full
digitization.
Tax proposals -
 Individual tax payers with taxable income of up to Rs 5 lakh will get full tax rebate from now on.
 Those earning Rs 6.5 lakh will not have to pay tax, if they invested in specified savings such as PF,
PPF, etc.
 However, the tax slabs will remain unchanged.
 This move will benefit around 3 crore middle class tax payers.
 For salaried persons, Standard Deduction is being raised from the current Rs 40,000 to Rs 50,000.
 The Tax Deducted at Source (TDS) on fixed deposits and postal deposits will be exempted for
interest earned up to Rs 40,000 from Rs 10,000 currently.
 The rent up to Rs 2.4 lakh will be exempted from TDS.
 The benefit of capital gains of up to Rs 2 crore will be increased to investment on two residential
houses. This benefit can be availed only once in a lifetime.
 The benefit of the section 80IBA of Income Tax Act will be extended for one more year for availing
of the affordable housing.
 Section 80IBA of Income Tax Act, 1961: Section 80IBA deals with 100 percent deductions for the
builders promoting affordable housing schemes subject to fulfilment of a few conditions.
70
GDP for BE 2019-2020 has been projected at Rs 21007439 crores assuming 11.5% growth over the estimated
GDP of Rs 18840731 crores for 2018-19 (RE).
As per the above table, the Revenue Receipts estimates for the fiscal year 2019-2020 stands at Rs 1977693
crores which include Tax Revenue as well as non-Tax revenue. Revenue generation from Capital receipts are
expected to be around Rs 806507 crores, that takes the Total receipts to Rs 2784200 crores.
71
The total expenditure presented in the budget 2019 is Rs 2784200 crores which is Rs 3,26,695 crores more
than the previous year’s Rs 2457235 crores indicates the government’s pledge to grant substantial investment
to spur growth in the country while maintaining the fiscal prudence with Fiscal Deficit 3.4% of the GDP. With
the Revenue Deficit of Rs 470214 crores, it is slated to be maintained at 2.2% of the GDP.
Where does the money come from?
72
The above-mentioned pie-chart describes in detail the distribution of the source of money the government of
India receives. The biggest source of income for the government is GST and Corporation-Tax which are both
estimated at 21% each of the total receipts. The government hopes to secure 19% of the investments through
Borrowings and 17% of it from the Income Tax Treasury. The other sources of receipts include Customs,
Union Excise Duties, Non-debt capital receipts and Non-Tax Revenue.
How is the money spent?
73
Looking at the chart, a major part of the expenditure goes into paying the States’ share of taxes and duties
pegged at about 23%. The GoI will spend 9% of the total expenditure on Central Sponsored Schemes such as
‘PM Kisaan Samman Yojana’. About 8% of the expenditure will be spent in the defence sector, while a large
chunk of the expense is consumed by paying up the Interest Payments. 8% is allocated to miscellaneous
expenditure, in case any revision is required in the current estimates.
74
Chapter-5
Conclusion and Suggestion
5.1 conclusion
A government budget is an annual financial statement presenting the government's

proposed revenues and spending for a financial year that is often passed by the legislature, approved by
the chief executive or president and presented by the Finance Minister to the nation. The budget is also known
as the Annual Financial Statement of the country. This document estimates the anticipated government
revenues and government expenditures for the ensuing (current) financial year.
For example, only certain types of revenue may be imposed and collected. Property tax is frequently the basis
for municipal and county revenues, while sales tax and/or income tax are the basis for state revenues,
and income tax and corporate tax are the basis for national revenues.
75
Bibliography
 Charles, T. H,(1997), Cost Accounting Managerial Emphasis.

 Cope, O.H, (1994), Operations Analysis: The Basis for Programme Budgeting:
performance budgeting and unit cost accounting for government unit.
 Lucey, T, (1988), Management Accounting (2nd edition), EIBS Op publication Ltd,
USA.
Webliography
www.wikipedia.com
www.governmentbudget.com
www.jagranjosh.com
www.scribd.com
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Budget and its Importance

Chapter No. Particular Page No.

1.1 Government Budget of India 3

1.2 Definition of Government Budget

1.3 History of Budget System in India

2.1 Objective of Government Budget

2.2 Impact of Budget

2.3 Need and Importance of Government Budget

2.4 Components of Government Budget

2.5 Types of Budget

2.6 Types of Government Budget

4. Data Analysis and Interpretation

4.1 Government Budgetary Process

4.2 Government Spending

4.3 Union Budget 2019-20

5. Conclusion and Suggestions

Bibliography and Website

1.1 Government Budget of India

1.2 Definitions of Government Budget

1.3 History of Budget System in India

First Indian Budget

2.1 Objectives of a Government Budget

(i) Economic growth:

(ii) Reduction of poverty and unemployment:

(iii) Reduction of inequalities/Redistribution of income:

(iv) Reallocation of resources:

(v) Price stability/Economic stability resource:

(vi) Financing and management of public enterprises:

2.2 Impact of the budget

2.3 Need and importance of a government budget

2.4 Components of Government Budget

The main components or parts of government budget are explained below.

(a) Revenue Receipts ↓

ii. Non-Tax Revenue:-

iii. India's Revenue Receipts :-

(b) Revenue Expenditure ↓

 Expenditure on defence and civil administration.

 Expenditure on exports and external affairs.

 Payment of interest on loans taken in the previous year.

iii. India's Defence Expenditure-

(a) Capital Receipts ↓

i. What are Capital Receipts?

(b) Capital Expenditure ↓

Difference between Revenue Receipt and Capital Receipt -

Difference between Capital Expenditure and Revenue Expenditure -

2.5 Types of Budget

(1) Railway budget and (2) Main Budget.

2.6 Types of Government Budget

(A) Balanced Budget:

Government’s estimated revenue = Governments proposed expenditure.

For individuals and families, it is always advisable to have a balanced budget.

(B) Unbalanced Budget:

Unbalanced Budget is of two types

Governments expected revenue ˃ Governments proposed expenditure.

Governments proposed expenditure ˂ Government’s expected revenue

Hence a surplus budget is practically non-existent.

Government’s estimated expenditure ˃ Governments expected revenue.

Governments expected revenue ˂ Government’s estimated expenditure

Types of Deficit in the Budget

Primary deficit = Revenue deficit –Interest payments

Objectives of Deficit financing –

Adverse effects of Deficit Financing