ECONOMICS

XII-(2023-24)

PART 1

VIDEO
NOTES
 MEANING

Government Budget is a statement of

expected receipts and expected expenditures
of the government for a fiscal year.
Every government prepares budget whether it
is local, state and central government.

First day of the month of February is well known

in India as a day the Finance Minister present
annual budget of the government called
Union Budget of India
 OBJECTIVES OF
GOVERNMENT
BUDGET
Managing Public Sector Enterprise:
There are large number of public sector
enterprises which are established and
managed for social welfare of the public.

Budget is prepared with the objective

of making various provisions
for managing such enterprise and
providing them financial help.

However in case public sector enterprises

are showing inefficiency and losses. The
govt may plan their privatization
 Economic stability:
Main objective of budget is to
bring stability in economy.
It control fluctuations in general
price level through taxes,
subsidies and government
expenditure.

for e.g. when there is inflation (continuous rise in prices)

Government can increase taxes and reduce its
expenditure.

When there is deflation (continuous fall in prices).

Government can reduce taxes and grant subsidies to
encourage spending by people.
REDISTRIBUTION OF INCOME AND WEALTH:

It means reduce the inequalities

between income and wealth. Through
the policy Government seeks to
promote “equity”. To increase the
disposable income of poor, Government
provide them subsidies.
To decrease the disposable income of rich section, tax
system is made progressive. Putting greater burden on
richer sections of the society. These are reflected in the
government budget by way of tax revenue and welfare
expenditure.
ALLOCATION OF RESOURCES:

Through the budgetary policy, government

aims to reallocate resources in
accordance with profit maximization
and social welfare. Government can
influence allocation of resources
through taxation and subsidies policy.

To encourage investment for welfare, Government can

give tax concessions and subsidies to the producers.
Government also discourage the production of harmful
consumption goods like, liquor, bidi, cigarettes,
tobacco etc. through heavy taxation and encourages
the use of “Khadi product” by way of subsidies.
ECONOMICS
XII-(2023-24)

PART 2

VIDEO
NOTES
 PRIMARY
FUNCTIONS
OF MONEY

BUDGETARY RECEIPTS BUDGETARY EXPENDITURE

(I) BUDGETARY RECEIPT

Budgetary receipts refer to total estimated money receipts of
the Government from all sources during a fiscal year.

TAX RECEIPT NON-TAX RECEIPT

1. Tax receipt: These are those
receipt of the Government which 2. Non-tax receipts: Non-tax
are received from the tax receipts are those receipts which are
received from sources other than
component (Tax source). ‘Tax’ is a
taxes. These are the following:
compulsory payment to the
government under any law. The TYPES
taxpayer cannot expect any
FINES
service or benefit from the
Government in Return. If a person FEES
fails to pay tax, he is liable to ESCHEAT
penal action. It is to be treated as
GRANTS/DONATIONS
revenue receipt because it neither
create any liability nor reduce any INCOME FROM
PUBLIC ENTERPRISES
asset of the government
INTRESTS

TYPES

DIRECT TAX

INDIRECT TAX
 TAX RECEIPT

DIRECT TAX
Direct tax are those tax, the person who bears the
burden of tax does himself deposit it with
government.

Burden of these taxes are not shiftable i.e. the

amount of tax can’t be recover from any other. These
taxes are progressive in nature.
e.g. Income tax, Corporation tax, gift tax, wealth tax,
etc.

INDIRECT TAX

Indirect tax are those tax,

the person who bears the
burden of tax does not
himself deposit it with
Government .
Burden of these taxes are
shiftable i.e. the amount of
tax can be recover from
customer. These taxes are
regressive in nature.
e.g. Goods and services tax,
custom duty, etc.
 NON-TAX RECEIPTS
(i)Fines: Fines are those payments which are made by the law
breakers to the Government by way of economic punishment. The
aim is not to earn revenue, but to make people respectful towards
the laws.

(ii)Fees: A fees is a payment to the Government for the services

that it renders to the people. e.g. Land registration fees, birth
registration fees, passport fees, court fees, license fees, etc. It is to
be noted that fee is not a payment for commercial service. It is a
payment for administrative and judicial services provided to the
people.

(iii) Escheat: It refers to income of the state which arises out of the
property left by the people without a legal heir.

(iv) Grants/ Donations: Grants received by the Government are

also a source in revenue. In the event of some natural calamities
like floods, famine, earthquake, or during wars. It also includes
donations received from citizens and non residents and rest of the
world.

(v) Income from public enterprises: Several enterprises are

owned by the Government e.g. Indian Railways, Indian Oil, Bhilai
Steel Plant, LIC, BHEL, etc.

(vi) Interest: Interest received by the government on loans are

considered as a revenue receipts.
 (B) CAPITAL RECEIPTS

These receipts are those receipts of the Government which

leads to creation of any liabilities the government or
reduction in any assets of the government.

BORROWING AND
RECOVERY OF LOAN OTHER LIABILITIES

DISINVESTMENT (PSU)

(i)Recovery of loan: Loan offered to others are assets of

the Government Accordingly recovery of loan cause
reduction in assets.

(ii)Disinvestment (PSU): Disinvestment occurs due to the

privatization.
It means sale of share of public sector undertaking to
private corporate sector. It reduces the assets of
Government

(iii) Borrowings & other liability: Government borrow

money from general public by issuing share / securities,
from RBI, from Rest of the world, it create liabilities of the
Government. Borrowings are debt creating capital
receipts.
ECONOMICS
XII-(2023-24)

PART 3

VIDEO
NOTES
 REVENUE
STOCK CAPITAL
FLOW
These are those
These are those receipts
receipts of the
1. MEANING
government which of the government which
don’t leads to leads to reduction in any
reduction in any assets or creation of any
assets nor creation of liabilities
any liabilities

2. NATURE These are recurring in These are non recurring

nature. in nature.

Revenue receipts Some capital

3.DEBT receipts like
are not debt
CREATION borrowing are debt
creating
creating

Tax receipts, fees, Recovery of loans,

4.EXAMPLES fines, interest, disinvestments (PSU) &
penalties, etc. borrowings.
 PRACTICE
QUESTION
Q.1) Classify the following into Revenue Receipts &
Capital Receipts, give reason.
(i) Loan from world bank
(ii) Corporation tax
(iii) Sale of shares held by Government of a PSU.
(iv) Dividend Received by Government from a company.
(v) Profit of LIC, a public enterprise.
(vi) Amount borrow from Japan for bullet train.
(vii) Goods & Service Tax collection
(viii) Recover amount of loan from Bhutan.

Q.2) Classify the following into debt creating and non-

debt creating capital receipt. Give reasons.
(i) Sale of public sector undertakings.
(ii) Borrowings from public
(iii) Recovery of loans

FORMULAE
FORMULAE:

TOTAL RECEIPTS = REVENUE RECEIPTS + CAPITAL RECEIPTS

REVENUE RECEIPTS = TAX REVENUE + NON TAX REVENUE

TAX REVENUE = DIRECT TAX + INDIRECT TAX

CAPITAL RECEIPTS = RECOVERY OF LOANS +

DISINVESTMENT + BORROWINGS
 (II) BUDGETARY EXPENDITURE

It refers to the total estimated expenditure

of the government over a fiscal year

REVENUE CAPITAL

(A)Revenue expenditure: These are those expenditure of

the government which do not create any asset nor
reduction in liability of the government.
Examples: Old age pension, subsidy, scholarship, salaries
to Government employees, interest payment, gifts, grants,
donation any type, expense on defense service, wage bill
of the government, expenditure on collection of taxes, etc.
These all are revenue expenditure because they do not
create any assets nor reduction in any liabilities of the
government.

(B) Capital expenditure: These are those expenditure of

the government which leads to reduction in liabilities of
the government or creation of any Assets of the
government
Examples: Repayment of loan, equity shares of the
domestic or multinational, corporations purchased by the
Government Expenditure on land and Building, Machinery,
equipment, construction of school, flyover, hospitals,
college, etc.
 REVENUE
STOCK CAPITAL
FLOW
These are those
These are those
expenditure of the
1. MEANING expenditures of the
government which
government which leads
don’t leads to
to creation of any assets
creation of any assets
or reduction of any
nor reduction of any
liabilities.
liabilities.

2. NATURE These are recurring in These are non recurring

nature. in nature.

These are incurred These are incurred

3.PURPOSE on normal on acquisition of
functioning of the assets and granting
government loans

Interest, subsidies, Acquisition of

expense on machinery,
4.EXAMPLES collection of taxes, construction of school,
donation, pensions, hospital, building,
etc repaid loans, etc.
 PRACTICE
QUESTION
Q.1) Giving reasons categories the following into revenue
and capital expenditure:
(i) Grants given to state government
(ii) Repayment of loans.
(iii) Expenditure on construction of roads.
(iv) Interest payment on past loans.
(v) Payment of salaries to Government employees.
(vi) Taking over a private firm by the Government
(vii) Expenditure on subsidies.
(viii) Purchase of shares by the Government
ECONOMICS
XII-(2023-24)

PART 4

VIDEO
NOTES
 Situation in Government Budget

(i) Balanced budget / Equilibrium Budget: It is a

situation when budgetary expenditure is equal to
budgetary receipts.

TR = TE

(ii) Surplus Budget: It is a situation when budgetary

receipts are greater than budgetary expenditure. In
situation of inflation, surplus budget is prepared by
the government.

TR > TE

(iii) Deficit Budget: It is a situation when budgetary

expenditures are greater than budgetary receipt. In
situation of deflation, deficit budget is prepared by
the government.

TE > TR
REVENUE DEFICIT FISCAL DEFICIT PRIMARY DEFICIT

BUDGETARY DEFICIT = TOTAL EXPENDITURE – TOTAL RECEIPTS

(i) Revenue deficit: It is the excess of revenue

expenditures over revenue receipts.
RD = RE – RR, Here (RE > RR)

IMPLICATIONS OF REVENUE DEFICIT

Since revenue receipts and revenue expenditures
are related largely to recurring expenses of the
Government (as on administration & maintenance)
High revenue deficit gives a warning signal to the
government either to cut its expenditure or increase
its tax/non tax receipts. In less developed countries
like India, it is difficult to force the poor people to
pay high tax. In such situation, the Government is
compelled to cope with high revenue deficit through
borrowings or disinvestment. Borrowings creates
liability of the Government whereas disinvestment
cause reduction in assets of the Government
(ii) Fiscal deficit: It is the excess of Total
expenditure over Total receipts other than
borrowings.
i.e. Fiscal deficit is equal to borrowings of the
Government Fiscal deficit =
TE – TR (excluding borrowings)
⇒ Fiscal deficit = Total expenditure – Revenue
Receipts – Capital receipts excluding Borrowings
⇒ Fiscal deficit = (RE + CE) – RR – Recovery of loan –
Disinvestment
⇒ Fiscal deficit = Budgetary deficit + Borrowing &
Other liabilities

IMPLICATIONS OF FISCAL DEFICIT

Greater fiscal deficit implies greater borrowings by

the Government.
(a)It causes Inflation: Government borrowings
includes borrowing from RBI.
It increases circulation of money in economy and
cause inflation.
(b) Increase foreign dependence: Government also
borrows from rest of the world. It increases our
dependence on other countries.
(c) It accumulates financial burden for future
generation to repay the loan with interest.
(d) Increase in fiscal deficit implies increase in
borrowings i.e. ultimately leads to increase in
interest expenditure i.e. increase in revenue deficit
also. It is also called Debt Trap.
(iii) Primary Deficit: It is the difference between
fiscal deficit and interest payment
Primary Deficit = Fiscal deficit – Interest payment
While fiscal deficit shows borrowings
requirement of the Government including of
interest payment on the accumulated national
debt. Primary deficit shows borrowing
requirement of the Government exclusive of
interest payment.
Tax Receipt = Direct Tax + Indirect Tax

PRACTICE
QUESTION
Q.1. How can the deficit in budget be financed?
(i) Deficit financing: This refers to borrowing by
Government from RBI against Treasury Bills. RBI
purchase the Bill in Return of Cash, which the
Government uses to fund the deficit.
(ii) Borrowing from public.
(iii) Disinvestment
(iv) Government should reduces its expenditure and
increase tax & non tax revenue
ECONOMICS
XII-(2023-24)

PART 5

VIDEO
NOTES
 PRACTICE
QUESTION
Q.1. FIND OUT (A) FISCAL DEFICIT AND (B) PRIMARY DEFICIT.

Q.2) FROM THE FOLLOWING DATA, CALCULATE (A)

REVENUE DEFICIT; (B) FISCAL DEFICIT
 Q.3) GIVEN THE FOLLOWING DATA ESTIMATE THE VALUE
OF: (I) REVENUE DEFICIT; (II) FISCAL DEFICIT:

Q.4) FROM THE FOLLOWING INFORMATION DETERMINE: (A)

CAPITAL EXPENDITURE, (B) TOTAL EXPENDITURE AND (C) INTEREST
PAYMENTS.

Q.5) CALCULATE (I) REVENUE DEFICIT (II) FISCAL DEFICIT (III)

PRIMARY DEFICIT.
Q.6) IF THE BUDGETARY DEFICIT OF THE
GOVERNMENT IS ₹50,000 CRORES AND THE
BORROWINGS AND OTHER LIABILITIES AND ₹14,000
CRORES, HOW MUCH WILL BE THE FISCAL DEFICIT?

Q.7) REVENUE DEFICIT IS ESTIMATED TO BE ₹20,000

CRORES, AND BORROWING IS ESTIMATED TO BE
₹15000 CRORE. IF EXPENDITURE ON INTEREST
PAYMENT IS ESTIMATED TO BE 50% OF THE REVENUE
DEFICIT FIND FISCAL DEFICIT AND PRIMARY DEFICIT

Q.8) FIND BORROWINGS BY THE GOVERNMENT IF

PAYMENT OF INTEREST IS ESTIMATED TO BE OF
₹15,000 CRORE WHICH IS 25% OF PRIMARY DEFICIT.

Q.9) CALCULATE (I) REVENUE DEFICIT (II) FISCAL DEFICIT (III)

PRIMARY DEFICIT
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