• Revenue – sources of revenue • Tax revenue and non tax revenue • Union budget analysis • Expenditure of government • Need, types, objectives of government expenditure • What is fiscal policy • Concept and types of fiscal policy • Different measures to control fiscal deficit

1. BUSINESS ENVIORNMENT
PRACTICAL
ASSIGNMENT WORK

2. TOPIC
THE REVENUE AND EXPENDITURE OF INDIA
AND
A FISCAL POLICY TO CONTROL FISCAL DEFICIT

3. Revenue – sources of revenue
 In common language revenue means tax or income. But in a business
concern revenue means sales proceeds of goods or services or it is the
price of goods sold or services rendered to the customers. "Revenue is
the monetary expression of the aggregate of products or services
transferred by an enterprise to its customers during a period of time".
The revenue for a given period is equal to the inflow of cash and
receivables (debtors) from sales made in that period. Thus:
Revenue = Amount received in cash + Receivable

4. Sources…
 Sale proceeds of goods or services (Sales A/C).
 Interest received on investment (Interest A/C credit balance).
 Dividend received on share (Dividend A/C).
 Discount received from creditors (Discount received account credit
balance)
 Commission received from customers (Commission A/C credit balance).
 Profit on sale of assets (except goods).
 Direct Taxes, as the name suggests, are taxes that are directly paid to the
government by the taxpayer. It is a tax applied on individuals and
organizations directly by the government e.g. income tax, corporation tax,
wealth tax etc.
 Indirect Taxes are applied on the manufacture or sale of goods and
services. These are initially paid to the government by an intermediary,
who then adds the amount of the tax paid to the value of the goods /
services and passes on the total amount to the end user. e.g sales tax,
service tax, excise duty etc.

5. Sources of public revenue
 Tax revenue :- Total tax revenue as a percentage of GDP
indicates the share of a country's output that is collected by the
government through taxes.
 Non tax revenue :- Non-Tax Revenue is the recurring income
earned by the government from sources other than taxes :-
a) Interest receipts
b) Surplus profits of reserve bank of india
c) Currency, coinage and mint
d) Railways
e) Profits of public enterprise

6. Economy of India (statistics)
• Budget balance :- 12.25 trillion Rs (US$ - 180 billion) (2018)
• Revenues :- 39.29 trillion Rs (US$ - 570 billion) 20.60% of GDP (2018)
• Expenses :- 52.03 trillion Rs (US$ - 750 billion) 27.28% of GDP (2018)
• Economic aid :- $ 3.09 billion (2017)

7. Expenditure of government
 In order to carry on their functions, governments must obtain
the services of labour and other factor units and (except in a
completely socialist economy) acquire goods produced by
private business firms.
 Public expenditure consists of expenditure by the central
government and state governments, local authority (such as
municipalities and public corporations), with central
government accounting for the major portion of such
expenditure. Thus the central government is required to
maintain good roads, bridges, defence activities, canals and
harbours, to protect trade, to maintain the coinage and to
provide social security, education and religious instruction.

8. Categories of Government Expenditures:
 Direct government purchases of goods and services :-
Purchases of goods and services include government expenditures on the
services of individuals, such as those in the armed forces, and on goods,
such as food, medicine schools, hospitals, highways, and motor cars.
When a good or service is provided for everyone and no one can be
excluded from its use, it is termed a public good. Flood control and
national defence systems are examples of public goods.
 Transfer payments :- A second category of government expen-
diture is transfer payments, which are payments from the
government for which nothing is received in return. Social security
benefits, compensation to unemployed people, benefits to senior
citizens and pensions to retired government employees and
freedom fighters are all examples of transfer payment programs.

9.  Interest paid on borrowed funds :-
Interest paid on borrowed funds is another type of government expenditure.
At times, government units finance some of their activities through
borrowing, and the interest on those borrowed funds is an expense that the
government unit must meet.
Contributing to the operation of various public
enterprises :-
The government may also incur expenses for running or contributing to the
operation of various public enterprises such as toll roads, airports, and
hospitals, or for providing intergovernmental grants. These grants are given
primarily by the Central Government to State and Local Governments.

10. Fiscal policy
 Fiscal policy is prepared to ensure the economic growth of a country. The
government of a country takes responsibility for the well-being of the
countrymen. That’s why every spending of the government should be in
the right order. And to do so, the government needs to collect the taxes
from businesses and individuals of the country.
 Concept of fiscal policy :-
a) Fiscal surplus :- When the government spends less than it earns, then the
government creates a fiscal surplus. This concept sounds great, but
normally it’s very difficult to create a surplus in reality.
b) Fiscal deficit :- When the government spends more money than it earns,
then it is called a fiscal deficit. This concept is very much known to the
public because the media and newspapers talk a lot about it. When a
government creates a fiscal deficit, it needs to take the debt from
external sources and then bear the cost (if any). Fiscal deficit, as you can
expect, is much more common phenomenon than fiscal surplus.

11. Types of fiscal policy
 Expansionary fiscal policy :- The government uses this by two ways. Either
they spend more money on public works, provide benefits to the
unemployed, spend more on projects that are halted in between or they
cut taxes so that the individuals or businesses don’t need to pay much to
the government. Expansionary policy isn’t easy to apply for state
government because state government is always on a pressure to keep a
budget that is balanced.
 Contractionary fiscal policy :- The nature of this sort of policy is just the
opposite. In this case, the government spending is cut as much as possible
and the rate of taxes is increased so that the purchasing power of the
consumer gets reduced.
 Taking away money from the hands of the consumers can be dangerous
because that means businesses will not be able to sell off goods and
services and as a result, the economy will take a sure-shot hit which only
can be reversed by taking the expansionary fiscal policy.

12. A fiscal policy to control fiscal deficit
• Measures to reduce government deficit :-
 Increased emphasis on tax-based revenues and appropriate
measures to reduce tax evasion.
 Disinvestment should be done where assets are not being used
effectively
 Reduction in subsidies by the government will also help reduce the
deficit.
 Try and avoid unplanned expenditures.
 Borrowing from domestic sources.
 Borrowing from external sources.
 A broadened tax base may also help in reducing the government
deficit.

13. Measures to Reduce Public Expenditure:
1. A drastic reduction in expenditure on major subsidies such as food,
fertilisers, exports, electricity to curtail public expenditure. A huge sum
of money equal to Rs. 20,000 crores are spent on major subsidies on
food, fertilisers, export promotion by the central government. Without a
drastic cut in subsidies over time it is difficult to reduce public
expenditure to an appreciable degree.
2. Die huge sum of money is spent by the government on LTC (Leave
Travelling Concessions), bonus, leave encashment etc. A reduction in
expenditure on these is desirable if the government is determined to cut
public expenditure.

14. 3. Another useful measure to cut public expenditure is to reduce interest
payments on past debt. In India, interest payments account for about 40
per cent of expenditure on revenue account of the central government. In
our view, funds raised through disinvestment in the public sector should be
used to retire a part of old public debt rather than financing current
expenditure. Retirement of public debt quickly will reduce burden of
interest payments in future.
4. Budgetary support to public sector enterprises other than
infrastructure projects should be substantially reduced. Further, public
sector enterprises should be asked to raise funds from the market and
banks.
5. Austerity measures should be adopted to curtail unnecessary
expenditure in all government departments.

15. Increasing Revenue from Taxation:
 To reduce fiscal deficit and thereby check rise in inflation rate, apart
from reducing government expenditure, government revenue has
to be raised.
 The obvious way to reduce a budget deficit is to increase tax rates
and cut government spending. However, the difficulty is that this
fiscal tightening can cause lower economic growth – which in turn
can cause a higher cyclical deficit (government get less tax revenue
in a recession). The best way to reduce fiscal deficits depends on
the situation a country is in.
 A budget deficit occurs when a government spending is greater
than tax revenues. This leads to an accumulation of public sector
debt. If the deficits are unsustainable, this can cause rising bond
yields (higher interest payments) and in the worse case, lead to a
loss of confidence in the government. Though this is quite rare for
countries with their own currency.