In the modern world, every government aims
at maximising the welfare of its country. It
require a number of infrastructural,
economics and welfare activities. All these
activities require huge expenditure to be
incurred. This requires appropriate planning
and policy of the government. The solution
to all these problems is “Budget”. A Budget is
a document containing detailed programmes
and policies of action for the given fiscal
Government budget is an annual
statement, showing item wise
estimates of receipts and
expenditure during fiscal year i.e.
financial year. The receipts and
expenditure, shown in the budget,
are not the actual figure, but the
estimated values for the coming
Budget is prepared by governments at all levels, i.e.
central government, state government and local
government, prepares its respective annual budget.
Estimated expenditures and receipts are planned as per
the objectives of the government.
In India, Budget is presented in the parliament on such a
day, as the President may direct. By convention, it is
prepared on the last working day of February each year.
It is required to be approved by the parliament, before it
can be implemented.
OBJECTIVES OF GOVERNMENT
INCOME AND WEALTH
Government prepares the budget for fulfilling certain
objectives. These objectives are the direct outcome of the
government’s economic, social and political policies. The
various objectives of government budget are:
Reallocation of Resources: Through the budgetary policy,
Government aims to reallocate resources in accordance with
the economic and priorities of the country. Government can
influence allocation of resources through:
Tax concession or subsidies: To encourage investment,
government can give tax concession, subsidies etc. to the
producers. For example, Government discourages the
production of harmful consumption goods(like liquor,
cigarettes etc.) through heavy taxes and encourages the use
of “Khadi Products” by providing subsidies.
Directly producing goods and services: If private sector does
not take interest, government can directly undertake the
Reducing Inequalities in income and wealth: Economic
inequality is an inherent part of every economic system.
Government aims to reduce such inequalities of income
and wealth, through its budgetary policy. Government
aims to influence distribution of income by imposing
taxes on the rich and spending more on the welfare of
Economic Stability: Government budget is used to prevent
business fluctuation of inflation of deflation to achieve
the objective of economic stability. The government aims
to control the different phases of business fluctuations
through its budgetary policy.
Management of Public Enterprises: There are large
numbers of public sector industries(especially natural
monopolies), which are established and managed for
social welfare of the public. Budget is prepared with the
objectives of making various provisions for managing
such enterprises and providing them financial help.
Economic Growth: The growth rate of a
country depends on rate of saving and
investment. For this purpose, budgetary
policy aims to mobilise sufficient resources
for investment in the public sector.
Therefore, the government makes various
provisions in the budget to raise overall rate
of savings and investment in the economy.
Reducing regional disparities: The
government budget aims to reduce
regional disparities through its taxation and
expenditure policy for encouraging setting
up of production units in economically
Components of budget refers to structure of the budget.
Two main components of Budget are:
Revenue Budget: It deals with the revenue aspect of the
government budget. It explains how revenue is
generated or collected by the government and how it is
allocated among various expenditure heads. Revenue
budget has two parts:
i. Revenue Receipts
ii. Revenue Expenditures
Capital Budget: it deals with the capital aspect of the
government budget and it consists of:
i. Capital Receipts
ii. Capital Expenditures
Budget Receipts refer to the estimated money receipts of
the government from all sources during a given fiscal
year. Budget receipts may be further classified as:
i. Revenue Receipts
ii. Capital Receipts
Revenue receipts refer to those receipts which
neither create any liability nor cause any
reduction in the assets of the government. They
are regular and recurring in nature and
government receives them in its normal course of
A receipts Is revenue receipt, if it satisfies the
following two essential conditions:
The receipts must not create a liability for the
The receipts must not cause decrease in the
Sources Of Revenue Receipts
Tax Revenue refers to sum
total of receipts from taxes
and other duties imposed by
Non Tax revenue refers to
receipts of the government
from all sources other than
those of tax receipts.
Basis Direct Taxes Indirect Taxes
Direct Taxes refer to taxes that are
imposed on property and income
of individuals and companies and
are paid directly by them to the
Indirect Taxes refer to those
taxes which affect the income
and property of individuals and
companies through their
Direct Taxes are levied on
individuals and companies.
Indirect Taxes are levied
on goods and services.
The burden of a shift tax cannot be
shifted, i.e. impact and incidence is
on same person.
The burden of an indirect tax
can be shifted, i.e. impact and
incidence is on different person.
They are generally
progressive in nature.
They are generally
proportional in nature.
They have limited reach as they
do not reach all the sections of
They have a wide coverage
as they reach all sections of
the sections of the society.
Interest: Government receives interest on loans given by it to
state government union territories, private enterprises and
general public. Interest receipts from these loans is an
important source of non tax revenue.
Profit and Dividends: government earns profit through public
sector undertakings like Indian Railways , LIC, BHEL, etc. It
earns profit from the sale proceeds of the products of such
Fees: Fees refer to those charges imposed by the government to
cover the cost of recurring services provided by it. Such services
are generally in public interest and fees is paid by those, who
receive such services. It is also a compulsory contribution like
License Fee: It is a payment charged by the government to grant
permission for something. For example, license fee paid for
permission of keeping a gun or to obtain National Permit for
Fines and Penalties: They refer to those payments which are
imposed on law breakers. For Example, fine for jumping red
light or penalty for non-payment of taxes.
Escheats: It refers to claim of the government on the
property of a person who dies without leaving behind any
legal heir or a will.
Gifts and Grants: Government receives gifts and grants
from foreign governments and international organisations.
Forfeitures: These are in the form of penalties which are
imposed by the courts for non-compliance of orders or
non-fulfilment of contracts etc.
Special Assessment: It refers to the payment made by
owners of those properties whose value has appreciated
due to developmental activities of the government. For
example, if a value of property near a metro station has
increased, then a part of developmental expenditure is
recovered from owners of such property in the form of
Capital receipts refer to those receipts
which either create a liability or cause a
reduction in the assets of the government.
They are non-recurring and non-routine in
nature. A receipt is a capital receipt if it
satisfies any one of the two conditions:
The receipt must create a liability for the
The receipts must cause a decrease in
Capital receipts are broadly classified into three group:
Borrowings: Borrowings are the funds raised by government to meet
excess expenditure. Government borrow fund from:
a)Open Market(Public) b)Reserve Bank of India(RBI)
c)Foreign governments(loans from USA) d)International Institution
Recovery from Loans: Government grants various loans to state
governments or union territories. Recovery of such loans is a capital
receipt as it reduces the assets of the government.
Other Receipts: These include:
1. Disinvestment: Disinvestment refers to the act of selling a part or
the whole of shares of selected public sector undertakings(PSU) in
the form of equity shares.
2. Small Savings: Small saving refer to funds raised from the public in
the form of Post Office deposits, National Saving Certificates, Kisan
Vikas Patra etc.
Basis Revenue Receipts Capital Receipts
They neither create any liability
nor reduce any asset of the
They either create any
liability or reduce any
asset of the government.
They are regular and recurring
They are irregular and
non-recurring in nature.
There is no future obligation to
return the amount.
In case of certain capital
there is future obligation
to return the amount
along with interest.
Tax revenue and Non-tax
Budget expenditure refers to the
estimated expenditure of the
government during a given fiscal
year. The budget expenditure can
be broadly categorised as:
Revenue Expenditure refers to the expenditure which
neither creates any asset nor causes any reduction in
any liability of the government. It is recurring in nature.
It is incurred on normal functioning of the
Examples: Payment of salaries, pensions, interests,
An expenditure is a revenue expenditure, if it satisfies
the following two essential condition:
a) The expenditure must not create an asset of the
b) The expenditure must not cause decrease in an
Capital expenditure refers to the expenditure which either
creates an asset or causes a reduction in the liabilities of
the government. It is non-recurring in nature.
It adds to capital stock of the economy and increases its
productivity through expenditure on long period
Examples: Loan to states and Union Territories, etc.
An expenditure is a capital expenditure, if it satisfies any
one of the following two conditions:
1. The expenditure must create an asset for the
2. The expenditure must cause a decrease in the liabilities.
Budget expenditure can also be classified as Plan and
Plan Expenditure: It refers t the expenditure that is
incurred on the programmes detailed in the current
five year plan. For example, expenditure on agriculture
and allied activities, irrigation, energy, transport,
communication, etc. Plan expenditure shows the
expenditure to be incurred on:
1. Projects covered under the Central Plans
2. Central Assistance for State and Union Territories.
Non Plan Expenditure: It refers to the expenditure
other than the expenditure related to the current five
year plan. For example, payment of interest,
expenditure on defence services, subsidies etc. It is
incurred on routine functioning of the government.
Therefore, it is a must for every country.
Budget Expenditure can also be classified as
Developmental and Non-Developmental Expenditure.
1) Developmental Expenditure: It refers to the
expenditure which is directly related to economic and
social development of the country. For example,
expenditure on education, health, social welfare etc. It
adds to the flow of goods and services in the
2) Non Developmental Expenditure: It refers to the
expenditure which is incurred on the essential general
services of the government. For example, expenditure
on defence, administrative services, police, justice etc.
It does not directly contribute to economic
development, but it indirectly helps in the
development of the economy.
There are three types of budgets:
o Balanced Budget: Government budget is said to be
balanced budget if estimated government receipts
are equal to the estimated government
o Surplus Budget: If estimated government receipts
are more than the estimated government
expenditure, then the budget is termed as “Surplus
o Deficit Budget: If estimated government receipts
are less than the estimated government
expenditure, then the budget is termed as “Deficit
Budgetary deficit is defined as the excess of
total estimated over total estimated revenue.
When the government spends more than it
collects, then it incurs a budgetary deficit.
With reference to budget of Indian
government, budgetary deficit can be of 3
1) Revenue Deficit
2) Fiscal Deficit
3) Primary Deficit
Revenue Deficit is concerned with the
revenue expenditures and receipts of the
government. It refers to excess of revenue
expenditure over revenue receipts during the
given fiscal year.
Revenue Deficit = Revenue Expenditure – Revenue
It signifies that government’s own revenue is
insufficient to meet the expenditures on
normal functioning of government
departments and provisions for various
It indicates the inability of the government to meet its
regular and recurring expenditure I the proposed
It implies that government is dissaving, i.e. government
is using up savings of other sectors of the economy to
finance its consumption expenditure.
It also implies that the government has to make up this
deficit from capital receipts, i.e. through borrowings or
Use of capital receipts for meeting the extra
consumption expenditure leads to an inflationary
situation in the economy. Higher borrowings increase
the future burden in terms of loan amount and interest
A high revenue deficit gives a warning signal to the
government to either curtail its expenditure or increase
Reduce Expenditure: Government
should take serious steps to reduce its
expenditure and avoid unproductive
or unnecessary expenditure.
Increase Revenue: Government should
increase its receipts from various
sources of tax and non-tax revenue.
Fiscal deficit presents a more comprehensive view of
budgetary imbalances. Fiscal Deficit refers to the
excess of total expenditure over total receipts
(excluding borrowings) during the given fiscal year.
Fiscal Deficit= Total Expenditure – Total Receipts
Sources Of Financial Fiscal Deficit:
Government has to look out for different options to
finance the fiscal deficit. The main two sources are:
Borrowings: Fiscal Deficit can be met by borrowings
from the internal sources or external sources.
Deficit Financing: Government may borrow from RBI
against its securities to meet the fiscal deficit. RBI
issues new currency for this purpose. This process
is known as deficit financing.
The implications of fiscal deficit are as follows:
Debt Trap: Fiscal deficit indicates the total
borrowings requirements of the government.
Borrowings not only involve repayment of principal
amount, but also require payment of interest.
Inflation: Government mainly borrows from Reserve
Bank of India (RBI) to meet its fiscal deficit. RBI prints
new currency to meet the deficit requirements.
Foreign Dependence: Government also borrows from
rest of the world, which raises its dependence on other
Hampers the Future growth: Borrowings increase the
financial burden for future generations. It adversely
affects the future growth and development prospects
of the country.
Primary deficit refers to difference between fiscal
deficit of the current year and interest payments on the
Primary Deficit = Fiscal Deficit – Interest Payments
Implications Of Primary Deficit:
It indicates, how much of the government borrowings
are going to meet expenses other than the interest
payments. The difference between fiscal deficit and
primary deficit shows the amount of interest payments
on the borrowings made in past. So, a low or zero
primary deficit indicates that interest commitments
have forced the government to borrow.