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BUDGET AND ITS
•Meaning of Government Budget
•Objective of Government Budget
•Components of Budget
•Measures of government Deficit
In the modern world every government
aims at maximization of the welfare of its
country. It requires a number of
infrastructural economic and welfare
activities. All these activities requires huge
expenditure to be incurred. This requires
appropriate planning and policy. Budget
helps in Planning and framing policies.
Meaning of budget
The term budget is derived from the French word
"Budgette" which means a "leather bag" or a "wallet". It is a
statement of the financial plan of the government.
"A budget is a document containing a preliminary approved
plan of public revenues and expenditure".
In general Government Budget is an annual statement’
showing items wise estimates of receipts and expenditures
during a fiscal year. The receipts and expenditure shown in
the budget are not the actual figures but only the estimated
values for the coming year. The fiscal year is considered from
1st April to 31st March.
Important Points of Government Budget
• Budget is prepared by government at all level i.e, central
government state government and local government prepare its
respective annual budget . However, we restrict our studies to
budget of central government known as Union Budget.
• Estimated expenditures and receipts are planned as per the
objective of the government.
• In India, Budget is presented in parliament on such a day as the
president may direct by convention, It is presented on last
working day of February, each year.
• It is required to be approved by the parliament before it can be
2017-18 Budget at a Glance
(in ₹ crore)
2016-2017 Budget estimates
(in ₹ crore)
(in ₹ crore)
(in ₹ crore)
1. Revenue Receipts 1195025 1377022 1423562 1515771
2. Capital Receipts1 595748 601038 590845 630964
3. Total Receipts 1790783 1978060 2014407 2146735
4. Scheme Expenditure 725114 801966 869847 945078
5. Expenditure on Other than
1065669 1176094 1144560 1201657
6. Total Expenditure 1790783 1978060 2014407 2146735
7. Revenue Deficit 342736 354015 310998 321163
8. Effective Revenue Deficit 210982 187175 139526 125813
9. Fiscal Deficit 532791 533904 534274 546532
23. Primary Deficit 91132 41234 51205 23454
• Government prepares the Budget for
fulfilling certain objectives. These
objectives are the direct outcome of
government economic , social and
political policies . The various
objectives of Government Budget etc.
◄1)Reallocation of Resources:-Through
the Budgetary policies, government
aims to reallocate resources in
accordance with the economic and
social priorities of the country.
1) Tax concessions or subsidies:- to
encourage investment government
can give tax to producers for ex:
government discourage the
production of harmful by providing
2) Directly producing goods and
services:-If private sector does not
take interest, government can
directly undertake the production.
2)Reducing inequalities in income and
wealth:- Economic inequalities is an
inherent part of every economic system.
Government aims to reduce 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 the poor. It will reduce income
of rich and raise standard of living of the
poor, thus reducing inequalities in the
distribution of income.
3) Economic Stability:-Government
budget is used to prevent business
fluctuations of inflation or deflation to
achieve the objective of economic
●Inflationary tendencies emerge when
aggregate demand is higher than
●During deflation, government can
increase its expenditure and give tax
concessions and subsidies.
• 4)Financing and management of public sector
enterprises: There are large number of
public sector industries and managed for
social welfare of the public budgets
prepared with the objective of making
various provision for managing such
enterprises and providing them financial
◄5)Economic Growth:- the growth rate of a
country depends on rate of saving and
investment for this purpose bugetary policy
aims to mobilise sufficient resources for
investment I the public sector. Through the
government makes various provisions in the
Public Sector . Therefore the government
makes various rate of saving and
investments in savings.
◄6)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
•Two major components of Budget
●Revenue Budget:- It deals with
the revenue aspect to the
government budget. It explains
how revenue is generated or
Capital Budget:- Capital
Budget consists of capital receipts
and payments. It also incorporates
transactions in the Public
•The components of Budget can also be
categorised according to receipts and
expenditure .On this basis two broad
components are :-
1)Budget Receipts 2) Budget
◄Budget Receipts:-Budget receipts
refers to the estimated money receipt
of this government from all sources
during a given fiscal year Budget
•Revenue Receipts:- Revenue Receipts refers to those
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 activities.
A receipt is a revenue receipt is satisfies the
following two essential conditions:-
1)The receipt must not create a liability for
government for ex:- taxes levied by the government
are revenue receipts as they do not create any
liability. However any amount borrowed by the
government is not a revenue receipt as it cause an
increase in the liability in terms of repayment of
2)The receipt must not cause decrease in the asset
for ex:- receipts from sale of shares of a public
Sources of Revenue
• Revenue Receipts of the government are generally classified
under two heads:-
• 1) Tax Revenue
• 2) Non Tax Revenue
• Tax Revenue refers to sum total of receipts from taxes and
duties imposed by the government . Tax is compulsory payment
made by people and companies of the government without
reference to any direct benefit in return .It means there are two
aspects of taxes
• i)Tax is a compulsory payment no one can refuse to pay it.
• ii) Tax receipts are spent by the government for common
benefit of people in the country.
Types of taxes
•1) Direct Taxes:- They are imposed on property and income of
individual and companies and are paid directly by the government.
•They are imposed on individuals and companies.
•The liability to pay the tax actual burden of tax lie on the same
person i.e burden can not be shifted to others. E.g. income tax,
•2)Indirect Taxes:- Refers to those taxes which affect the income and
property of individuals and companies through their consumption
expenditure. E.g. Vat, GST, entertainment tax
Non Tax Revenue
Non tax revenue refers to receipts of the
government from all services other than those tax
receipts. The main sources of non tax revenue are:-
1. Interest:- Government receives interest on loans
given by it to state government union territories
private enterprises and general public
2. Fees:- It refers to charges imposed by
government cover the cost of recurring provided
by it court fees, registration fees etc. are some
example of fees.
•License Fees:- It is a payment
charged by the government to
grant permission of something
license fees paid for permission
of keeping a gun or to obtain.
National permit for commercial
•Fines and Penalties :-They
refers to those payment which
are imposed on Law Breakers
E.G: fine for jumping light, for
non-payment of tax the latter is
imposed to generate revenue.
•Escheats:-It refers to claim of
the government on the property
of a person who dies without
leaving behind a heir or a will.
•Gifts and Grants:- Government receives
gifts and grants from foreign government
and international organisations.
Sometimes, individuals and companies
money to the government received during
national crisis such as war food etc.
•Forfeitures:- These are in the form of
penalties which are imposed by the court
of non-compliance of others contract etc.
•Special Assesment:-It refers to the
payment made by the owners of those
properties whose value has appreciated
due to development activities of the
government expenditure is recovered
Components of capital budget
•Capital receipts refers 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
•1)The receipts must create a liability for the
government borrowings are capital receipts as they
lead to an increase in the liability of the government
. However tax received is not a capital receipt as it
does not result in creation of any liability.
•2)The receipts must cause a decrease in the assets
receipts fro, scale of share of public enterprises is
a capital receipt as it leads to reduction in assets of
•Capital Receipts are broadly classified into three
•Borrowings:- borrowings are the funds raised
by government to meet excess expenditure
•i) Government Open Market
•ii) Reserve Bank Of India
•iii) Foreign Government
•v) Borrowings are capital receipts as they
create a liability for the government.
•Recovery of Loans:- Government grants
various loans to state government or union
territories assets of the government.
•Other Receipts:- These include the following
•Disinvestment:- Refers to the act of selling a
part or the whole of shares of selection
public sector undertakings held by the
government. They are termed as capital
receipts as they reduce the assets of the
government . A part of or whole of its shares
it leads to transfer of ownership PSU to the
•Small Saving:- Refers to funds raised from
the public in the form of post office deposits
, National saving certificates , Kisan Vikas
Patras etc. They are treated as capital
receipts as they lead to an increase liability.
Classification:- A receipt is a capital, if it
Items Categorized as Revenue and Capital Receipts
•1)Loan from the World Bank:-It is a capital
receipt as it creates liability for the government.
•2)Corporation Tax:-It is revenue receipt as it
neither creates any liability nor reduces any
•3)Grants received from World Bank:-It is a
revenue receipt as it creates any liability nor
reduces any asset of the government.
•4)Profits of Public Sector Undertaking:-It is a
revenue receipt as it neither creates liability nor
reduces asset of the government.
•5)Sale of a Public Sector Undertaking:- It is a
capital receipt as it reduces assets of the
•6)Foreign Aid against earthquake victims:-
It is a revenue receipt as it neither creates
any liability nor reduce any asset of the
•7)Dividends on Investment made
Government:-It is revenue receipt as it
neither any liability nor reduces any asset
of the government.
•8)Borrowings from Public:-It is a capital
receipt as it creates liability.
•9)Recovery of Loans:-It is a capital receipt
as it reduces assets of the government.
•10)Interest received :-Its is a revenue
receipt as it neither creates any liability nor
•Budget Expenditure refers to
the estimated expenditure of
the government during a given
fiscal year. The budget
expenditure can be broadly
•2) capital Expenditure
•Revenue expenditure refers to the
expenditure which neither creates any
asset nor causes reduction in any liability
•It is recurring in nature.
•It is incurred on normal functioning of the
•The expenditure must not create an asset
of the government. Payment of salaries or
pension is revenue expenditure as it does
not create any asset Development of delhi
metro is not a revenue expenditure as it
• Capital Expenditure refers to the
expenditure which either creates an
asset or cause a reduction in the
liabilities of the government. It is
non-recurring in nature.
• It adds to capital stock of the
economy and increase its
productivity through expenditure on
long period like Metro or Flyover.
• The expenditure must create an
asset for the government for ex:-
School building construction is
capital expenditure as it leads to
creation of asset However, any
amount paid as salaries to teachers
is not a capital expenditure.
• Examples: loan to states and union
territories expenditure on building,
roads, flyovers etc.
•4)Construction of school buildings:-It is a capital
Expenditure as it increase asset of the government.
•5)Expenditure incurred on Administrative:-It is a
revenue expenditure as it neither creates nor
reduces any liability of the government.
•6)Repayment of Loans:-It is a capital expenditure as
it reduces the assets of the government.
•7)Expenditure on building a bridge:-It is a capital
expenditure as it increase asset of the government.
•8)Payment of Salaries to staff of government:-It is
a revenue expenditure as it neither creates any
asset nor reduces anyliabilty of the government.
•9)Purchase of 20 cranes for the flyover:-It is a
capital expenditure as it increase asset of the
Plan and Non Plan Expenditure
•1)Plan Expenditure:-Plan Expenditure
refers to the expenditure that is incurred
on the programmes detailed in the
current five year plan for ex:-
expenditure on agriculture and allied
activities, irrigation, energy, transport
i)Projects covered under the central plans
ii)Central assistance for state and Union
•2)Non-Plan Expenditure:-Non plan
Expenditure refers to the expenditure
Development and Non Development Expenditure
•1)Development Expenditure refers to the
expenditure which is directly related to
economic and social development of the country.
Expenditure on such services is not a part of
the essential functioning of the government.
Developmental expenditure adds to the flow of
goods services in the economy.
•2)Non Developmental Expenditure refers to the
expenditure which is incurred on the essential
general services of the government. It does not
directly contributes to economic development
but it directly help in the development in the
economy such expenditure is essential from the
Measures of Govt. BUDGET Deficit
•Budgetary deficit is defined as the
excess of total estimated expenditure
over total estimated revenue. When
the govt. spends more than it collects
then it incurs a budgetary deficit with
reference to budget of Indian Govt.
Can be of 3 type:-
•Revenue Deficit is concerned with the
revenue expenditure and revenue
receipts of the government. It refers
to excess of revenue expenditure over
revenue receipts during the given
•Revenue Deficit signifies that
government own revenue is insufficient
to meet the expenditures of
•Revenue deficit= Revenue
expenditure – Revenue Receipts
Implications of revenue deficit
• It indicates the inability of the government to meet its
regular and recurring expenditure in the proposed
• It implies that government is dis-saving i.e government
is using up saving or other sector of the economy to
finance its expenditure.
• It also implies that the government has to make up this
deficit from capital receipts i.e through borrowings or
reduces the assets.
• Use of capital receipts for meeting the extra
consumption expenditure leads to an inflationary
situation in the economy.
• A high revenue deficit gives a warming signal to the
government to either curtail its expenditure.
• Reduce expenditure govt. should take serious steps to
A fiscal deficit occurs when a
government's total expenditures exceed
the revenue that it generates, excluding
money from borrowings.
Fiscal Deficit presents a more
comprehensive view of budgetary tool for
explaining and understanding the budgetary
development in India.
The extent of Fiscal deficit is an indication
of how for the government is spending
beyond its means.
Fiscal Deficit= Total Expenditure- Total
•Fiscal deficit indicates the total
borrowings requirements of the govt.
borrowing not only repayment of principal
amount, but also require payment of
•Government mainly borrow from Reserve
Bank Of India to meet its Fiscal Deficit.
•Government also borrow from rest of the
world which raises its dependence on their
•Borrowings increase the financial burden.
Sources Of Financing Fiscal
•Borrowings:-Fiscal deficit can be
meet by borrowings from the
internal sources on the external
•Deficit Financing:-Government may
borrow from Reserve Bank Of
India against its securities to meet
the fiscal deficit .RBI issues new
currency for this purpose.
Primary Deficit & Implications
•It indicates how much of the government
borrowings are going to meet expenditure other
than. It indicates interest payments.
•The difference between Fiscal Deficit and Primary
Deficit shows the amount of interest payment on
the borrowings , made in past .
•Primary deficit = Fiscal Deficit – Interest Payments
•In India interest payment have considerably
increased in the recent years. High interest
payment on past borrowings have greatly increased
the fiscal deficit . To reduce the fiscal deficit
interest payment should be reduce4d through
repayments of loans as early as possible.
How to classify expenditure as
Revenue or Capital Expenditure?
•An Expenditure is a capital expenditure if it either
creates an asset or reduces a liability.
•An expenditure is revenue expenditure if it neither
creates any asset nor reduces any liability.
•1)Subsidies:-It is a revenue expenditure as it
neither create any asset nor reduce any of the
•2)Defence capital equipments purchased from
Germany:-It is a capital expenditure as it increase
asset of the government.
•3)Grants given to State Governments:-It is a
revenue expenditure as it neither creates any asset
nor reduces any of the government.
•Macroeconomics: T.R.Jain & V.K.Ohri
•Macroeconomics: Sandeep Garg
•All in one : Akansha Sharma
• By K.K.Dewett