Government Budget: NBSE Class 12 Economics notes

Here, you will find summaries, questions, answers, textbook solutions, pdf, extras etc. of (Nagaland Board) NBSE Class 12 (Arts/Commerce) Economics Chapter 10: Government Budget. These solutions, however, should be only treated as references and can be modified/changed.

Introduction

A government budget is an annual financial statement presenting the estimated revenues and expenditures of the government over the upcoming fiscal year. It outlines how the government plans to allocate resources to achieve its policy objectives.

The annual union budget presented by the central government has two key components – the revenue budget and the capital budget. The revenue budget consists of revenue receipts like taxes and non-taxes, and the expenditures met from these revenues related to the normal functioning of government departments. The capital budget comprises of capital receipts like borrowings and disinvestment proceeds, and long-term capital expenditures on asset creation and investments.

On the receipts side, government receipts are divided into revenue receipts and capital receipts. Revenue receipts neither create liabilities nor reduce assets, and include proceeds from taxes like income tax, corporate tax, customs duties, etc. and non-taxes like interest, dividends, fees and fines. Capital receipts either create liabilities like market borrowings or reduce assets like disinvestment, and are used to finance capital expenditures.

On the expenditure side, the budget is split into revenue expenditures and capital expenditures. Revenue expenditures like interest payments, subsidies and salaries neither create assets nor reduce liabilities. Capital expenditures like asset purchases, investments and loan disbursals create assets or reduce liabilities.

Based on whether estimated revenues equal, exceed or fall short of estimated expenditures, budgets are characterized as balanced, surplus or deficit respectively. A balanced budget means receipts equal expenditures. A budget surplus indicates excess receipts, while a budget deficit implies expenditures exceed receipts and needs to be financed through borrowings. Deficit budgets are commonly adopted now to fund welfare expenditures.

The government budget through appropriate revenue and expenditure policies serves as an effective fiscal tool to steer the economy towards stability and growth.

Textual questions and answers

A. Very short-answer questions (answer in one word/one sentence)

1. What are direct taxes?

Answer: When liability to pay a tax and the burden of that tax falls on the same person, the tax is called a direct tax. 

2. What are revenue receipts?

Answer: These are proceeds of taxes, interest and dividend on government investment, cess and other receipts for services rendered by the government. 

3. Define capital receipts.

Answer: When the govt. raises funds either by incurring a liability or by disposing of its assets, it is called a capital receipt.

4. Which one of the following is not an objective of government budget?

Answer: Question is incomplete.

5. A government budget is an annual statement of __________ during a fiscal year.

Answer: The estimated receipts and expenditure of the government.

6. State examples of indirect tax.

Answer: Sales tax, excise duty, custom duty, entertainment tax etc.

7. What is repayment of loan?

Answer: Repayment of loan is a capital expenditure.

8. What is revenue deficit?

Answer: Revenue deficit is excess of total revenue expenditure of the government over its total revenue receipts.

9. What is borrowing in government budget?

Answer: Borrowing in government budget is the only way to finance fiscal deficit. Borrowing can be from domestic sources, e.g., public and commercial banks, open market operations and the Central Bank, or from external sources like World Bank, IMF, and Foreign Banks.

10. The non-tax revenue is ____________.

Answer: All receipts from sources other than taxes.

B. Short-answer questions-I (answer in 30-50 words)

1. What is a government budget?

Answer: A government budget is an annual financial statement of estimated revenue and estimated expenditure during a fiscal year.

2. What are the objectives of a budget? Write any two.

Answer:  The objectives of a budget are:

• Reallocation of resources: To allocate resources in line with social and economic objectives, the Government provides more resources into socially productive sectors.
• Reduction of inequalities in income and wealth: The Government can reduce inequalities of income and wealth through its tax and expenditure policy.

3. Give two examples of debt creating capital receipts.

Answer: Examples of debt creating receipts are net borrowing by government at home, loans received from foreign govts, borrowing from RBI. 

4. Give two examples of non-debt capital receipts.

Answer:  Examples of non-debt capital receipts are recovery of loans, proceeds from sale of public enterprises (i.e., disinvestment), etc.

5. Why is tax not a capital receipt?

Answer: Tax is considered a revenue receipt because it neither creates assets nor reduces the government’s liability. Therefore, it does not meet the criteria for being a capital receipt.

6. Why are borrowings by government capital receipts?

Answer: Borrowings are categorized as capital receipts because they create a liability for the government, specifically the obligation to return the borrowed funds. This characteristic qualifies them as capital receipts.

7. Why is recovery of loan a capital receipt?

Answer: Recovery of loans is treated as a capital receipt because it leads to a reduction in the assets of the government. When a loan is repaid, the value of the government’s assets decreases, thus qualifying it as a capital receipt.

8. Why is interest received on loan a revenue receipt?

Answer: Interest received on loans is considered a revenue receipt because it neither creates a liability nor reduces an asset for the government. It is a form of income that does not alter the government’s financial obligations or assets.

9. Why is sale of public undertaking a capital receipt?

Answer: The sale of a public sector undertaking is considered a capital receipt because it results in a reduction of government assets. When the government sells its shares in a public sector enterprise, its assets decrease, qualifying the proceeds as a capital receipt.

10. What is ‘Disinvestment’?

Answer: Disinvestment means selling a whole or part of the shares (i.e., equity) of selected public sector enterprises held by the government to the private sector. This action reduces government assets and is sometimes termed as privatization.

11. Define public expenditure.

Answer: Capital expenditure as an expenditure that either creates an asset or reduces liability. It includes expenditures on the purchase of land, buildings, machinery, and investment in shares, among others. Such expenditures add to the capital stock of the economy.

12. Why is repayment of loan a capital expenditure?

Answer: Repayment of a loan is considered capital expenditure because it reduces the liability of the government. When a loan is repaid, the government’s financial obligations decrease, making it a capital expenditure.

13. Why are subsidies treated as revenue expenditure?

Answer: Subsidies are treated as revenue expenditure because they neither create assets nor reduce liabilities. Subsidies are short-term, recurring expenditures incurred for the normal functioning of government machinery.

14. How can a deficit be financed?

Answer: Government resorts to borrowing when its expenditure exceeds its revenue, i.e., when there is a fiscal deficit. These funds can be borrowed from the open market, the Reserve Bank of India, foreign governments, and international organizations.

15. Write adverse effect of deficit financing.

Answer: Deficit financing can lead to inflationary pressure in the economy. It increases the money supply, which can result in rising prices. Additionally, it may lead to wasteful and unnecessary expenditure by the government. This can create a vicious circle and a debt trap, as the government may be compelled to borrow even to finance interest payments.

16. What is deficit financing?

Answer: Deficit financing is a measure to meet fiscal deficit by borrowing from the Reserve Bank of India. The Government issues treasury bills, which the RBI buys in return for cash. This cash is created by the RBI by printing new currency notes against government securities. It is an easy way to raise funds but carries adverse effects like inflationary trends.

C. Short-answer questions-II (answer in 60-80 words)

1. What is a government budget? What are its objectives?

Answer: A government budget is an annual financial statement of estimated revenue and estimated expenditure during a fiscal year. The government presents this before the Lok Sabha at the beginning of every fiscal year. It plans expenditure according to its objectives and then tries to raise resources to meet the proposed expenditure. 

The objectives of a government budget include reallocation of resources, reduction of inequalities of income and wealth, economic stability, economic growth, and management of public enterprises.

2. What is a union budget? State its components in short.

Answer: The Union Budget is thus a comprehensive financial plan that outlines the government’s revenue and expenditure for the upcoming fiscal year.

Components of the Union Budget:

• Revenue Budget: This part comprises revenue receipts and expenditures met from these revenues. Revenue refers to the government’s income, including both tax revenue (like income tax, excise duty) and non-tax revenue (like interest receipts, profits).
• Capital Budget: This part consists of capital receipts (like borrowing, disinvestment) and long-period capital expenditures (creation of assets, investment). Capital receipts create liabilities or reduce financial assets, while capital expenditures either create assets or reduce liability.

3. Explain how the government reallocates resources to achieve its objectives.

Answer: To allocate resources in line with social and economic objectives, the Government provides more resources into socially productive sectors. Government can influence allocation of resources through (a) taxes and subsidies and (b) direct participation in production.

(a) Taxes and subsidies: Heavy taxes can be imposed on production units engaged in production of harmful products, like liquor, cigarettes. On the other hand, subsidies can be given to encourage production of products like khadi and handloom useful for the masses. 

(b) Government’s direct participation in production: The Government can directly produce goods and services ignored by private sector due to absence of attractive profit. 

4. Define tax and non-tax revenue. Give an example of each.

Answer: Tax revenue is defined as “a legally compulsory payment imposed by the government on income and property of persons and companies without any benefit in return.” Examples of tax revenue include income tax, corporate tax, wealth tax, sale tax, estate duty, excise duty, value added tax, etc. Non-tax revenue is defined as “income from sources other than taxes.” Examples of non-tax revenue include interest received on loans given by the government to state governments, Union territory governments, local governments, and profits and dividends generated by public enterprises like Nationalised Banks, LIC, HMT, MMTC, BHEL, etc.

5. Define primary deficit. What is importance of primary deficit?

Answer: Primary deficit is defined as fiscal deficit of current year minus interest payments on accumulated debt. 

In terms of importance, primary deficit shows the borrowing requirements of the government on account of current year expenditure exceeding current year receipts exclusive of interest payment. If primary deficit is zero, then fiscal deficit is equal to interest payment, meaning it is not adding to the existing loan. Primary deficit is generally used as a basic measure of fiscal irresponsibility. A lower or zero primary deficit indicates that the government has realized the need to tighten its belt.

6. Distinguish between developmental and non-developmental expenditure.

Answer: Developmental expenditure refers to the government spending that is aimed at promoting economic growth and development. It includes investments in infrastructure development, education, healthcare, research and development, and other sectors that contribute to the long-term development of the economy.

Non-developmental expenditure, on the other hand, refers to government spending that is not directly related to economic development. It includes expenditures on administrative costs, defense, interest payments on loans, subsidies, pensions, and other non-productive activities. 

7. What is the difference between revenue budget and capital budget?

Answer: The Revenue Budget comprises revenue receipts and expenditure met from these revenues. Revenue refers to the income of the government. The revenue receipts include both tax revenue (like income tax, excise duty) and non-tax revenue (like interest receipts, profits).

On the other hand, capital Budget consists of capital receipts (like borrowing, disinvestment) and long period capital expenditure (creation of assets, investment). Capital receipts are receipts of the government which create liabilities or reduce financial assets, e.g., market borrowing, recovery of loan, etc.

8. Briefly describe how the government budget contributes to the process of growth and stability.

Answer: The government strives to achieve a high rate of economic growth through its revenue and expenditure policy. Since the growth rate of an economy depends on the rate of saving and investment, the government makes necessary provisions like tax rebates and other incentives in the budget to raise the rate of saving and investment. It makes investment expenditure, especially on the development of infrastructure including dams, bridges, roads, and basic industries. The budget impacts the society at three levels: (i) Fiscal discipline through controlled expenditure, (ii) Allocation of resources based on social priorities, and (iii) Effective and efficient programs for the delivery of goods and services.

9. How is debt creating capital receipt different from non-debt creating capital receipt?

Answer: Debt creating capital receipts and non-debt creating capital receipts differ in terms of their impact on the government’s liability. Debt creating capital receipts, such as borrowing from domestic or foreign sources, create a future obligation for the government to repay the borrowed amount along with interest. 

On the other hand, non-debt creating capital receipts, such as recovery of loans or proceeds from the sale of public enterprises, do not create any future liability for the government. These receipts do not involve borrowing and therefore do not increase the government’s debt burden.

10. What are the components of tax revenue?

Answer: Tax revenue consists of proceeds of taxes and other duties levied by the Union government. It is the main source of government revenue. Tax revenue can be broadly classified into two groups: direct tax and indirect tax.

• Direct Tax: Direct taxes are imposed on the income and property of individuals and companies. The main components of direct tax revenue include income tax, corporate tax, wealth tax, gift tax, and estate duty.
• Indirect Tax: Indirect taxes are imposed on the sale, manufacturing, export, and import of goods and services. The main components of indirect tax revenue include sales tax, custom duty, excise duty, service tax, and entertainment tax.

11. What are the components of capital receipts?

Answer: The components of recovery of loans are:

• Recovery of loans and advances: Loans offered by the government to others are government assets because it owns money that it lends. Recovery of such loans is treated as capital receipts because it causes reduction in assets ofthe government. 
• Disinvestment: Disinvestment means selling whole or a part of the shares (i.e., equity) of selected public sector enterprises (like Indian Oil Corporation, Steel Authority of India) held by the government to private sector. 
• Borrowing (domestic and external): Funds raised by the government from borrowing are treated as capital receipts because they create liability of returning loans. These funds are borrowed from (i) open market, (ii) Reserve Bank of India, (iii) foreign governments and international organisations. 
• Small savings: The Government receipts also include small savings like Post Office deposits, Public Provident Fund deposits, National Saving Certificate deposits, Kisan Vikas Patras, etc.

12. Explain the meaning of public expenditure with examples.

Answer: Public expenditure refers to the spending of government funds on various activities and services for the benefit of the public. Examples of Public Expenditure

• Education and Health Services: The government allocates a significant portion of its budget towards providing quality education and healthcare services to its citizens.
• Infrastructure Development: Public expenditure is also directed towards the construction and maintenance of infrastructure such as roads, bridges, railways, airports, and public utilities.
• Social Welfare Programs: This includes providing subsidies, grants, and financial assistance for poverty alleviation, rural development, housing schemes, and social security programs.

13. Explain the meaning of revenue expenditure with examples.

Answer: Revenue expenditure refers to the expenses incurred by the government on the normal functioning and maintenance of government departments and services. Some examples of revenue expenditure include:

• Pensions: The payment of pensions to retired government employees is categorized as revenue expenditure as it is a recurring expense to support retired individuals.
• Subsidies: Government subsidies provided to various sectors or individuals are considered revenue expenditure as they are recurring expenses aimed at supporting specific activities or groups.
• Grants: Grants given to state governments or other entities are treated as revenue expenditure, even if some of the grants

14. Explain the meaning of capital expenditure with examples.

Answer: An expenditure which either creates an asset (e.g., school building) or reduces liability (e.g., repayment of loan) is called capital expenditure.

Examples of capital expenditure include the purchase of land, buildings, machinery, computers, investment in shares, loans to state and foreign governments, and acquisition of valuables. 

15. What is fiscal deficit? Give its three implications.

Answer: Fiscal deficit refers to the excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. 

Implications of Fiscal Deficit

• Debt Trap: Fiscal deficit is financed through borrowing, which creates the problem of interest payment and loan repayment. As the government’s borrowing increases, its liability to repay the loan amount along with interest also increases.
• Wasteful Expenditure: High fiscal deficit often leads to wasteful and unnecessary expenditure by the government. This can create inflationary pressure in the economy.
• Increased Burden: Fiscal deficit increases the burden of taxes on the public. It may require higher taxes in the future to repay the borrowed amount without any benefit arising from investment.

D. Long-answer questions-I (answer in 90-120 words)

1. What is budget? Discuss in detail the objectives of a government budget.

Answer: A government budget is an annual financial statement that outlines the estimated revenue and expenditure for a fiscal year. It serves as a statement of the government’s income and expenditure, similar to a household budget.

Objectives of a Government Budget:

• Rapid and Balanced Economic Growth: The government aims to achieve rapid and balanced economic growth, ensuring equality and social justice.
• Resource Allocation: The budget helps in the reallocation of resources to different sectors of the economy based on the government’s priorities and objectives.
• Reduction of Inequalities: The budget aims to reduce inequalities of income and wealth by implementing policies that promote equitable distribution of resources.
• Economic Stability: The government budget plays a crucial role in maintaining economic stability by managing fiscal policies and ensuring a stable macroeconomic environment.
• Management of Public Enterprises: The budget helps in the effective management of public enterprises, such as railways and power generation, which are established for the welfare of the public.

2. Differentiate between revenue receipts and capital receipts.

Answer: Revenue receipts are government (money) receipts which neither (i) create liabilities nor (ii) reduce assets. These are proceeds of taxes, interest, and dividend on government investment, cess, and other receipts for services rendered by the government. These are current income receipts of the government from all sources. Revenue receipts are further classified into Tax Revenue and Non-tax Revenue.

On the other hand, capital receipts are government (money) receipts which either (i) create liabilities (e.g., borrowing) or (ii) reduce assets (e.g., disinvestment). Thus when the government raises funds either by incurring a liability or by disposing of its assets, it is called a capital receipt. Two examples of Capital Receipts which create liability are Borrowing and Raising of funds from Public Provident Fund and Small savings deposits. Borrowings are treated as capital receipts because they create the liability of returning loans.

3. Write a short note on tax revenue.

Answer: Tax revenue is a legally compulsory payment imposed by the government on income and property of persons and companies without any benefit in return. Taxes are imposed on income earnings; on sale, manufacturing, export, and import of goods, etc. Such taxes are broadly classified into two groups: direct tax and indirect tax. Components or main sources of tax revenue are income tax, corporate tax, wealth tax, sale tax, estate duty, excise duty, value-added tax, etc.

Revenue receipts are further classified into Tax Revenue and Non-tax Revenue. Tax Revenue is a part of revenue receipts, which are proceeds of taxes, interest, and dividend on government investment, cess, and other receipts for services rendered by the government.

4. What are capital receipts? Write their components.

Answer: Capital Receipts are government (money) receipts which either (i) create liabilities (e.g., borrowing) or (ii) reduce assets (e.g., disinvestment). 

Components (sources) of capital receipts are as follows:

• Recovery of loans and advances: Loans offered by the government to others are government assets. Recovery of such loans is treated as capital receipts because it causes a reduction in assets of the government.
• Disinvestment: The Government raises funds from disinvestment, which means selling whole or a part of the shares of selected public sector enterprises to the private sector. As a result, government assets are reduced.
• Borrowing (domestic and external): Funds raised by the government from borrowing are treated as capital receipts because they create the liability of returning loans.
• Small savings: The Government receipts also include small savings like Post Office deposits, Public Provident Fund deposits, National Saving Certificate deposits, Kisan Vikas Patras, etc. 

5. Write a note on each of the following:

(i) Direct taxes

Answer: Direct tax is when (i) liability to pay a tax and (ii) the burden of that tax falls on the same person. For example, Income tax is a direct tax because the person whose income is taxed is liable to pay the tax directly to the government and bear the burden of the tax himself. Direct taxes are generally considered progressive taxes because they are based on the ability to pay. A progressive tax is the one the rate of which increases with rise in income and decreases with fall in income.

(ii) Indirect taxes

Answer: Indirect taxes are a type of tax where the liability to pay the tax falls on one person, but the burden of the tax can be shifted to another person. These taxes are imposed on goods and services and are collected by intermediaries such as shopkeepers, producers, and importers, who then pass on the tax burden to the customers or end consumers by including it in the price of the commodity. Examples of indirect taxes include sales tax, excise duty, custom duty, entertainment tax, service tax, octroi, value-added tax (VAT), and Goods and Services Tax (GST).

6. Write short notes on the following:

(i) Balanced budget

Answer: A government budget is said to be a balanced budget in which government estimated receipts (revenue and capital) are equal to government estimated expenditure. Two main merits of a balanced budget are: (i) It ensures financial stability and (ii) It avoids wasteful expenditure. Two main demerits are: (i) Process of economic growth is hindered and (ii) Scope of undertaking welfare activities is restricted.

(ii) Surplus budget

Answer: When government receipts are more than government expenditure in the budget, the budget is called a surplus budget. A surplus budget shows that government is taking away more money than what it is pumping into the economic system. As a result, aggregate demand tends to fall which helps reduce the price level.

(iii) Deficit budget

Answer: A deficit budget happens when government estimated expenditure exceeds estimated government receipts in the budget. It implies that government revenue is less than government expenditure. Deficit budgets are often used by governments to meet the growing needs of the people and combat recession. However, they can lead to unnecessary expenditure and financial instability.

7. What are the implications of the fiscal deficit?

Answer: Implications of Fiscal Deficit are:

• Debt Trap: Fiscal deficit is financed by borrowing, which creates a problem of not only interest payment but also repayment of loans. As government borrowing increases, its liability to repay loan amount along with interest also increases, leading to a debt trap.
• Wasteful Expenditure: High fiscal deficit generally leads to wasteful and unnecessary expenditure by the government. This can create inflationary pressure in the economy.
• Inflationary pressure: As the government borrows from RBI which meets this demand by printing more currency notes (called deficit financing), it results in circulation of more money. This may cause inflationary pressure in the economy.
• Partial use: The entire amount of fiscal deficit, i.e. borrowing is not available for growth and development of the economy because a part of it is used for interest payment. Only the primary deficit (fiscal deficit-interest payment) is available for financing expenditure.
• Retards Future Growth: Borrowing to finance fiscal deficit becomes a financial burden on future generations. This burden can retard the growth and development of the economy.
• Increases Foreign Dependence: The government may borrow from foreign countries, which increases dependence and can lead to economic and political interference by foreign governments.

E. Long-answer questions-II (answer in 130-200 words)

1. How does an increase in inequalities of distribution of income affect the welfare of society?

Answer: An increase in inequalities in the distribution of income implies that the rich are becoming richer while the poor are becoming poorer. This widening gap has several implications for the welfare of society:

• Diminishing Marginal Utility and Welfare: According to the law of diminishing marginal utility, the utility of money is lower among the rich and higher among the poor. Therefore, an increase in income inequalities may not lead to an increase in the overall welfare of society.
• Economic Stability and Welfare: Economic stability, which refers to the absence of big fluctuations in prices, is crucial for the welfare of society. The government can bring economic stability by controlling fluctuations in the general price level through taxes, subsidies, and expenditure. This stability ensures that the benefits of growth reach every section of society, especially the poor.
• Economic Growth and Welfare: Economic growth, characterized by a sustained increase in real GDP and the total volume of goods and services produced, is essential for the welfare of society. The government strives to achieve high rates of economic growth through revenue and expenditure policies. It focuses on inclusive growth, ensuring that the benefits of growth reach all sections of society, particularly the poor.
• Management of Public Enterprises and Welfare: The government plays a crucial role in financing and managing public enterprises, such as railways and power. By efficiently managing these enterprises, the government can contribute to the welfare of society.

2. How is revenue receipt different from capital receipt?

Answer: Revenue receipts are government receipts that do not create liabilities or reduce assets. They are the current income receipts of the government from various sources such as taxes, interest, dividends, fees, fines, and other receipts for services rendered by the government. Revenue receipts are further classified into tax revenue and non-tax revenue.

On the other hand capital receipts are government receipts that either create liabilities or reduce assets. They include receipts from borrowing, disinvestment, recovery of loans, and other capital transfers. Capital receipts increase the liability of the government to repay these amounts in the future. Disinvestment and recovery of loans are examples of capital receipts that reduce government assets.

The main difference between revenue receipts and capital receipts is that revenue receipts do not create any future obligation for the government to return the amount, while capital receipts create a liability for the government to repay the amount along with interest. Revenue receipts are current income receipts that do not reduce assets, while capital receipts either create liabilities or reduce assets of the government.

3. Discuss the components of revenue receipts.

Answer: Revenue receipts of the government are divided into two groups: tax revenue and non-tax revenue.

• Tax Revenue: Tax revenue consists of the proceeds of taxes and other duties levied by the government. It is the main source of government revenue. Tax revenue includes various components such as income tax, corporate tax, wealth tax, sales tax, excise duty, and estate duty. These taxes are imposed on income earnings, sale and manufacturing of goods, and other economic activities.
• Non-tax Revenue: Non-tax revenue consists of all receipts from sources other than taxes. It includes various components such as interest receipts, profits and dividends, fees and fines, recovery of loans, disinvestment, borrowings, external grants, provident funds, special assessments or taxes, and the sale of spectrum. Non-tax revenue is generated from sources like investments, loans, fines, and other non-tax sources.

These revenue receipts are the current income receipts of the government from all sources. They do not create liabilities or reduce assets of the government. Revenue receipts play a crucial role in financing the day-to-day expenses and functioning of the government. They are used for various purposes such as providing public services, infrastructure development, welfare programs, and meeting administrative expenses.

4. Differentiate between revenue expenditure and capital expenditure.

Answer: Revenue expenditure refers to the expenditure incurred on the normal running of government departments and maintenance of services. It is a short-term and recurring expenditure that is incurred every year. Examples of revenue expenditure include salaries of government employees, interest payment on loans, pensions, subsidies, grants, and expenses related to rural development, education, and health services.

Capital expenditure, on the other hand, refers to the expenditure that either creates an asset or reduces a liability. It is a long-term and non-recurring expenditure. Examples of capital expenditure include the purchase of land, buildings, machinery, computers, investment in shares, loans by the central government to state governments and foreign governments, and acquisition of valuables.

5. Explain in detail direct taxes and indirect taxes.

Answer: Direct taxes are taxes that are paid directly to the government by the person who is liable to pay them. The burden of these taxes falls on the same person who pays them. Examples of direct taxes include wealth tax, income tax, and capital gain tax. Direct taxes are considered progressive because the rate of taxation increases with an increase in income and decreases with a decrease in income.

Indirect taxes, on the other hand, are taxes that are paid by one person but the burden of the tax is shifted to another person. The liability to pay the tax is on one person, such as a shopkeeper or a producer, but they recover the tax amount from the customers or wholesalers and retailers. Examples of indirect taxes include sales tax, excise duty, custom duty, entertainment tax, service tax, octroi, value-added tax, and GST (Goods and Services Tax).

6. Explain the fiscal deficit in detail.

Answer: Fiscal deficit is defined as the excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. In simple words, it is the amount of borrowing the government has to resort to meet its expenses. A large deficit means a large amount of borrowing. Fiscal deficit is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate. In the form of an equation:

Fiscal deficit = Total expenditure – Total receipts excluding borrowings

Implications

• Debt trap: Fiscal deficit is financed by borrowing. And borrowing creates problem of not only (a) payment of interest but also of (b) repayment of loans. As the government borrowing increases, its liability in future to repay loan amount along with interest thereon also increases.
• Wasteful expenditure: High fiscal deficit generally leads to wasteful and unnecessary expenditure by the government. It can create inflationary pressure in the economy.
• Inflationary pressure: As the government borrows from RBI which meets this demand by printing more currency notes (called deficit financing), it results in circulation of more money. This may cause inflationary pressure in the economy.
• Partial use: The entire amount of fiscal deficit, i.e. borrowing is not available for growth and development of economy because a part of it is used for interest payment. Only primary deficit (fiscal deficit-interest payment) is available for financing expenditure.
• Retards future growth: Borrowing is in fact financial burden on future generation to pay loan and interest amount which retards growth of economy. Thus, it retards future growth and development.
• Increases foreign dependence: The Govt. also borrows from foreign countries. This ases dependence which often leads to economic and political interference by foreign governments.

Additional/extra questions and answers

1. What is a government budget?

Answer: A government budget is an annual financial statement of estimated revenue and estimated expenditure during a fiscal year.

2. How is a government budget similar to a household budget?

Answer: Just as a household budget is about what one earns and spends, similarly the government budget is a statement of its income and expenditure.

3. How does the government plan its expenditure?

Answer: The government plans expenditure according to its objectives and then tries to raise resources to meet the proposed expenditure.

4. From where does a government earn money?

Answer: A government earns money broadly from taxes, fees and fines, interest on loans given to states, and dividend received from public sector enterprises.

5. What are the main expenditures of the government?

Answer: The government spends mainly on:

• Securing and providing goods and services to citizens.
• Law and order and internal security.
• Defence.
• Staff salaries.

6. When does the financial (fiscal) year start and end in India?

Answer: In India, the financial (fiscal) year starts on April 1 and ends on March 31 of the next year.

7. What does the budget reveal?

Answer: The budget reveals two main things:

• Financial performance of the government during the past one year.
• Financial programme along with fiscal policy for the next one year.

8. List the main elements of a budget.

Answer: 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.

9. What are the general objectives of a government budget?

Answer: The general objective of all our policies and plans is rapid and balanced economic growth with equality and social justice.

10. How does the government influence allocation of resources?

Answer: The Government can influence allocation of resources through:

• Taxes and subsidies: By imposing heavy taxes on harmful products and offering subsidies on products useful for the masses.
• Direct participation in production: The Government can directly produce goods and services ignored by private sector due to the absence of attractive profit.

11. How does the government address reduction of inequalities in income and wealth?

Answer: The Government can reduce inequalities of income and wealth through its tax and expenditure policy by:

• Charging heavy rate of tax from higher income groups.
• Imposing higher rate of tax on goods and services consumed by the rich.
• Using the collected money to offer free education, medical facilities, and cheaper housing to the poor.
• Providing subsidies and other amenities to low-income individuals.

12. What are the two budgetary measures to reduce inequalities of income and wealth?

Answer: The two budgetary measures to reduce inequalities of income and wealth are:

• Progressive taxation.
• Increasing government expenditure.

13. Define ‘Redistribution of Income’ in the context of a government budget.

Answer: Redistribution of Income means allocating the income in a way that reduces income inequalities and prevents concentration of income among the few rich. This primarily requires the rate of increase in real income of poor sections of society to be faster than that of rich sections. The government can achieve this by imposing higher taxes on the rich and spending the collected money on providing free goods and services to the poorer sections of society.

14. What does an increase in inequalities in the distribution of income signify?

Answer: Increase in inequalities in distribution of income means rich becoming richer and the poor becoming poorer.

15. How does the law of diminishing marginal utility relate to the distribution of income?

Answer: According to the law of diminishing marginal utility, utility of money is lower among the rich and higher among the poor. Therefore, an increase in inequalities of income may not lead to an increase in the welfare of society.

16. Define economic stability.

Answer: Economic stability means absence of big fluctuations in prices. Thus, economic stability means stability of prices.

17. How can the government control fluctuations in the general price level?

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

18. What does inclusive growth emphasize?

Answer: Emphasis is on inclusive growth which implies that benefits of growth should reach every section, especially poor sections of the society.

19. How would you define economic growth in terms of GDP and total volume of goods and services?

Answer: Economic growth refers to a sustained increase in real GDP of an economy. Alternatively, it signifies a sustained increase in the total volume of goods and services produced by an economy.

20. What role does the government play to achieve a high rate of economic growth?

Answer: The government strives to achieve a high rate of economic growth through its revenue and expenditure policy. Since the growth rate of an economy depends on the rate of saving and investment, the government accordingly makes necessary provisions like tax rebates and other incentives in the budget to raise the rate of saving and investment. It makes investment expenditure, especially on the development of infrastructure including dams, bridges, roads, and basic industries.

21. What purpose do public enterprises serve in the society?

Answer: The Government has to finance and manage public enterprises which are of the nature of national monopolies, like railways, power generation, and water lines, etc. Public enterprises are established and managed for the social welfare of the public.

22. Highlight the three levels at which a budget impacts society.

Answer: A budget impacts the society at three levels. (i) Fiscal discipline- It promotes aggregate fiscal discipline through controlled expenditure in view of limited resources revenue. (ii) Social Priorities- Resources of the country are allocated on the basis of social priorities, (iii) Delivery of goods and services- It contains effective and efficient programmes for the delivery of goods and services to achieve its targets and goals.

23. Describe the three-tier system of government in India and their respective budgets.

Answer: According to the Constitution of India, there is a three-tier system of the government, namely Central (or Union) government, State government, and Local government (like Municipal Corporation, Municipal Committee, Zila Parishad, etc.). Accordingly, these governments prepare their own respective budgets (called Union Budget, State Budget, and Municipal Budget) containing estimates of expected revenue and proposed expenditure. The basic structure of the government budget is almost the same at all levels of government but items of expenditure and sources of revenue differ from budget to budget.

24. When is the Union Budget for the coming financial year normally presented in India?

Answer: In India, every year Central (or Union) Budget for the coming financial year is presented by the Union Finance Minister in the Lok Sabha normally on the last working day of the month of February.

25. How is the budget divided and what do Revenue and Capital Budgets comprise of?

Answer: The budget is divided into two parts- (i) Revenue Budget and (ii) Capital Budget. The Revenue Budget comprises revenue receipts and expenditure met from these revenues. Revenue refers to the income of the government. The revenue receipts include both tax revenue (like income tax, excise duty) and non-tax revenue (like interest receipts, profits). The Capital Budget consists of capital receipts (like borrowing, disinvestment) and long period capital expenditure (creation of assets, investment). Capital receipts are receipts of the government which create liabilities or reduce financial assets, e.g., market borrowing, recovery of loan, etc. Capital expenditure is the expenditure of the government which either creates assets or reduces liability.

26. Provide a summary of the budget for the financial year 2016-17 as presented in Parliament.

Answer: For instance, Union Budget for the financial year 2016-17 as presented in Parliament reflects this approach. It contains details of government Receipts and Expenditures under the following four heads: (i) Actual for the year 2015-16 (ii) Budget estimates for the year 2016–17 (iii) Revised estimates for the year 2016-17 (iv) Budget estimates for the year 2017-18.

27. What are Budget receipts?

Answer: Budget receipts refer to estimated money receipts of the government from all the sources during a fiscal year. It shows the sources from where the government intends to get money to finance the expenditure (both revenue and capital expenditure). Budget receipts are of two types – Revenue Receipts and Capital Receipts.

28. What are the two types of Budget receipts?

Answer: The two types of Budget receipts are Revenue Receipts and Capital Receipts.

29. Define Revenue Receipts and mention its two types.

Answer: Revenue Receipts are government (money) receipts which neither (i) create liabilities nor (ii) reduce assets. These are proceeds of taxes, interest and dividend on government investment, cess and other receipts for services rendered by the government. These are current income receipts of the government from all sources. Revenue receipts are further classified into Tax Revenue and Non-tax Revenue.

30. What is meant by Capital Receipts and provide its two examples?

Answer: Capital Receipts refer to government (money) receipts which either (i) create liabilities (e.g. borrowing) or (ii) reduce assets (e.g. disinvestment). Two examples of Capital Receipts which create liability are Borrowing and Raising of funds from Public Provident Fund and Small savings deposits. Borrowings are treated as capital receipts because they create a liability of returning loans. Similarly, funds raised from PPF, small saving deposits in post offices and banks are treated as capital receipts because they increase the liability of the government to repay these amounts to PPF (Public Provident Fund) holders and small savings depositors.

31. Explain two examples of Capital Receipts that reduce assets.

Answer: Two examples of Capital Receipts which reduce assets are Disinvestment and Recovery of Loans. Disinvestment by the government means selling a part or whole of its shares of public sector undertakings (e.g., HMT, LIC, Coal India Ltd.) to private enterprises. Disinvestment is treated as a capital receipt because it reduces government assets. Recovery of loan is also a capital receipt as it reduces government assets. For instance, if UP government, which has taken a loan of 100 crore from the Central government, repays 20 crore, the value of the Central government assets of 100 crore is now reduced to 80 crore because of partial recovery of the loan.

32. How do Revenue Receipts differ from Capital Receipts?

Answer: The main difference between revenue receipts and capital receipts is that in the case of revenue receipts, the government is under no future obligation to return the amount, i.e. they do not create any liability. But in the case of capital receipts which are borrowings, the government is under an obligation to return the amount along with interest, i.e. it creates a liability.

33. Differentiate between debt creating and non-debt creating capital receipts and provide examples.

Answer: Capital receipts may be debt creating or non-debt creating. Debt creating receipts give rise to debt. Examples of debt creating receipts are – Net borrowing by the government at home, loans received from foreign govts, and borrowing from RBI. On the other hand, non-debt capital receipts do not give rise to debt. Examples of non-debt capital receipts are – Recovery of loans and proceeds from the sale of public enterprises (i.e., disinvestment).

34. What are the two main groups of revenue receipts?

Answer: The two main groups of revenue receipts are (i) tax revenue and (ii) non-tax revenue.

35. How is tax revenue defined and what is its significance?

Answer: Tax revenue consists of proceeds of taxes and other duties levied by the Union government such as income tax, corporate tax, excise duty, customs duty, service tax, etc. Tax receipt is a revenue receipt because it neither creates assets nor reduces liability of the government. It is the main source of government revenue. A tax is a legally compulsory payment imposed by the government on income and property of persons and companies without any benefit in return.

36. What are the main sources of tax revenue?

Answer: Components or main sources of tax revenue are income tax, corporate tax, wealth tax, sale tax, estate duty, excise duty, value added tax, etc.

37. What is non-tax revenue and give examples of its sources?

Answer: Non-tax revenue arises from sources other than taxes and is the income earned on account of administrative and judicial functions of the government. Examples of non-tax revenue receipts include: interest, dividend, profit, fees, fines and external grants.

38. Define and give examples of the following non-tax revenue sources: Interest, Profits and Dividends, and Fees and Fines.

Answer: Interest is an important source of government non-tax revenue, with the Government receiving interest on loans given to state governments, Union territory governments, and local governments. 

Profits and Dividends arise when the government starts its own production units called public enterprises like Nationalised Banks, Industrial Finance Corporation of India, LIC, STC, HMT, MMTC, BHEL, etc., which generate profits. The Government also gets dividends on investments made by it. 

Fees and Fines are another source of income for the Government, though nominal, in the form of different types of fees such as tuition fees in schools, OPD card fees in hospitals, land registration fees, passport fees, court fees, driving licence fees, import fees, etc. 

Additionally, income is generated by fines and penalties imposed on various types of offences committed by law-breakers, termed as payment for administrative and judicial services rendered to the people.

39. What is Escheat?

Answer: Escheat is the reversion of property (right of succession) to the state in the absence of legal heirs. Thus, it is a tax that government realizes from property which is left without a legal heir.

40. Explain the concept of Special Assessment.

Answer: Special Assessment arises when the government undertakes development activities like construction of roads, provision of drainage, street lighting in a particular area. As a result of these activities, the value of nearby property or rental value of houses in the vicinity increases. Special assessment is, therefore, like a special tax that the government levies in proportion to the benefit accruing to property owners to defray the cost of development.

41. What are External grants-in-aid?

Answer: External grants-in-aid refer to the financial help that the Government receives from foreign governments and international organisations in the form of grants, donations, gifts, and contributions.

42. What are the components or sources of capital receipts?

Answer: The components or sources of capital receipts are: (a) Recovery of loans and advances from entities such as States, Union territories, public sector enterprises, other parties, and foreign governments. (b) Disinvestment, which refers to the selling of whole or part of the shares of selected public sector enterprises held by the government to the private sector. (c) Borrowing, both domestic and external, from sources like the open market, Reserve Bank of India, foreign governments, and international organisations. (d) Small savings like Post Office deposits, Public Provident Fund deposits, National Saving Certificate deposits, Kisan Vikas Patras, etc.

43. How is the term ‘Budget Expenditure’ defined?

Answer: Budget (or Government) expenditure refers to the estimated expenditure to be incurred by the government under different heads in a year. Public (government) expenditure for a welfare state holds significance because it (i) accelerates economic growth, (ii) reduces inequalities, and (iii) checks unemployment and depression.

44. Enumerate the main objectives of government expenditure.

Answer: The main objectives of government expenditure include: (i) For satisfaction of collective needs of the people. (ii) For smooth functioning of government machinery. (iii) For economic and social welfare of the people. (iv) For the creation/addition of capital goods and infrastructure. (v) For controlling depressionary tendencies in the economy. (vi) For accelerating the speed of economic development. (vii) For reducing regional disparities of growth.

45. Differentiate between Revenue Expenditure and Capital Expenditure.

Answer: Revenue Expenditure is the expenditure which neither creates assets nor reduces liabilities. Its components include payment of interest, payment of salaries and pensions, grants and subsidies, educational and health services, and defence services. On the other hand, Capital Expenditure is the expenditure which either creates assets or reduces liabilities. Its components encompass construction of buildings, roads, bridges, purchase of land and machinery, investment in shares, loans to states and foreign governments, and repayment of loans.

46. Define Revenue Expenditure and give examples.

Answer: Revenue Expenditure is an expenditure which neither creates assets nor reduces liability. Examples of revenue expenditure are salaries of government employees, interest payment on loans taken by the government, pensions, subsidies, grants, rural development, education and health services, etc. Generally, expenditure incurred on normal running of the government departments and maintenance of services is treated as revenue expenditure.

47. What is Capital Expenditure and provide examples of expenditures that lead to the creation of assets?

Answer: Capital Expenditure is an expenditure which either creates an asset or reduces liability. Capital expenditure which leads to creation of assets includes: (a) expenditure on purchase of land, buildings, machinery, computers, (b) investment in shares, loans by Central government to state governments, foreign governments and government companies, and (c) acquisition of valuables.

48. Distinguish between Revenue Expenditure and Capital Expenditure.

Answer: Revenue Expenditure:

• It is incurred for normal running of government departments and maintenance.
• It does not result in creation of assets.
• It is recurring in nature and incurred regularly.
• It is a short-period expenditure.
• Examples include expenditure on medicines, salaries of doctors, subsidies, payment of interest, grants, collection of taxes.

Capital Expenditure:

• It is incurred for acquisition of capital assets.
• It results in creation of assets.
• It is non-recurring in nature.
• It is generally a long-period expenditure.
• Examples are construction of a hospital building, repayment of loan, purchase of computers.

49. What are direct taxes and provide examples?

Answer: Direct taxes are those taxes where the liability to pay a tax and the burden of that tax falls on the same person, and its burden cannot be shifted to others. Examples of direct taxes include Income tax, Wealth tax, Corporate tax, Gift tax, and Estate duty. Direct taxes are generally considered progressive taxes because they are based on the ability to pay.

50. Explain the concept of indirect taxes and provide examples.

Answer: Indirect taxes are taxes where the liability to pay a tax is on one person, but the burden of that tax falls on some other person, meaning the tax’s burden can be shifted to others. Examples of indirect taxes include Sales tax, Excise duty, Custom duty, Entertainment tax, Service tax, Octroi (chungi), ‘Value added tax’, and GST (Goods and Services Tax). All taxes levied on goods and services in different forms, like on production, sale, and transport, are called indirect tax.

51. What is the basis of classifying taxes into direct and indirect taxes?

Answer: The basis of classifying taxes into direct and indirect taxes is who ultimately bears the burden of the tax. Alternatively, it’s determined by “whether the burden of the tax is shiftable to others or not.” If the burden is not shiftable, meaning when the liability to pay and the burden falls on the same person, it is considered a direct tax. If the burden of a tax is shiftable, it is categorized as an indirect tax.

52. Discuss the significance and upcoming changes associated with GST (Goods and Services Tax).

Answer: GST (Goods and Services Tax) is a significant reform in taxation that was set to become operative in the financial year 2017-18, as per the GST bill passed by the Parliament. According to this bill, almost all Central and State taxes will be merged into the Goods and Services Tax, leading to a uniform rate of tax prevailing across the country. In essence, all taxes levied on goods and services in various forms, such as on production, sale, transport, etc., are termed as indirect tax, and the introduction of GST is expected to consolidate these into a single, unified system.

53. What is the definition of a budget?

Answer: A budget is defined as an annual statement of the estimated receipts and expenditure of the government over the fiscal year.

54. List the three types of budgets based on estimated receipts and expenditures.

Answer: The three types of budgets are: balanced, surplus and deficit budgets. These are determined depending upon whether the estimated receipts are equal to, less than or more than estimated expenditures, respectively.

55. Define a balanced budget.

Answer: A government budget is said to be a balanced budget in which government estimated receipts (revenue and capital) are equal to government estimated expenditure. In terms of symbols: Balanced Budget = Estimated Govt. Receipts = Estimated Govt. Expenditures.

56. Mention two main merits and demerits of a balanced budget.

Answer: Two main merits of a balanced budget are: (i) It ensures financial stability and (ii) It avoids wasteful expenditure. The two main demerits are: (i) Process of economic growth is hindered and (ii) Scope of undertaking welfare activities is restricted.

57. What is a surplus budget?

Answer: When government receipts are more than government expenditure in the budget, the budget is called a surplus budget. Symbolically: Surplus Budget = Estimated Govt. Receipts > Estimated Govt. Expenditure.

58. Explain the implications of a surplus budget on the economic system.

Answer: A surplus budget shows that government is taking away more money than what it is pumping into the economic system. As a result, aggregate demand tends to fall which helps reduce the price level. Therefore, in times of severe inflation, which arises due to excess demand, a surplus budget is the appropriate budget. But in a situation of deflation and recession, surplus budget should be avoided. Balanced budget and surplus budget are rarely used by the government in the modern-day world.

59. Define a deficit budget and its implications on government liability and reserves.

Answer: When government estimated expenditure exceeds estimated government receipts in the budget, the budget is said to be a deficit budget. The Government covers the gap either through borrowing or through withdrawals from its reserves. Thus, a deficit budget implies an increase in government liability and a fall in its reserves. When an economy is in an under-employment equilibrium due to deficient demand, a deficit budget is a good remedy to combat recession.

60. Enumerate the merits and demerits of a deficit budget.

Answer: A deficit budget has merits, especially for a developing economy: (i) It accelerates economic growth, (ii) It enables the undertaking of welfare programmes for the people, and (iii) It is a cure for deflation as it checks the downward movement of prices. However, it also has demerits such as: (i) It encourages unnecessary and wasteful expenditure by the government, (ii) It may lead to financial and political instability, and (iii) It shakes the confidence of foreign investors.

61. Differentiate between Revenue deficit, Fiscal deficit, and Primary deficit.

Answer: There are three concepts of deficit: (i) Revenue deficit is the excess of total revenue expenditure over total revenue receipts. (ii) Fiscal deficit is the excess of total expenditure over total receipts excluding borrowings. (iii) Primary deficit is calculated as Fiscal deficit minus interest payments.

62. Explain the concept of Revenue Deficit.

Answer: Revenue deficit is the excess of total revenue expenditure of the government over its total revenue receipts. It is related only to revenue expenditure and revenue receipts of the government. Revenue deficit signifies that the government’s own earning is insufficient to meet the normal functioning of government departments and the provision of services. Revenue deficit results in borrowing. Simply put, when the government spends more than what it collects by way of revenue, it incurs a revenue deficit. In the analogy of the household, the revenue deficit tells the amount the householder is borrowing to pay the grocer.

63. What does the term “revenue deficit” indicate?

Answer: Revenue deficit means spending beyond the means. This results in borrowing. Loans are paid back with interest. This increases revenue expenditure leading to greater revenue deficit.

64. List two implications of revenue deficit.

Answer: (i) Reduction of assets: Revenue deficit indicates dissavings on government account because the government has to make up the uncovered gap by drawing upon capital receipts either through borrowing or through sale of its assets (disinvestment). 

(ii) Inflationary situation: Since borrowed funds from capital account are generally used for meeting generally consumption expenditure of the government, it leads to inflationary situation in the economy with all its ills.

65. How might a revenue deficit lead to more revenue deficits in the future?

Answer: Large borrowings to meet revenue deficit will increase debt burden due to repayment liability and interest payments. This may lead to larger and larger revenue deficits in future.

66. Define fiscal deficit in relation to a government’s budget.

Answer: Fiscal deficit is defined as excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. In simple words, it is the amount of borrowing the government has to resort to meet its expenses. A large deficit means a large amount of borrowing. Fiscal deficit is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate.

67. What is the equation representing fiscal deficit?

Answer: Fiscal deficit = Total expenditure – Total receipts excluding borrowings = Borrowing. Moreover, if we add borrowing in total receipts, fiscal deficit is zero.

68. Can there be a fiscal deficit without a Revenue deficit? Provide conditions for the same.

Answer: Yes, there can be a fiscal deficit without a Revenue deficit. It is possible (i) when revenue budget is balanced but capital budget shows a deficit or (ii) when revenue budget is in surplus but deficit in capital budget is greater than the surplus of revenue budget.

69. Highlight the importance of fiscal deficit.

Answer: Fiscal deficit shows the borrowing requirements of the government during the budget year. Greater fiscal deficit implies greater borrowing by the government. In fact, the importance of a government budget lies in the fact that the government, through its fiscal policy (i.e. through changes in its expenditure and taxes), can stabilize the economy.

70. What are the potential pitfalls or dangers associated with a high fiscal deficit? List six points.

Answer: (i) Debt trap: Fiscal deficit is financed by borrowing. Borrowing creates the problem of payment of interest and repayment of loans. Payment of interest increases revenue expenditures leading to higher revenue deficit, compelling the government to borrow even for interest payment, resulting in a vicious circle and debt trap.

(ii) Wasteful expenditure: High fiscal deficit generally leads to wasteful and unnecessary expenditure by the government.

(iii) Inflationary pressure: Borrowing from the RBI, which meets this demand by printing more currency notes (called deficit financing), results in the circulation of more money causing inflationary pressure.

(iv) Partial use: Only primary deficit (fiscal deficit-interest payment) is available for financing expenditure since a part of borrowing is used for interest payment.

(v) Retards future growth: Borrowing is a financial burden on future generations, retarding the growth of the economy.

(vi) Increases foreign dependence: Borrowing from foreign countries increases dependence, which can lead to economic and political interference by foreign governments.

71. How is fiscal deficit defined? (2 marks)

Answer: Fiscal deficit is the excess of government total expenditures over its total receipts excluding borrowings.

72. What is considered the safe level of fiscal deficit as a percentage of GDP? (2 marks)

Answer: The safe level of fiscal deficit is considered to be 5% of GDP.

73. List the two major ways to finance fiscal deficit. (2 marks)

Answer: The two major ways to finance fiscal deficit are borrowing from domestic sources such as public and commercial banks and borrowing from external sources like the World Bank, IMF, and Foreign Banks.

74. What is the implication of deficit financing by printing new currency notes? (4 marks)

Answer: Deficit financing by printing new currency notes means borrowing from the Reserve Bank of India. The Government issues treasury bills which RBI buys in return for cash demanded by the government. This cash is created by RBI by printing new currency notes against government securities. Its implication is that the money supply increases in the economy, creating inflationary trends and other issues that result from deficit financing.

75. How can fiscal deficit be advantageous to an economy? (4 marks)

Answer: Fiscal deficit is advantageous to an economy if it creates new capital assets, develops the infrastructural base which increases productive capacity, and generates future income stream. However, it is detrimental for the economy if it is used just for covering revenue deficit.

76. Describe measures to reduce fiscal deficit. (6 marks)

Answer: Measures to reduce fiscal deficit include reducing public expenditure through a drastic reduction in expenditure on major subsidies, reducing expenditure on bonus, LTC, leave encashment, and taking austerity steps to curtail non-plan expenditure. On the revenue side, measures include broadening the tax base, curtailing tax concessions and reductions, effectively checking tax evasion, emphasizing on taxes to increase revenue, restructuring and selling shares in public sector units, and benefiting from spectrum sales and auction of coal blocks.

77. Differentiate between revenue deficit and fiscal deficit. (4 marks)

Answer: The excess of total revenue expenditure over total revenue receipts is called revenue deficit. On the other hand, fiscal deficit is the excess of total expenditure (Revenue expenditure + Capital expenditure) over total receipts (Revenue receipts + Capital receipts excluding borrowing).

78. What is primary deficit, and how is it different from fiscal deficit? (8 marks)

Answer: Primary deficit is defined as the fiscal deficit of the current year minus interest payments on accumulated debt. It indicates how much government borrowing is going to meet expenses other than interest payment. In other words, while the fiscal deficit indicates borrowing requirement inclusive of interest payment, primary deficit indicates borrowing requirement exclusive of interest payment. Thus, primary deficit does not carry the load of interest payment on account of past loans. The difference between fiscal deficit and primary deficit reflects the amount of interest payments on public debt incurred in the past. A lower or zero primary deficit means that while its interest commitments on earlier loans have forced the government to borrow, it has not been borrowing to fund current expenses. Primary deficit is a narrower concept and a part of fiscal deficit because the latter also includes interest payment.

Additional/extra MCQs

1. What is an annual financial statement of estimated revenue and expenditure termed as?

A. Fiscal Report B. Yearly Statement C. Government Budget D. Economic Forecast

Answer: C. Government Budget

2. The government’s primary expenditure is on which of the following?

A. Business Investments B. Law and Order C. Sports Events D. Tourism Campaigns

Answer: B. Law and Order

3. In India, when does the fiscal year conclude?

A. December 31 B. June 30 C. March 31 D. September 30

Answer: C. March 31

4. The government’s main source of earning money includes?

A. Share Market B. Auctions C. Taxes D. Telecommunications

Answer: C. Taxes

5. By imposing heavy taxes on which product does the government influence resource allocation?

A. Organic Food B. Electric Cars C. Cigarettes D. Solar Panels

Answer: C. Cigarettes

6. Which measure is employed by the government to decrease inequalities by levying a higher rate on affluent groups?

A. Direct Tax B. Indirect Tax C. Regressive Taxation D. Progressive Taxation

Answer: D. Progressive Taxation

7. To uplift the standard of living for the underprivileged, the government can offer free what?

A. Concert Tickets B. Fashion Accessories C. Housing D. Digital Gadgets

Answer: C. Housing

8. Which of the following areas might see direct government participation due to lack of private sector interest?

A. Movie Production B. E-commerce Websites C. Rural Development D. Online Streaming Services

Answer: C. Rural Development

9. What signifies an increase in inequalities in the distribution of income?

A. Rich investing more B. Middle class expanding C. Poor becoming wealthier D. Rich becoming richer and the poor becoming poorer

Answer: D. Rich becoming richer and the poor becoming poorer

10. What does economic stability imply?

A. Growth in GDP B. Absence of big fluctuations in prices C. Increase in public enterprises D. Inclusive growth

Answer: B. Absence of big fluctuations in prices

11. In the event of inflation, what action can the government take?

A. Increase taxes B. Reduce its own expenditure C. Increase subsidies D. Increase public enterprises

Answer: B. Reduce its own expenditure

12. What is the main emphasis of inclusive growth?

A. Economic stability B. High rate of economic growth C. Benefits reaching every section, especially the poor D. Management of public enterprises

Answer: C. Benefits reaching every section, especially the poor

13. What does economic growth refer to?

A. Increase in public enterprises B. Absence of fluctuations in prices C. Sustained increase in real GDP D. Reduction in income inequality

Answer: C. Sustained increase in real GDP

14. For what purpose are public enterprises primarily established and managed?

A. Increase in GDP B. Social welfare of the public C. Control over monopolies D. Economic growth

Answer: B. Social welfare of the public

15. Which of the following is NOT a level at which a budget impacts society?

A. Fiscal discipline B. Economic growth C. Social Priorities D. Delivery of goods and services

Answer: B. Economic growth

16. In the Constitution of India, how many tiers of the government are defined?

A. One B. Two C. Three D. Four

Answer: C. Three

17. What does the Revenue Budget mainly consist of?

A. Capital receipts and expenditure B. Market borrowing C. Recovery of loans D. Revenue receipts and expenditure met from these revenues

Answer: D. Revenue receipts and expenditure met from these revenues

18. Which of the following is a part of the Capital Budget?

A. Income tax B. Market borrowing C. Interest receipts D. Excise duty

Answer: B. Market borrowing

19. What do Budget receipts refer to?

A. Money spent by the government in a fiscal year B. Estimated money receipts of the government during a fiscal year C. Annual financial statement of the government D. Tax collection by the government in a fiscal year

Answer: B. Estimated money receipts of the government during a fiscal year

20. Which type of government receipt does not create liability nor reduce assets?

A. Capital Receipts B. Borrowing C. Revenue Receipts D. Disinvestment

Answer: C. Revenue Receipts

21. Which of the following is classified under Revenue Receipts?

A. Borrowing B. Tax Revenue C. Recovery of Loans D. Sale of public enterprises

Answer: B. Tax Revenue

22. Why are Borrowings treated as capital receipts?

A. They reduce government assets B. They create an obligation to return the amount with interest C. They are a source of non-tax revenue D. They create a liability of returning loans

Answer: D. They create a liability of returning loans

23. Disinvestment by the government means?

A. Increasing government’s investment in public enterprises B. Borrowing funds from foreign governments C. Selling a part or whole of its shares of public sector undertakings to private enterprises D. Recovery of loans from state governments

Answer: C. Selling a part or whole of its shares of public sector undertakings to private enterprises

24. The main distinction between revenue receipts and capital receipts is?

A. Source of the money B. Amount of money involved C. Future obligation to return the amount D. Duration of the receipt

Answer: C. Future obligation to return the amount

25. Which of the following is an example of a non-debt creating capital receipt?

A. Borrowing from RBI B. Loans received from foreign governments C. Net borrowing by the government at home D. Recovery of loans

Answer: D. Recovery of loans

26. Debt creating capital receipts result in?

A. Reducing government assets B. Creation of liabilities for the government C. No future obligation for the government D. Increasing government’s current income

Answer: B. Creation of liabilities for the government

27. Revenue receipts of the government are divided into which two main categories?

A. Tax revenue and Non-profit revenue B. Tax revenue and Non-tax revenue C. Non-tax revenue and Capital revenue D. Capital revenue and Indirect revenue

Answer: B. Tax revenue and Non-tax revenue

28. What is the main source of government revenue?

A. Loans B. Dividends C. Grants-in-aid D. Tax

Answer: D. Tax

29. A tax is a legally compulsory payment imposed by the government without what in return?

A. Dividend B. Any benefit C. Non-tax revenue D. Profit

Answer: B. Any benefit

30. Which of the following is NOT a source of non-tax revenue for the government?

A. Dividends B. Escheat C. Income tax D. Fees and Fines

Answer: C. Income tax

31. What does ‘Escheat’ refer to in the context of government revenue?

A. Income from external grants-in-aid B. Special tax for development C. Reversion of property to the state in the absence of legal heirs D. Dividend on investment made by the government

Answer: C. Reversion of property to the state in the absence of legal heirs

32. What does the term ‘Disinvestment’ in the context of government finance mean?

A. Borrowing from foreign governments B. Recovery of loans and advances C. Selling shares of public sector enterprises D. Obtaining external grants-in-aid

Answer: C. Selling shares of public sector enterprises

33. When the government’s expenditure exceeds its revenue, this situation is known as what?

A. Revenue deficit B. Budgetary surplus C. Fiscal deficit D. Trade deficit

Answer: C. Fiscal deficit

34. What is the primary objective of government expenditure?

A. For satisfaction of collective needs of the people B. For increasing government revenue C. For disinvestment of public sector units D. For increasing the fiscal deficit

Answer: A. For satisfaction of collective needs of the people

35. Which type of expenditure neither creates assets nor reduces liabilities for the government?

A. Capital Expenditure B. Direct Expenditure C. Revenue Expenditure D. Indirect Expenditure

Answer: C. Revenue Expenditure

36. Which of the following is a component of Capital Expenditure?

A. Payment of salaries and pensions B. Educational and health services C. Investment in shares D. Defence services

Answer: C. Investment in shares

37. What is Revenue Expenditure?

A. An expenditure that creates assets B. Expenditure that reduces a liability C. Expenditure which neither creates assets nor reduces liability D. Expenditure on acquiring land

Answer: C. Expenditure which neither creates assets nor reduces liability

38. Which of the following is an example of Revenue Expenditure?

A. Purchase of computers B. Expenditure on collection of taxes C. Repayment of loan D. Investment in shares

Answer: B. Expenditure on collection of taxes

39. Which expenditure results in the creation of assets?

A. Revenue Expenditure B. Interest on past debt C. Capital Expenditure D. Old-age pension

Answer: C. Capital Expenditure

40. Which tax is borne by the person on whom it is imposed and its burden cannot be shifted to others?

A. Indirect tax B. Sales tax C. Custom duty D. Direct tax

Answer: D. Direct tax

41. Which of the following is an example of a Direct Tax?

A. Sales tax B. Excise duty C. Income tax D. Service tax

Answer: C. Income tax

42. What kind of tax is GST (Goods and Services Tax)?

A. Direct tax B. Progressive tax C. Indirect tax D. Estate duty

Answer: C. Indirect tax

43. What is the basis of classifying taxes into direct and indirect?

A. The rate of the tax B. The purpose of the tax C. Who ultimately bears the burden of the tax D. The collection method of the tax

Answer: C. Who ultimately bears the burden of the tax

44. Which of the following is NOT an example of Indirect Tax?

A. Service tax B. Wealth tax C. Custom duty D. Sales tax

Answer: B. Wealth tax

45. Which of the following defines a budget in terms of government fiscal year?

A. A monthly record of income and expenses B. A yearly report of private sector investments C. An annual statement of the estimated receipts and expenditure D. A daily account of monetary inflow and outflow

Answer: C. An annual statement of the estimated receipts and expenditure

46. A budget in which government estimated receipts are equal to government estimated expenditure is called?

A. Surplus Budget B. Unbalanced Budget C. Balanced Budget D. Deficit Budget

Answer: C. Balanced Budget

47. Which of the following is NOT a merit of a balanced budget?

A. It ensures financial stability B. It avoids wasteful expenditure C. It accelerates economic growth D. It restricts undertaking welfare activities

Answer: C. It accelerates economic growth

48. In a surplus budget, the government’s:

A. Expenditure is less than its receipts B. Expenditure is more than its receipts C. Expenditure equals its receipts D. Expenditure has no relation to its receipts

Answer: A. Expenditure is less than its receipts

49. Which budget type implies an increase in government liability and a decrease in its reserves?

A. Balanced Budget B. Surplus Budget C. Deficit Budget D. Unbudgeted

Answer: C. Deficit Budget

50. What does a deficit budget mean for an economy in under-employment equilibrium?

A. It hinders economic growth B. It checks the upward movement of prices C. It’s a good remedy to combat recession D. It should be avoided at all costs

Answer: C. It’s a good remedy to combat recession

51. The excess of total revenue expenditure over total revenue receipts is termed as?

A. Fiscal Deficit B. Primary Deficit C. Revenue Deficit D. Budgetary Deficit

Answer: C. Revenue Deficit

52. Fiscal deficit is calculated as the excess of total expenditure over total:

A. Revenue B. Receipts excluding borrowings C. Revenue receipts D. Capital expenditure

Answer: B. Receipts excluding borrowings

53. Primary deficit is determined by:

A. Total revenue expenditure over total revenue receipts B. Fiscal deficit minus total receipts C. Fiscal deficit minus interest payments D. Revenue deficit minus fiscal deficit

Answer: C. Fiscal deficit minus interest payments

54. In the context of a household analogy, what does the revenue deficit indicate?

A. The savings of the householder B. The investments of the householder C. The amount the householder earns D. The amount the householder borrows to pay the grocer

Answer: D. The amount the householder borrows to pay the grocer

55. What is the meaning of “revenue deficit”?

A. Excess of total receipts over expenditure B. Spending within the means C. Spending beyond the means D. Excess of expenditure over total receipts excluding borrowings

Answer: C. Spending beyond the means

56. Which of the following is NOT an implication of a revenue deficit?

A. Reduction of assets B. Stabilizing the economy C. Inflationary situation D. Increased government liabilities

Answer: B. Stabilizing the economy

57. How is fiscal deficit defined in relation to a government’s budget?

A. Excess of total budget receipts over expenditure B. Borrowing required to meet revenue deficit C. Excess of total budget expenditure over total budget receipts excluding borrowings D. Amount saved after meeting all expenses

Answer: C. Excess of total budget expenditure over total budget receipts excluding borrowings

58. Which of the following is a consequence of a high fiscal deficit?

A. Increase in government assets B. Decrease in foreign dependence C. Stabilization of economy D. Inflationary pressure

Answer: D. Inflationary pressure

59. If there is a fiscal deficit without a revenue deficit, which scenario is possible?

A. Revenue budget is in surplus, and the deficit in the capital budget is less than the surplus of the revenue budget B. Both revenue and capital budgets are balanced C. Revenue budget is balanced, but capital budget shows a deficit D. Revenue budget shows a deficit, but capital budget is balanced

Answer: C. Revenue budget is balanced, but capital budget shows a deficit

60. Which statement best describes the importance of fiscal deficit?

A. It depicts the savings of the government B. It shows the borrowing requirements of the government during the budget year C. It represents the surplus in the government’s budget D. It measures the amount the government owes to international organizations

Answer: B. It shows the borrowing requirements of the government during the budget year

61. What is the result of the government borrowing from the RBI by printing more currency notes?

A. Deficit reduction B. Increased foreign reserves C. Deficit financing leading to inflationary pressure D. Reduced inflationary pressure

Answer: C. Deficit financing leading to inflationary pressure

62. Which of the following is not a pitfall of high fiscal deficit?

A. Boosting economic growth B. Wasteful expenditure by the government C. Debt trap due to increased borrowing D. Increased foreign dependence

Answer: A. Boosting economic growth

63. What is the excess of government’s total expenditures over its total receipts excluding borrowings called?

A. Revenue Deficit B. Fiscal Deficit C. Primary Deficit D. Budgetary Deficit

Answer: B. Fiscal Deficit

64. What percentage of GDP is considered the safe level of fiscal deficit?

A. 3% B. 5% C. 7% D. 10%

Answer: B. 5%

65. Which of the following is NOT a method to finance the fiscal deficit?

A. Borrowing from domestic sources B. Taxation C. Deficit financing by printing new currency notes D. Borrowing from external sources

Answer: B. Taxation

66. What is the implication of deficit financing by printing new currency notes?

A. Decrease in foreign reserves B. Decrease in public debt C. Increase in money supply leading to inflationary trends D. Increase in external borrowings

Answer: C. Increase in money supply leading to inflationary trends

67. What does the primary deficit indicate?

A. Government’s borrowing requirement inclusive of interest payment B. Government’s borrowing exclusive of interest payment C. Total revenue expenditure over total revenue receipts D. Total expenditure over total receipts including borrowings

Answer: B. Government’s borrowing exclusive of interest payment

68. Which measure is NOT suggested to reduce fiscal deficit?

A. Drastic reduction in expenditure on major subsidies B. Broadening the tax base C. Reducing expenditure on defense D. Curtailing non-plan expenditure

Answer: C. Reducing expenditure on defense

69. If the fiscal deficit and primary deficit are equal, it implies that:

A. The government has not borrowed in the current year B. Interest payments on past loans are zero C. The government’s current year expenditure exceeds its revenue D. The government is practicing fiscal responsibility

Answer: B. Interest payments on past loans are zero

70. The difference between fiscal deficit and primary deficit reflects:

A. The government’s total expenditures B. The amount of public debt incurred in the past C. The amount of interest payments on public debt incurred in the past D. The government’s total revenue

Answer: C. The amount of interest payments on public debt incurred in the past

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