UNIT3:

Meaning of government budget,objectives,components of

government budget,,budget receipts,revenue receipts,capital
receipts,budget expenditure,measures of government deficit

Government Budget: Definition & Features

A Government Budget is a formal financial statement that estimates the expected revenue
(receipts) and expenditure (spending) of the government for a particular financial year (April
1 - March 31 in India). It serves as a crucial tool for economic planning, resource allocation, and
ensuring overall financial stability.

Features of a Government Budget

1.Annual Nature

The government budget is prepared every year for a single financial year.
In India, the financial year runs from April 1 to March 31.
It provides a roadmap for government spending and income collection for the upcoming
year.
The budget must be presented before the beginning of the financial year to ensure timely
implementation.

Example: The Union Budget for 2024-25 was presented on February 1, 2024, but it will be
applicable from April 1, 2024, to March 31, 2025.

2.Estimations of Income & Expenditure

The budget consists of anticipated (estimated) receipts and expenditures for the year.
Receipts (Income): Include tax collections (GST, Income Tax, Corporate Tax), loans, and
non-tax revenue (fees, fines, profits from PSUs).
Expenditure (Spending): Includes infrastructure development, defense, education,
healthcare, and subsidies.

Example: If the government expects to collect ₹50 lakh crore in taxes but plans to spend ₹60
lakh crore, there is a fiscal deficit of ₹10 lakh crore.
3.Approval by Legislature (Parliament)

The Union Budget is presented in Parliament (Lok Sabha & Rajya Sabha) in India by the
Finance Minister.
It requires approval before implementation.
If the budget is not passed, it can lead to political instability or financial delays in the
government's functioning.

Example: In India, the Finance Bill and Appropriation Bill must be approved before the
budget can be legally implemented.

4. Classification into Revenue & Capital Budget

The budget is divided into two main parts:

A) Revenue Budget (Day-to-Day Operations)

Revenue Receipts:
Tax Revenue – GST, Income Tax, Excise Duty, Customs Duty.
Non-Tax Revenue – Fees, fines, interest on government loans, income from state-owned
enterprises.

Revenue Expenditure:
Salaries, pensions, subsidies (food, fuel, fertilizers).
Interest payments on previous loans.

B) Capital Budget (Long-Term Development & Borrowing)

Capital Receipts:
Loans from RBI, World Bank, IMF.
Disinvestment (selling shares of government companies).

Capital Expenditure:
Spending on infrastructure, defense equipment, healthcare, and education.
Investments in new industries, highways, and public transport.

Example: The government allocates ₹10 lakh crore for roads and highways in 2024-25 under
the capital budget.
5.Fiscal Policy Tool for Economic Stability

The budget helps the government regulate inflation, unemployment, and economic growth.
Expansionary Budget: If the government wants to boost economic growth, it increases
spending (infrastructure, employment schemes).
Contractionary Budget: If inflation is high, the government reduces spending or increases
taxes.

Example: During COVID-19, the Indian government increased spending on healthcare and
welfare schemes, making it an expansionary budget.

Conclusion
The government budget is a crucial document that outlines the government's income sources
and spending plans for the financial year.
It is mandatory to be passed by the legislative body (Parliament in India) before
implementation.
It is divided into Revenue Budget & Capital Budget to efficiently manage short-term
operations and long-term investments.
It acts as an economic tool for growth, stability, and public welfare.

Objectives of the Government Budget

A Government Budget is not just a financial statement but a strategic tool used to achieve
social, economic, and developmental goals. It helps in ensuring economic stability, reducing
income inequality, generating employment, and fostering overall national progress.

1. Efficient Allocation of Resources

Meaning:

Since resources (money, manpower, and materials) are limited, the government must allocate
them wisely to maximize economic and social benefits. The budget helps in prioritizing sectors
that contribute to national development, such as:

Healthcare – Building hospitals, providing free vaccines, and improving sanitation.

Education – Allocating funds for schools, scholarships, and digital learning.
 Infrastructure – Developing roads, railways, airports, and smart cities.
Defense – Strengthening national security through military spending.
Renewable Energy – Investing in solar, wind, and hydropower to reduce reliance on fossil
fuels.

Example:

Union Budget 2024-25: The government allocated ₹10 lakh crore for infrastructure projects,
including expressways, rail corridors, and smart cities.
Increase in healthcare spending during COVID-19 – Higher funds were allocated to buy
vaccines and set up emergency hospitals.

Impact: A well-planned budget ensures that funds are utilized efficiently, reducing wastage
and increasing productivity.

2.Economic Stability
Meaning:

The budget helps in maintaining economic stability by controlling inflation, deflation, and
economic crises. The government uses fiscal policies (taxation & spending) to regulate the
economy.

How It Works:

During Inflation (High Prices):

 The government reduces its spending to control excessive demand.

 It may increase taxes to reduce people's purchasing power.

During Deflation (Low Demand & Slow Growth):

 The government increases its spending to boost demand.

 It may reduce taxes to encourage people to spend and invest.

Example:

During COVID-19 (2020-21): The Indian government increased public spending through
relief packages, free ration schemes, and employment schemes to boost demand.
In 2023, to control inflation, the Reserve Bank of India (RBI) increased interest rates, and
the government reduced unnecessary expenditures.
Impact: A well-balanced budget helps in preventing economic crises and ensures a stable
business environment for growth.

3. Redistribution of Income and Wealth

Meaning:

The budget helps in reducing income inequality by taxing the rich more and providing
subsidies and welfare schemes for the poor. This ensures social justice and a more balanced
society.

How It Works:

Progressive Taxation: Higher-income individuals and businesses pay higher tax rates.
Welfare Programs: Subsidized food, free healthcare, and financial aid for the
underprivileged.
Minimum Wages & Pension Schemes: Ensuring a minimum standard of living for all
citizens.

Example:

Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) – Free food grains were given to
poor families during the pandemic.
Higher tax rates on luxury goods – High-end cars, imported alcohol, and jewelry are taxed
more.
Direct Benefit Transfers (DBT) – Subsidies (LPG, fertilizers, pensions) are transferred
directly to bank accounts of beneficiaries.

Impact: A fair tax system and welfare programs help in reducing poverty and bridging the
income gap between the rich and the poor.

4. Employment Generation
Meaning:

The government budget promotes job creation by investing in industries, infrastructure

projects, and rural employment schemes.
How It Works:

Government projects create direct jobs – Construction of highways, railways, and smart
cities.
Encouraging industries & startups – Tax incentives for businesses to create more jobs.
Skill development programs – Training youth in IT, healthcare, and manufacturing sectors.

Example:

Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) – Guarantees

100 days of employment to rural workers.
Startup India & Make in India – Encourages entrepreneurship and self-employment.
Production-Linked Incentive (PLI) Scheme – Boosts domestic manufacturing, creating
thousands of jobs.

Impact: More employment leads to higher income levels, improved standard of living, and
economic growth.

5.Economic Growth and Development

Meaning:

A key objective of the budget is to accelerate economic growth by investing in industries,

digital economy, infrastructure, and innovation.

How It Works:

Boosting Industrial Growth: Incentives for MSMEs (Micro, Small, and Medium
Enterprises) and large-scale industries.
Developing Infrastructure: Investing in railways, highways, ports, and airports to
improve connectivity.
Encouraging Innovation: Research & development in IT, artificial intelligence (AI), and
biotechnology.

Example:

Union Budget 2024: ₹10 lakh crore allocated for capital expenditure to boost economic
growth.
Digital India Mission – Investment in broadband connectivity, e-governance, and startups.

Impact: Higher GDP growth, better living standards, and increased global competitiveness.
6.Regional Development
Meaning:

The budget helps in reducing regional disparities by allocating special funds for backward
states, rural areas, and underdeveloped regions.

How It Works:

Special Economic Zones (SEZs): Encouraging industries in backward regions.

Higher Fund Allocation for Rural Areas: Roads, schools, electricity, and water supply.
Tax Benefits for Underdeveloped States: To attract businesses and investors.

Example:

North-East India Development Package – Special fund allocation for connectivity, trade,
and tourism.
Pradhan Mantri Gram Sadak Yojana (PMGSY) – Rural road development program.
Funds for backward states like Bihar, Jharkhand, Odisha to boost industrialization.

Impact: More employment, improved infrastructure, and balanced economic growth across all
regions.

Objective Description Example

Efficient Resource Ensuring funds are used wisely for Investment in renewable
Allocation development projects. energy.
Economic Stability Managing inflation, recession, and Increasing spending in
financial health. slow growth periods.
Income Redistribution Reducing wealth gaps through taxation & Progressive taxation &
welfare. food subsidies.
Employment Creating jobs through government MNREGA,
Generation programs. infrastructure projects.
Economic Growth Boosting industry and investment. Make in India, Smart
Cities.
Regional Development Addressing disparities between urban & Special funds for
rural areas. backward states.
Conclusion
The Government Budget is more than just income and expenditure – it is a blueprint for
national development.
It ensures economic stability, reduces income inequality, creates jobs, and fosters growth.
By focusing on education, healthcare, infrastructure, and industrialization, the budget
helps in improving the standard of living for all citizens.

Components of a Government Budget

A Government Budget is essentially divided into two main parts, each focusing on different
aspects of public finance:

1. Revenue Budget – Deals with the government’s day-to-day income and expenditure.
2. Capital Budget – Focuses on long-term investments, borrowings, and asset creation.

1.Revenue Budget (Day-to-Day Operations)

The Revenue Budget is concerned with the regular functioning of the government, such as
income generation and expenditure on routine administrative functions. It primarily focuses
on maintaining the current state of affairs without generating new assets.

Revenue Receipts

Revenue receipts are the income that the government generates which does not create any
liability. These are recurring receipts, helping in day-to-day governance.

Tax Revenue:
The government collects taxes from various sources, which make up a significant portion of its
income. Tax revenue is mandatory and continuous.

 Income Tax: Paid by individuals and businesses based on their income levels.
 Goods and Services Tax (GST): A consumption-based tax levied on goods and services.
 Customs Duty: Tax on goods imported and exported.
 Excise Duty: Tax on the production of goods (e.g., alcohol, tobacco).

Non-Tax Revenue:
This includes income from non-tax sources, like fees, fines, and other receipts. These sources
do not impose a direct levy on citizens but are derived from government-owned assets or
services.

 Fees & Fines: Payments for services or penalties (e.g., passport fees, court fines).
 Dividends: Earnings from public sector undertakings (PSUs).
 Grants & Aid: Financial support received from foreign countries or organizations.

Revenue Expenditure

Revenue expenditure refers to the government’s regular spending that is necessary for
maintaining the current level of public services but does not result in the creation of assets.
This type of spending is recurring and is used to support the day-to-day operations of the
government.

Examples of Revenue Expenditure:

 Salaries & Pensions: Payments to government employees, including civil servants, police, and
military.
 Subsidies: Financial support for essential goods (e.g., food subsidies for the poor, fuel subsidies,
and fertilizer subsidies).
 Interest Payments: Payment of interest on the government’s existing debts.
 Defense Expenditure: Regular spending on defense activities (salaries, maintenance, etc.)
without directly adding to physical assets.

2.Capital Budget (Long-Term Development & Borrowing)

The Capital Budget deals with long-term financial matters. It is focused on the creation of
assets and the management of liabilities. This portion of the budget is more concerned with the
developmental aspect of government expenditure, ensuring the country's long-term growth and
infrastructure.

Capital Receipts

Capital receipts are incomes that either create liabilities for the government or reduce its
existing assets. These receipts are non-recurring and are often related to borrowings or sales of
government-owned entities.

Examples of Capital Receipts:

 Borrowings: Money borrowed from various sources, including domestic (RBI, commercial banks)
and foreign (World Bank, IMF) institutions.
 Loans from RBI, World Bank, and IMF: These are long-term borrowings to meet capital
requirements.
  Disinvestment: Selling of shares in Public Sector Undertakings (PSUs) or other government
assets to generate funds. This reduces the government’s equity holdings but raises funds that
can be used for infrastructure and developmental projects.

Capital Expenditure

Capital expenditure refers to spending by the government on assets that will be useful in the
long term. These expenditures create infrastructure and developmental assets that help in
boosting the economy and promoting future growth.

Examples of Capital Expenditure:

 Infrastructure Projects: Government investments in roads, bridges, railways, and metro

projects. These are critical for national economic development and contribute to job creation.
 Defense Equipment: Spending on the purchase of fighter jets, weapons, and submarines. Such
capital outlays ensure that the defense system is strengthened over time.
 Education & Health Infrastructure: Investment in new educational institutions (e.g., AIIMS,
IITs) and healthcare infrastructure to improve the quality of services available to citizens.

Key Differences Between Revenue & Capital Budget

Aspect Revenue Budget Capital Budget

Nature of Income Regular and recurrent income (taxes, Non-recurring income (borrowings,
fines, etc.) disinvestment)
Expenditure Type Routine (salaries, subsidies, interest Developmental (infrastructure, defense,
payments) etc.)
Purpose Maintaining current governance and Creating assets and economic growth
operations
Impact on Does not create new liabilities Creates liabilities (loans, borrowings) or
Liabilities assets
Examples Subsidies, salaries, pensions, interest Roads, railways, metro projects, defense
payments equipment

Example of Government Budget Allocation

Let’s consider the Union Budget 2024-25 of India:

 Revenue Budget
The government might allocate a large portion of the budget to subsidies, such as for
food security programs (e.g., PMGKAY). Other major expenses would include salaries
for government employees and interest payments on previous loans.
 Capital Budget
In the capital budget, the government might allocate funds for infrastructure
 development like new highways, renewable energy projects, and urban development
schemes. Additionally, borrowings from the World Bank and IMF may be used to
finance large-scale projects like Metro systems and defense procurement.

Conclusion

The Government Budget is essentially split into two key components:

1. Revenue Budget: Deals with the government’s regular income and expenditure for day-to-day
functioning.
2. Capital Budget: Focuses on long-term investments, borrowings, and the creation of
developmental assets.

Each of these components has its own specific role in shaping the economic trajectory of the
country. While the Revenue Budget ensures smooth and effective day-to-day governance, the
Capital Budget focuses on nation-building and infrastructure development, creating lasting
assets for future growth.

Meaning of Budget Receipts

Budget receipts refer to the total income or revenue the government receives during a financial
year. These receipts are used to finance government expenditures and are classified into
Revenue Receipts and Capital Receipts based on their nature and impact on liabilities or assets.

Classification of Budget Receipts

Budget Receipts are broadly categorized into:

1. Revenue Receipts – Income that does not create liabilities or reduce government assets.
2. Capital Receipts – Income that creates liabilities or reduces government assets.

1. Revenue Receipts (Non-Borrowed Income)

Revenue Receipts are the income generated by the government without incurring any liability
or reducing assets. These receipts are recurring in nature and are used to cover the day-to-day
expenses of the government.
 Components of Revenue Receipts

Revenue receipts are divided into two major categories:

A. Tax Revenue (Compulsory Payments to the Government)

Tax revenue is the major source of revenue receipts. It includes taxes imposed by the
government, which are further divided into Direct Taxes and Indirect Taxes.

Direct Taxes (Paid Directly to the Government by Individuals & Businesses)

 Income Tax – Tax paid by individuals and firms based on their income levels.
 Corporate Tax – Tax imposed on the profits of corporations and companies.
 Wealth Tax – Tax levied on personal wealth and assets. (Abolished in India in 2015)
 Capital Gains Tax – Tax on the profit earned from the sale of assets like property, stocks, etc.
 Gift Tax – Tax imposed on gifts above a certain limit.

Indirect Taxes (Collected from Consumers Through Goods & Services)

 Goods and Services Tax (GST) – A comprehensive tax on the supply of goods and services.
 Excise Duty – Tax on the production of goods within the country. (Merged with GST in India)
 Customs Duty – Tax on imported and exported goods.
 Service Tax – Tax on services like telecom, insurance, hospitality, etc. (Merged with GST in India)

B. Non-Tax Revenue (Government’s Earnings Other Than Taxes)

Non-tax revenue refers to the income earned by the government from sources other than taxes.
These receipts are mainly from government services, fees, and other financial activities.

Major Sources of Non-Tax Revenue:

1. Interest Receipts – The interest earned on loans given to states, private businesses, or foreign
governments.
2. Dividends and Profits – Income from Public Sector Undertakings (PSUs) such as LIC, ONGC, SBI,
etc.
3. Fees & Penalties – Government charges like passport fees, court fees, driving license fees,
traffic fines, environmental fines, etc.
4. Grants from Foreign Countries & International Organizations – Financial aid from institutions
like the World Bank, IMF, and United Nations.
5. Escheat Revenue – Revenue generated when unclaimed property (like bank deposits or assets
without legal heirs) is transferred to the government.

2.Capital Receipts (Income Creating Liabilities or Reducing Assets)

Capital Receipts include money that the government borrows or receives from sources that
create liabilities or reduce assets. These receipts help in financing long-term infrastructure
projects and other development programs.

Components of Capital Receipts

Capital receipts are divided into two main categories:

A. Borrowings (Creating Liabilities for the Government)

The government borrows money to cover fiscal deficits and fund infrastructure projects. These
borrowings create future repayment obligations (liabilities).

Major Sources of Government Borrowings:

1. Market Borrowings – Government sells bonds, treasury bills, and securities to the public, banks,
and financial institutions.
2. Loans from RBI (Deficit Financing) – The government takes loans from the Reserve Bank of
India (RBI), which prints new currency if needed.
3. Loans from Foreign Institutions – Borrowing from World Bank, International Monetary Fund
(IMF), Asian Development Bank (ADB), etc.
4. Loans from State Governments & Public Sector Banks – The central government borrows funds
from state governments and public banks to meet financial shortfalls.

B. Disinvestment (Reducing Government Assets)

Disinvestment refers to the sale of government-owned assets or shares in Public Sector

Undertakings (PSUs). It is a method used to reduce government control over businesses and
generate revenue.

Examples of Disinvestment:

 The government sells its stake in companies like Air India, LIC, BPCL, etc.
 Public share offerings of government enterprises in stock markets (IPO of PSU companies).

C. Recovery of Loans (Reducing Government Assets)

When the government lends money to states, companies, or foreign governments, and those
loans are repaid, it is considered a capital receipt as it reduces financial assets of the
government.

Differences Between Revenue Receipts and Capital Receipts

Aspect Revenue Receipts Capital Receipts
 Recurring and used for daily
Nature Non-recurring and used for development
operations

Impact on
Does not create liabilities Creates liabilities (loans)
Liabilities

Impact on Assets Does not reduce government assets Reduces assets (disinvestment, loan recovery)

Borrowings, sale of government shares, foreign

Examples Taxes, interest, dividends, fees
aid

Example of Budget Receipts in a Financial Year (Hypothetical Data)

Category Example Amount ( Crores) Percentage of Total Receipts

Revenue Receipts 20,00,000 Crores 70%

Tax Revenue 15,00,000 Crores 52%

Non-Tax Revenue 5,00,000 Crores 18%

Capital Receipts 8,00,000 Crores 30%

Borrowings 6,00,000 Crores 22%

Disinvestment 1,50,000 Crores 5%

Loan Recovery 50,000 Crores 3%

Total Budget Receipts 28,00,000 Crores 100%

Importance of Budget Receipts

1. Finance Public Services – Funds essential services like education, healthcare, infrastructure.
2. Reduce Economic Inequality – Progressive taxation helps redistribute wealth.
3. Control Inflation & Growth – Fiscal policies regulate demand and supply.
4. Encourage Investments – Disinvestment and tax incentives attract investors.
5. Ensure National Security – Defense budgets rely on revenue & capital receipts.
 Conclusion

Budget Receipts play a crucial role in government financial planning, ensuring that the
country runs smoothly. While Revenue Receipts sustain daily administration, Capital Receipts
finance long-term projects and infrastructural development.

Detailed Notes on Budget Receipts

Government receipts, also known as Budget Receipts, are the total income collected by the
government during a financial year. These receipts are used to finance government
expenditures and are classified into Revenue Receipts and Capital Receipts based on their
impact on government assets and liabilities.

Classification of Budget Receipts

Budget Receipts are broadly categorized into:

1. Revenue Receipts – Income that does not create liabilities or reduce government assets.
2. Capital Receipts – Income that creates liabilities or reduces government assets.

1 ⃣ Revenue Receipts (Non-Borrowed Income)

Revenue Receipts are the income generated by the government without incurring any liability
or reducing assets. These receipts are recurring in nature and are used to cover the day-to-day
expenses of the government.

Components of Revenue Receipts

Revenue receipts are divided into two major categories:

A. Tax Revenue (Compulsory Payments to the Government)

Tax revenue is the major source of revenue receipts. It includes taxes imposed by the
government, which are further divided into Direct Taxes and Indirect Taxes.

Direct Taxes (Paid Directly to the Government by Individuals & Businesses)

 Income Tax – Tax paid by individuals and firms based on their income levels.
 Corporate Tax – Tax imposed on the profits of corporations and companies.
  Wealth Tax – Tax levied on personal wealth and assets. (Abolished in India in 2015)
 Capital Gains Tax – Tax on the profit earned from the sale of assets like property, stocks, etc.
 Gift Tax – Tax imposed on gifts above a certain limit.

Indirect Taxes (Collected from Consumers Through Goods & Services)

 Goods and Services Tax (GST) – A comprehensive tax on the supply of goods and services.
 Excise Duty – Tax on the production of goods within the country. (Merged with GST in India)
 Customs Duty – Tax on imported and exported goods.
 Service Tax – Tax on services like telecom, insurance, hospitality, etc. (Merged with GST in India)

B. Non-Tax Revenue (Government’s Earnings Other Than Taxes)

Non-tax revenue refers to the income earned by the government from sources other than taxes.
These receipts are mainly from government services, fees, and other financial activities.

Major Sources of Non-Tax Revenue:

1. Interest Receipts – The interest earned on loans given to states, private businesses, or foreign
governments.
2. Dividends and Profits – Income from Public Sector Undertakings (PSUs) such as LIC, ONGC, SBI,
etc.
3. Fees & Penalties – Government charges like passport fees, court fees, driving license fees,
traffic fines, environmental fines, etc.
4. Grants from Foreign Countries & International Organizations – Financial aid from institutions
like the World Bank, IMF, and United Nations.
5. Escheat Revenue – Revenue generated when unclaimed property (like bank deposits or assets
without legal heirs) is transferred to the government.

2 ⃣ Capital Receipts (Income Creating Liabilities or Reducing Assets)

Capital Receipts include money that the government borrows or receives from sources that
create liabilities or reduce assets. These receipts help in financing long-term infrastructure
projects and other development programs.

Components of Capital Receipts

Capital receipts are divided into two main categories:

A. Borrowings (Creating Liabilities for the Government)

The government borrows money to cover fiscal deficits and fund infrastructure projects. These
borrowings create future repayment obligations (liabilities).
 Major Sources of Government Borrowings:

1. Market Borrowings – Government sells bonds, treasury bills, and securities to the public, banks,
and financial institutions.
2. Loans from RBI (Deficit Financing) – The government takes loans from the Reserve Bank of
India (RBI), which prints new currency if needed.
3. Loans from Foreign Institutions – Borrowing from World Bank, International Monetary Fund
(IMF), Asian Development Bank (ADB), etc.
4. Loans from State Governments & Public Sector Banks – The central government borrows funds
from state governments and public banks to meet financial shortfalls.

B. Disinvestment (Reducing Government Assets)

Disinvestment refers to the sale of government-owned assets or shares in Public Sector

Undertakings (PSUs). It is a method used to reduce government control over businesses and
generate revenue.

Examples of Disinvestment:

 The government sells its stake in companies like Air India, LIC, BPCL, etc.
 Public share offerings of government enterprises in stock markets (IPO of PSU companies).

C. Recovery of Loans (Reducing Government Assets)

When the government lends money to states, companies, or foreign governments, and those
loans are repaid, it is considered a capital receipt as it reduces financial assets of the
government.

Differences Between Revenue Receipts and Capital Receipts

Aspect Revenue Receipts Capital Receipts

Recurring and used for daily

Nature Non-recurring and used for development
operations

Impact on
Does not create liabilities Creates liabilities (loans)
Liabilities

Impact on Assets Does not reduce government assets Reduces assets (disinvestment, loan recovery)

Borrowings, sale of government shares, foreign

Examples Taxes, interest, dividends, fees
aid
 Example of Budget Receipts in a Financial Year (Hypothetical Data)
Category Example Amount ( Crores) Percentage of Total Receipts

Revenue Receipts 20,00,000 Crores 70%

Tax Revenue 15,00,000 Crores 52%

Non-Tax Revenue 5,00,000 Crores 18%

Capital Receipts 8,00,000 Crores 30%

Borrowings 6,00,000 Crores 22%

Disinvestment 1,50,000 Crores 5%

Loan Recovery 50,000 Crores 3%

Total Budget Receipts 28,00,000 Crores 100%

Importance of Budget Receipts

1. Finance Public Services – Funds essential services like education, healthcare, infrastructure.
2. Reduce Economic Inequality – Progressive taxation helps redistribute wealth.
3. Control Inflation & Growth – Fiscal policies regulate demand and supply.
4. Encourage Investments – Disinvestment and tax incentives attract investors.
5. Ensure National Security – Defense budgets rely on revenue & capital receipts.

Conclusion

Budget Receipts play a crucial role in government financial planning, ensuring that the
country runs smoothly. While Revenue Receipts sustain daily administration, Capital Receipts
finance long-term projects and infrastructural development.

Measures of Government Deficit

1.Meaning of Government Deficit
A government deficit occurs when its total expenditure exceeds total revenue in a financial
year. This shortfall is met through borrowing or other financial measures.

Why does a government run a deficit?

 To fund welfare schemes (education, health, subsidies).

 To build infrastructure (roads, railways, defense).
 To stimulate economic growth (job creation, investments).
 To manage economic downturns (COVID-19 relief measures).

Why is a high deficit concerning?

 Increases debt burden (interest payments rise).

 Leads to inflation (if financed by printing money).
 Weakens currency value (higher fiscal deficit → reduced investor confidence).
 Can cause economic instability (if debt spirals out of control).

Thus, governments monitor and manage deficits carefully to balance growth and financial
stability.

2.Types of Government Deficits & Their Measurement

1 ⃣ Revenue Deficit (RD)

Formula:

Revenue Deficit=Revenue Expenditure−Revenue Receipts\text{Revenue Deficit} = \text{Revenue

Expenditure} - \text{Revenue Receipts}

Meaning:

 Occurs when government's revenue expenditure exceeds its revenue receipts.

 It indicates that the government is borrowing to finance daily operations rather than
investments.

Implications:
Negative: Shows government reliance on borrowing for routine expenses (not productive).
Positive: Can be justified during crises like recessions or pandemics.

Example:
  Revenue Expenditure = 25 lakh crore
 Revenue Receipts = 22 lakh crore
 Revenue Deficit = 25 - 22 = 3 lakh crore

How to Reduce It?

✔ Increase tax revenue (better compliance, widen tax base).
✔ Cut wasteful expenditure (reduce subsidies, improve efficiency).

2. Fiscal Deficit (FD)

Formula:

Fiscal Deficit=Total Expenditure−Total Receipts (excluding borrowings)\text{Fiscal Deficit} = \text{Total

Expenditure} - \text{Total Receipts (excluding borrowings)}

Meaning:

 Most important deficit measure, shows total borrowing needed in a year.

 If government spends more than it earns, it has to borrow from RBI, foreign institutions, or
issue bonds.

Implications:
Positive: If used for infrastructure, boosts growth (productive spending).
Negative: If used for subsidies/wasteful spending, leads to higher debt burden.

Example:

 Total Expenditure = 50 lakh crore

 Total Receipts (excluding borrowings) = 42 lakh crore
 Fiscal Deficit = 50 - 42 = 8 lakh crore

How to Reduce It?

✔ Privatization & Disinvestment (selling PSU shares for revenue).
✔ Increase tax base (reduce tax evasion, higher compliance).
✔ Rationalize subsidies (targeted benefits instead of blanket subsidies).

Fiscal Deficit as % of GDP:

 Good: Below 4%
 Acceptable: 4-6%
 High Risk: Above 6%
3.Primary Deficit (PD)

Formula:

Primary Deficit=Fiscal Deficit−Interest Payments\text{Primary Deficit} = \text{Fiscal Deficit} -

\text{Interest Payments}

Meaning:

 Shows new borrowing excluding past debt interest.

 If primary deficit is low, most borrowing is for interest payments (not new spending).

Implications:
Positive: If primary deficit is low, debt burden is stable.
Negative: High primary deficit shows fresh loans are being taken, worsening fiscal position.

Example:

 Fiscal Deficit = 8 lakh crore

 Interest Payments = 3 lakh crore
 Primary Deficit = 8 - 3 = 5 lakh crore

How to Reduce It?

✔ Lower fresh borrowing by improving tax revenues.
✔ Reduce interest burden by refinancing debt at lower rates.

4. Budget Deficit (Outdated Concept)

Formula:

Budget Deficit=Total Expenditure−Total Revenue\text{Budget Deficit} = \text{Total Expenditure} -

\text{Total Revenue}

 Used earlier but now replaced by Fiscal Deficit for accuracy.

5.Effective Revenue Deficit (ERD) – Introduced in 2012-13 Budget

Formula:

Effective Revenue Deficit=Revenue Deficit−Grants for Capital Creation\text{Effective Revenue Deficit} =

\text{Revenue Deficit} - \text{Grants for Capital Creation}
 Why It Matters?

 Some revenue spending helps in asset creation (e.g., grants for schools, hospitals).
 ERD gives a better picture of wasteful vs. productive revenue spending.

Example:

 Revenue Deficit = 3 lakh crore

 Grants for Capital = 1 lakh crore
 Effective Revenue Deficit = 3 - 1 = 2 lakh crore

How to Reduce It?

✔ Shift focus from consumption-based spending to capital creation.

3. Relationship Between Deficits

 Revenue Deficit ↑ → Fiscal Deficit ↑ → More Borrowing Needed
 Fiscal Deficit ↑ → Higher Interest Payments → Primary Deficit Affected
 Deficits must be managed to ensure sustainable economic growth.

4. Consequences of High Government Deficit

Short-Term Effects:

 Increased government borrowing.

 Inflationary pressure (excess money supply).
 Higher interest payments reducing spending on welfare.

Long-Term Effects:

 Lower investor confidence.

 Currency depreciation.
 Debt trap risk – borrowing just to repay old debt.

5. Measures to Reduce Government Deficit

1. Increasing Revenue (Receipts Side)

✔ Tax Reforms – Higher tax compliance, better GST collection.

✔ Privatization & Disinvestment – Selling PSU shares for revenue.
✔ Boosting Non-Tax Revenue – More dividends from public enterprises.

2. Reducing Expenditure (Spending Side)

✔ Cutting Wasteful Subsidies – Targeted rather than universal subsidies.

✔ Reducing Interest Payments – Refinancing debt at lower rates.
✔ Better Fiscal Discipline – Avoiding unnecessary spending.

3. Promoting Economic Growth

✔ Higher GDP growth = Higher tax revenue without increasing tax rates.
✔ Investment in productive infrastructure creates jobs and revenue.

6.Example: India’s Fiscal Deficit Trends (Hypothetical Data)

Year Revenue Deficit (% of GDP) Fiscal Deficit (% of GDP) Primary Deficit (% of GDP)

2020-21 6.5% 9.5% 5.7%

2021-22 4.7% 6.7% 3.2%

2022-23 3.5% 5.9% 2.3%

Trend Observation:

 COVID-19 led to high deficits in 2020-21.

 Post-pandemic, India reduced its fiscal deficit by improving tax revenues & cutting spending.

7.Conclusion
A well-managed deficit drives economic growth, but excessive borrowing can create economic
instability. The key is balancing borrowing with productive investments for long-term
financial sustainability.