Introduction: -

In the modern world, every Govt. aims at maximizing the welfare of its country. It requires

a number of infrastructural, economic and welfare activities. All these activities require

huge expenditure to be incurred. This requires appropriate planning and policy of the Govt.

The solution to all these problems is ‘Budget’. A budget is a document containing detailed

programmers and policies of action for the given fiscal year.

Concept of Govt. Budget: -

Govt. Budget is an annual statement, showing item wise estimates of receipts and

expenditures during a Fiscal year. A budget, in this sense, becomes both a description of

the fiscal policies of the government and the financial plans corresponding to them. The

receipts and expenditures, shown in the budget, are not actual figures, but the estimated

values for the coming fiscal year. Fiscal year is taken from 1st April to 31st March.

Preparation of Govt. Budget: -

Budget is prepared by Govt. at all levels, i.e. Central Govt., State Govt. and Local Govt.,

prepares its respective annual budget. However, we will be mainly concerned with Budget

of Central Govt., known as Union Budget.

Estimated expenditures and receipts are planned as per the objectives of the

Government.

In India, Budget is presented in the parliament on such a day, as the President may direct.

By convention, it is prepared on the last working day of February each year.

It is required to be approved by the Parliament, before it can be implemented.

Objectives of Govt. Budget: -

outcome of Government’s economic, social and political policies. The various objectives

of Government budget are:

i) Reallocation of Resources: - Through the budgetary policy, Government aims to

reallocate resources in accordance with the economic (profit maximization) and social

(public welfare) priorities of the country. For example, Govt. discourages the production

of harmful consumption goods (like liquor, cigarettes etc.) through heavy taxes and

encourages the use of “khadi products” by providing subsidies.

ii) Redistribution Activities: - Economic inequality is an inherent part of every economic

system. Government aims to reduce such inequalities of income and wealth, through its

budgetary policy. Fiscal instruments like taxation, subsidies and expenditure on social

security, public works etc. are used by the Govt. to achieve this objective.

iii) Management of Public Enterprises: - There are large numbers of public sector

industries (especially natural monopolies) which are established and managed for social

welfare of the public. Budget is prepared with the objective of making various provisions

for managing such enterprises and providing them financial help.

iv) Stabilizing Economic Activities: - Govt. budget is used to prevent business fluctuations

of inflation or deflation and to maintain economic stability. The Govt. aims to control the

different phases of business fluctuations through it budgetary policy. Policies of surplus

budget during inflation and deficit budget during deflation are adopted to achieve

stability in the economy.

v) Economic growth: - Economic growth has been the main objective of every economy

at all times. The growth rate of a country depends on rate of saving and investment. For

this purpose, budgetary policy aims to mobilize sufficient resources for investment in the

public sector. Therefore, the Government makes various provisions in the budget to raise

overall rate of savings and investments in the eeonomy.

Revenue Budget– It consists of the Revenue Expenditure and Revenue Receipts.

Revenue Receipts are receipts which do not have a direct impact on the assets and

liabilities of the government. It consists of the money earned by the government through

tax (such as excise duty, income tax) and non-tax sources (such as dividend income,

profits, interest receipts).

Revenue Expenditure is the expenditure by the government which does not impact

its assets or liabilities. For example, this includes salaries, interest payments, pension, and

administrative expenses.

Capital Budget– It includes the Capital Receipts and Capital Expenditure.

Capital Receipts indicate the receipts which lead to a decrease in assets or an

increase in liabilities of the government. It consists of: (i) the money earned by selling
assets (or disinvestment) such as shares of public enterprises, and (ii) the money received

in the form of borrowings or repayment of loans by states.

Capital expenditure is used to create assets or to reduce liabilities. It consists of: (i)

the long-term investments by the government on creating assets such as roads and

hospitals, and (ii) the money given by the government in the form of loans to states or

repayment of its borrowing

Balanced, Surplus and Deficit Budget

Balanced Budget – A government Budget is assumed to be balanced if the expected expenditure

is equal to the anticipated receipts for a fiscal year.

Surplus Budget – A Budget is said to be surplus when the expected revenues surpass the

estimated expenditure for a particular business year. Here, the Budget becomes surplus, when

taxes imposed, are higher than the expenses.

Deficit Budget- A Budget is in deficit if the expenditure surpasses the revenue for a designated year.

Measures of Government Deficit

There are various measures that capture government Deficit:

Revenue Deficit: It refers to the excess of government’s revenue expenditure over revenue

receipts.

Revenue Deficit = Revenue expenditure – Revenue receipts

The revenue Deficit includes only such transactions that affect the current income and

expenditure of the government.

When the government incurs a revenue deficit, it implies that the government is dissaving

and is using up the savings of the other sectors of the economy to finance a part of its

consumption expenditure.
Fiscal Deficit: It is the gap between the government’s expenditure requirements and its receipts.

This equals the money the government needs to borrow during the year. A surplus arises if

receipts are more than expenditure.

Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating

capital receipts).

It indicates the total borrowing requirements of the government from all sources.

From the financing side: Gross fiscal deficit = Net borrowing at home + Borrowing from RBI

+ Borrowing from abroad

The gross fiscal deficit is a key variable in judging the financial health of the public sector

and the stability of the economy.