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Indian Public Finance-I

Hey Mumbai University SYBA IDOL students!  Today, we’re diving into the fascinating world of Economic Public Finance ,  continue exploring the chapter – “Indian Public Finance-I“. 

We’ll start by discussing the types and components of the budget. Understanding the different types of budgets, such as balanced, surplus, and deficit budgets, along with their components, helps us see how the government plans its finances and allocates resources.

Next, we’ll cover the meaning of public finance and identify the sources of public revenue. Public finance refers to how the government manages its income and expenditure, and we’ll look at various sources from which the government raises money, including taxes, fees, and borrowing.

We’ll then dive into the Goods and Services Tax (GST). GST is a significant tax reform in India, and we’ll explore how it works, its impact on businesses and consumers, and its role in the Indian economy.

Following that, we’ll examine the components of public expenditure. This includes understanding the different areas where government spending occurs, such as social services, infrastructure, and defense.

Finally, we’ll review the key points of the Indian budget for the year 2020-21. We’ll look at the major highlights and changes introduced in that budget and discuss their implications for the Indian economy.

 So, SYBA IDOL Mumbai University students, get ready to unwrap the mysteries of “Indian Public Finance-I” with customized IDOL notes  just for you. Let’s jump into this exploration together. 

Indian Public Finance-I

Question 1:- Explain the types and components of budget

 Introduction:

       A government budget is a detailed plan that shows how the government plans to spend and earn money over a specific period, usually a year. The budget is divided into two main parts: the Revenue Account and the Capital Account. Each part has its own components and types of budgets. Understanding these helps to see how the government manages its finances and plans its expenditures.

  1. Types of Budget:
  • Balanced Budget: A balanced budget happens when the government’s total expected revenues are equal to its total planned expenditures for the year. This means the government does not need to borrow money or use surplus funds. Classical economists often support balanced budgets because they believe it represents sound financial management.
  • Surplus Budget: In a surplus budget, the government expects its total revenues to be more than its total expenditures for the year. This means the government will have extra money, which can be used to reduce debt or increase savings. A surplus budget indicates a healthy financial situation where the government is earning more than it is spending.
  • Deficit Budget: A deficit budget occurs when the government’s planned expenditures exceed its expected revenues. This means the government needs to borrow money or use savings to cover the gap. With the rise of the Welfare State and increased public spending, deficit budgets have become more common. Modern economists often argue that running a deficit can be beneficial if it helps to improve societal welfare.
  1. Components of Budget:

 A. Revenue Account (Revenue Budget):

   1. Revenue Receipts

  • Tax Revenue: This includes money the government collects from taxes. It is divided into direct taxes, such as personal income tax and corporate tax, and indirect taxes, like excise duties and customs duties.
  • Non-Tax Revenue: This includes money earned from other sources such as fees, fines, penalties, interest from loans, and profits from government-run businesses.

   2. Revenue Expenditure

  • Developmental Expenditure: Spending aimed at promoting economic growth and improving infrastructure, like building schools or roads.
  • Non-Developmental Expenditure: Spending on areas such as defense, paying interest on debt, subsidies, and government salaries. This type of expenditure does not directly contribute to economic growth.

 B. Capital Account (Capital Budget):

   1. Capital Receipts

  • Market Borrowings: Money borrowed from the public through the sale of bonds or other financial instruments.
  • Small Savings and Provident Funds: Contributions from individuals in savings schemes and retirement funds.
  • Special Deposits: Funds deposited with the government for specific purposes.
  • Recoveries of Loans: Money received from repayments of loans given by the government.
  • External Loans: Money borrowed from foreign countries or international organizations.
  • Receipts from Disinvestment: Money earned from selling government-owned assets or shares in public enterprises.

  2. Capital Expenditure: This includes spending on creating and improving long-term assets like infrastructure projects, such as bridges and highways. Capital expenditure is crucial for long-term development and economic growth.

 Conclusion:

     A government budget is a comprehensive financial plan divided into the Revenue Account and the Capital Account. The Revenue Account includes various types of revenue and expenditure, while the Capital Account focuses on receipts and expenditures related to long-term investments. The types of budgets—balanced, surplus, and deficit—help us understand the government’s financial strategy and its impact on the economy. Understanding these components and types is essential for analyzing how the government manages its resources and achieves its economic and social goals.

Question 2 :- What is the meaning of public finance? What are the sources of public revenue?

 Introduction:

     Public finance is a field of economics that focuses on how governments manage their money. It looks at how governments earn money and how they spend it. Public finance is important because it affects how resources are distributed, how income is shared among people, and how stable the economy is. This area of study includes understanding government policies on taxes, public spending, and managing government debt.

 1. Meaning of Public Finance:

 A. Public finance involves:

   1. Revenue Collection: This is how the government earns money. It includes various methods like taxes and other sources.

   2. Expenditure Allocation: This is how the government spends the money it collects. It involves deciding how much to spend on things like healthcare, education, and infrastructure.

   3. Fiscal Policies: These are the rules and strategies the government uses to manage its revenue and expenditure. Fiscal policies include decisions on taxation, spending, and handling public debt.

   4. Economic Impact: Public finance affects:

  • Resource Allocation: How resources like money are distributed across different sectors of the economy.
  • Income Distribution: How income is shared among people, aiming to reduce inequality.
  • Economic Stability: How government actions help maintain a stable economy, avoiding extreme fluctuations.
   2. Sources of Public Revenue:

            The government earns money from two main sources:

  B. Tax Revenue:

1. Direct Taxes: These taxes are paid directly by individuals and businesses to the government. Examples include:

  • Personal Income Tax: Tax on the income of individuals.
  • Corporate Tax: Tax on the profits of businesses.

2. Indirect Taxes: These are taxes on goods and services that are collected by businesses and then paid to the government. Examples include:

  • Goods and Services Tax (GST): A tax on most goods and services.
  • Excise Duties: Taxes on specific goods like alcohol and tobacco.
  • Customs Duties: Taxes on goods imported into the country.

  B. Non-Tax Revenue

1. Fees and Charges: Money collected for services provided by the government, such as:

  • Licensing Fees: Payments for official permissions to conduct certain activities.

2. Fines and Penalties: Money paid as punishment for breaking laws or regulations.

3. Interest Receipts: Money earned from loans given by the government to individuals or businesses.

4. Profits from Public Enterprises: Money earned from businesses owned by the government.

5. Grants and Gifts: Financial help received from other governments or organizations.

 Conclusion:

     Public finance is crucial for managing a country’s economy. It involves how the government earns and spends money, including the various sources of revenue like taxes and non-tax income. Understanding public finance helps us see how government decisions impact economic stability, resource distribution, and income equality. By effectively managing its finances, the government can work towards promoting social welfare and economic growth.

Question 3 :- Write the about Goods and Services Tax (GST)

Introduction:

     Goods and Services Tax (GST) is a major tax reform in India designed to simplify the taxation system. It replaces multiple taxes that were previously imposed by both the central and state governments. GST aims to make tax collection more straightforward and fair, benefiting both businesses and consumers. This tax is applied to goods and services and helps in creating a more streamlined tax system.

  1. Definition of GST: 

           Goods and Services Tax (GST) is an indirect tax applied to the supply of goods and services in India. It replaces a variety of previous indirect taxes, including sales tax, excise duty, and value-added tax (VAT), which were imposed by different levels of government. By doing this, GST helps in reducing the complexity of the tax system and ensures that taxes are levied in a more organized manner.

  1. Key Features of GST:

 1. Single Tax Structure: GST introduces a unified tax structure across the country. Unlike the old system, where multiple taxes were applied at different stages, GST taxes only the value added at each stage of the supply chain. This means that tax is applied to the difference between the cost of production and the sale price, rather than on the total value.

2. Dual GST Model: India uses a dual GST model, which includes:

  • Central GST (CGST): This tax is collected by the central government on sales that occur within a single state.
  • State GST (SGST): This tax is collected by the state government on sales that occur within the same state.

           For transactions that cross state boundaries, Integrated GST (IGST) is used. IGST is the combined total of CGST and SGST.

3. Input Tax Credit: GST allows businesses to claim input tax credit, which means they can deduct the tax paid on purchases from the tax they need to pay on their sales. This helps avoid the problem of paying tax on tax (cascading effect) and reduces the overall tax burden on consumers.

4. Broad Coverage: GST covers a wide range of goods and services, treating them equally under the tax system. However, some items like alcoholic beverages and petroleum products are not covered by GST and continue to be taxed separately by states.

5. Simplified Compliance: GST simplifies the tax compliance process for businesses. Instead of filing multiple returns for different taxes, businesses now file a single tax return. This reduces the paperwork and makes the process easier to manage.

 3. Need for GST:

        The introduction of GST was necessary because the old tax system had several issues:

  • Overlapping Taxes: Different taxes were imposed at various stages, leading to confusion and inefficiency.
  • Lack of Credit: Businesses could not get credit for taxes paid on earlier stages of production.
  • Complex Compliance: The previous system required multiple returns and compliance with different tax rules.

           GST addresses these problems by providing a clear and transparent tax system. It helps businesses by reducing the complexity of tax filing and ensures better revenue collection for the government.

 Conclusion:

    GST is a significant improvement in India’s tax system. By unifying the tax structure, simplifying compliance, and allowing for input tax credits, GST makes the tax process more efficient and fair. It helps businesses operate more smoothly and ensures that the tax system supports economic growth and development.

Question 4 :- Explain the components of public expenditure

 Introduction:

     Public expenditure refers to the money spent by various levels of government—central, state, and local—to provide goods and services that benefit society. This spending is crucial for achieving social and economic goals. Public expenditure can be divided into different categories, each serving a specific purpose. Understanding these components helps us grasp how governments allocate resources and manage finances effectively.

 1. Components of Public Expenditure:

     A. Current Expenditure

 1. Revenue Expenditure: Revenue expenditure involves spending on the day-to-day operations of the government. It does not create physical assets but is necessary for running government services. Key areas include:

  • Salaries and Wages: Payments made to government employees and officials for their services.
  • Interest Payments: Money paid on the government’s existing debt.
  • Subsidies: Financial support provided to specific sectors or groups to assist them, such as subsidies for farmers or industries.
  • Administrative Expenses: Costs related to managing government departments and agencies.

  2. Developmental Expenditure: Developmental expenditure focuses on promoting economic growth and improving the quality of life. It includes:

  • Investment in Infrastructure: Spending on building roads, bridges, railways, airports, and public utilities to support economic activities.
  • Public Sector Enterprises: Investments in government-owned companies to enhance their productivity and service delivery.
  • Social Sector Projects: Funding for health, education, and welfare programs aimed at improving living standards and supporting citizens.

  B. Capital Expenditure: Capital expenditure is used to create or improve physical assets that provide long-term benefits. It includes:

  • Investment in Infrastructure: Spending on major projects that will benefit the public for many years, such as new roads or bridges.
  • Public Sector Enterprises: Investments in government-run businesses that are intended to be productive over a long period.
  • Social Sector Projects: Significant investments in health, education, and welfare that aim to bring lasting improvements.

 C. Transfer Payments: Transfer payments are funds given to individuals or groups without receiving any goods or services in return. Examples include:

  • Pensions: Payments to retired government employees or elderly individuals.
  • Welfare Schemes: Financial aid for low-income families, unemployment benefits, and other forms of social support.

  D. Defensive Expenditure: Defensive expenditure is focused on maintaining national security and public order. It includes:

  • Defense Spending: Money spent on the military, including salaries, equipment, and infrastructure.
  • Law Enforcement: Funding for police and security agencies to ensure safety and order within the country.

 E. Public Debt Servicing: Public debt servicing refers to the expenditure on managing government debt, including:

  • Interest Payments: Paying interest on borrowed money.
  • Repayments of Principal: Paying back the original amounts borrowed.
   2. Importance of Public Expenditure:

           Public expenditure is crucial for several reasons:

  • Economic Development: Investments in infrastructure and services can stimulate economic growth and create jobs.
  • Social Welfare: It helps reduce poverty and inequality by providing essential services and support to those in need.
  • Stabilization: Increased public spending during economic downturns can boost demand, support employment, and stabilize the economy.

 Conclusion:

   Public expenditure encompasses various types of spending that are essential for the functioning and development of society. By understanding its components—current expenditure, capital expenditure, transfer payments, defensive expenditure, and public debt servicing—we can see how governments use their resources to achieve economic and social objectives. Effective management of public expenditure is key to promoting growth, stability, and welfare in society.

Question 5 :- Explain the key points of budget of India (2020-21)

 Introduction:

      The Union Budget for India for the financial year 2020-21 was presented by Finance Minister Nirmala Sitharaman on February 1, 2020. This budget aimed to address various economic and social issues while setting the direction for the country’s growth and development. The key points of the budget highlight its focus on economic growth, infrastructure, tax reforms, and social welfare.

 A. Economic Growth

    1. GDP Growth Estimate: The budget estimated the Gross Domestic Product (GDP) growth for the year 2020-21 at a nominal rate of 10%. This was meant to reflect the anticipated expansion of the economy.

    2. Budget Estimates

  • Total Receipts: The government estimated total receipts at ₹22.46 lakh crore.
  • Total Expenditure: The projected total expenditure was ₹30.42 lakh crore.
  • Fiscal Deficit: This led to a fiscal deficit of 3.8% of GDP, which was higher than the target of 3.3%. A fiscal deficit occurs when a government’s spending exceeds its revenue.

  B. Defence Budget

    1. Increase in Allocation

  • The defence budget was increased to ₹3.37 lakh crore, up from ₹3.18 lakh crore in the previous year.
  • Capital Outlay: A significant part of this budget, ₹1.13 lakh crore, was allocated for purchasing new military equipment like weapons, aircraft, and warships.

  C. Income Tax Reforms

     1. New Tax Regime

  • The budget introduced a new tax regime with lower tax rates for individuals.
    • Income up to ₹5 Lakh: No tax was imposed on income up to ₹5 lakh.
    • Reduced Tax Rates: Tax rates were reduced for income levels above ₹5 lakh. The highest tax rate of 30% remained for income exceeding ₹15 lakh.
  • Dividend Distribution Tax: The budget abolished this tax, which was expected to benefit companies and investors by reducing their tax burden.

 D. Investment in Infrastructure

  1. Focus on Development

  • Significant investments were proposed in infrastructure projects, including roads, railways, and urban transport.
  • Purpose: These investments aimed to boost economic growth and create job opportunities.

 E. Social Sector Allocations

  1. Swachh Bharat Mission: An allocation of ₹12,300 crore was made for the Swachh Bharat Mission to promote cleanliness and sanitation across the country.

  2. Health and Education: Increased funding was provided to improve public health services and educational facilities.

  F. Support for Start-ups

   1. Tax Deferral on ESOPs: The budget proposed deferring the tax on Employee Stock Options (ESOPs) for up to five years or until the employee leaves the company or sells the shares. This was intended to encourage entrepreneurship and support start-ups.

 G. Fiscal Responsibility

  1. Managing Public Debt: The government aimed to maintain fiscal discipline by managing the fiscal deficit and public debt effectively. The central government’s debt was reported to have decreased to 48.7% of GDP in March 2019, down from 52.2% in March 2014.

 H. Agriculture and Rural Development

 1. Support for Farmers: Measures were included to support farmers through increased allocations for irrigation, crop insurance, and rural infrastructure projects.

 I. Digital Initiatives

 1. Enhancing Digital Infrastructure: The budget proposed steps to improve digital infrastructure and promote digital payments, aiming to increase transparency and efficiency in tax collection and public service delivery.

 Conclusion:

     The Union Budget of India for 2020-21 focused on promoting economic growth, enhancing infrastructure, implementing tax reforms, and improving social welfare. By addressing these key areas, the budget aimed to create a balanced approach to development while maintaining fiscal responsibility. The measures introduced were designed to support various sectors, encourage entrepreneurship, and promote long-term economic stability and growth.

Important Note for Students :– Hey everyone! All the questions in this chapter are super important! 

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