Public finance in india

Question 1

Functions of government

Answer 1

Obligatory functions : Protection from external attacks, maintaining internal law and order etc. are obligatory functions of
the government.
Optional functions : Provision of education and health services, provision of social security like pensions and other welfare measures etc. are optional functions of the government.

Question 2

Def of public finance

Answer 2

According to Prof. Findlay Shirras, public finanace is the study of principles underlying the spending and raising of funds by public authorities

Question 3

Public expenditure

Answer 3

Public expenditure is that expenditure which is incurred by the public authority [Central, State and Local Bodies] for protection of their citizens, for satisfying their collective needs and for promoting their economic and social welfare.

Question 5

Classification of public expenditure

Answer 5

1. Developmental
2. Revenue
3. Non-developmental
4. Capital

Question 6

Developmental expenditure

Answer 6

Developmental expenditure is productive in nature. The expenditure which results in generation of employment, increase in production, price stability etc. is known as developmental expenditure. For example, expenditure on health, education, industrial development, social welfare, Research and Development (R & D) etc

Question 7

Revenue expenditure

Answer 7

Revenue expenditure of the government is for incurred carrying out day-to-day functions of the government departments and
various services. It is incurred regularly. For example, administration costs of the government, salaries, allowances and
pensions of government employees, medical and public health services etc.

Question 8

Non-developmental expenditure

Answer 8

On the other hand, that government expenditure which does not yield any direct productive impact on the country is called nondevelopmental expenditure. For example, administration costs, war expenditure etc. These are unproductive in nature.

Question 9

Capital expenditure

Answer 9

Capital expenditure of the government is expenditure for progress and development of the country.
For example, huge investments in different development projects, loans granted to the state governments and government companies, repayment of government loans etc.

Question 10

Reasons for growth of public expenditure

Answer 10

1. Spread of democracy
2. Increasing activities of gov
3. Increase in defence expenditure
4. Inflation
5. Industrial development
6. Rapid increase in population
7. Disaster management
8. Growing urbanization

Question 11

Spread of democracy

Answer 11

Majority of the countries in the world are democratic in
nature. A democratic form of government is expensive due to regular elections and other such activities. This results in the increase in total expenditure of the government.

Question 12

Inflation

Answer 12

Just like a private individual, the government has to buy goods and services from the market for the spread of economic and social development. Normally, prices show a rising trend. Due to this, the government has to incur increasing costs.

Question 13

Increase in defence expenditure

Answer 13

In modern times, defence expenditure of the government is increasing even in the peace time due to unstable and hostile international relationships

Question 14

Increase in activities of gov

Answer 14

the modern government performs many functions for the social and economic development of the country. These functions include spread of education, public health, public works, public recreation, social welfare schemes etc. It is observed that new functions are continuously being undertaken and old functions are being performed more efficiently on a large scale by the government. This leads to increase in public expenditure

Question 15

Rapid Increase in Population

Answer 15

Population of developing countries like India is increasing fast. In 2011 Census, it was 121.02 crores. As a result, the government has to incur greater expenditure to fulfil the needs of the increasing population.

Question 16

Disaster management

Answer 16

Many natural and man-made calamities like earthquakes, floods, cyclones, social unrest etc. are
occurring more frequently. The government has to spend a huge amount for the disaster management which increases total expenditure.
Modern governments are working for ‘welfare state’. Hence, there is a continuous increase in the public expenditure

Question 17

Growing urbanization

Answer 17

Spread of urbanization is a global phenomenon of the day. This leads to increase in the government expenditure on water supply, roads, energy, schools and colleges, public transport, sanitation etc.

Question 18

Public revenue

Answer 18

Public revenue means the aggregate collection of income with the government through various sources.

Question 19

Sources of public revenue

Answer 19

1. Taxes
2. Non-tax revenue sources

Question 20

Taxes

Answer 20

According to Prof. Seligman, “A tax is a compulsory contribution from the person to the government without reference to special benefits conferred.

Question 21

Types of taxes

Answer 21

1. Direct
   It is paid by the taxpayer on his income and property. The burden of tax is borne by the person on whom it is levied. As he cannot transfer the burden of the tax to others, impact and incidence of direct tax falls on the same person. For examplepersonal income tax, wealth tax etc
   2.Indirect tax
   It is levied on goods or services. It is paid at the time of production
   or sale and purchase of a commodity or a service. The burden of an indirect tax can be shifted by the taxpayer (producers) to other person/s. Hence, impact and incidence of tax are on different heads. For example, newly implemented Goods and Services
   Tax [GST] in India has replaced almost all indirect taxes, custom duty.

Question 22

Principles of taxation

Answer 22

Adam Smith, the founder of Modern economics propounded the following four canons of taxation :
1) Canon of Equity or Equality : Smith suggested that every person will pay the taxes to the government in proportion to his ‘ability to pay’. It means rich people should pay more tax compared to the poor.
2) Canon of Certainty : According to Smith, the taxpayer should know in advance how much tax he has to pay, at what time he has to pay the tax and in what form the tax is to be paid to the government.
3) Canon of Convenience : According to this canon, every tax should be levied in such a manner and at such a time that it becomes convenient to the tax payer.
4) Canon of Economy : According to this canon, the cost of tax collection should be the minimum. If a major portion of the tax proceeds is spent on the tax collection itself, then such a tax cannot be considered as a good tax

Question 23

Non-tax revenue sources

Answer 23

1. Borrowings
2. Fines and penalities
3. Grants, gifts and donations
4. Fees
5. Prices of public goods and services
6. Special assessment
7. Special levies

Question 24

Borrowings

Answer 24

The government can borrow from the people in the form of deposits, bonds etc. It also gets loans from foreign governments and organizations such as IMF, World Bank etc. Loans are becoming more and more popular source of revenue for the governments in the modern times.

Question 25

Fees

Answer 25

A tax is paid compulsorily without any return service whereas, fee is paid in return for certain specific services rendered by the government. For example- education fee, registration fee, etc.

Question 26

Gifts, grants and donations

Answer 26

The government may also earn some income in the form of gifts by the citizens and others. The government may also receive grants from the foreign governments and institutions for general and specific purposes. Foreign aid has become an important source of development finance for a developing country like India. However, this source of revenue is uncertain in nature.

Question 27

Fines and penalities

Answer 27

The government imposes fines and penalties on those who violate the laws of the country. The objective of the imposition of fines and penalties is not to earn income, but to discourage the citizens from violating the laws framed by the Government. For example, fines for violating traffic rules. However, the income from this source is small.

Question 28

Prices of public goods and service

Answer 28

Modern governments sell various types of commodities and services to the citizens. A price is a payment made by the citizens to the government for the goods and services sold to them. For example- railway fares, postal charges etc.

Question 29

Special assessment

Answer 29

The payment made by the citizens of a particular locality in exchange for certain special facilities given to them by the authorities is known as ‘special assessment.’ For examplelocal bodies can levy a special tax on the residents of a particular area where extra/special facilities of roads, energy, water supply etc. are provided

Question 30

Special levies

Answer 30

This is levied on those commodities, the consumption of which is harmful to the health and well-being of the citizens. Like fines and penalties, the objective is not to earn income, but to discourage the consumption of harmful commodities by the citizens. For exampleduties levied on wine, opium and other intoxicants.

Question 31

When did GST come into effect?

Answer 31

July 1, 2017 Propsed by Kelkar Task force

Question 32

Public debt

Answer 32

In fact, raising debt is the most common activity of any government, because government expenditure generally exceeds government revenue

Question 33

Types of debt

Answer 33

1) Internal Debt : When a government borrows from its citizens, banks, central bank, financial institutions, business houses etc. within the country, it is known as internal debt. 2) External Debt : When a government borrows from foreign governments, foreign banks or institutions, international organizations like International Monetary Fund, World Bank etc., it is known as external debt.

Question 34

Fiscal policy

Answer 34

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It deals with the public expenditure, public revenue and public debt. In short, it is the financial policy implemented by the Government.

Question 35

Financial administration

Answer 35

A smooth and efficient implementation of revenue, expenditure and debt policy of government is called financial administration. It includes preparation and implementation of government budget.

Question 36

Government budget

Answer 36

Budget is an important instrument of financialadministration through which all the financial affairs of the state are regulated. Budget is a financial statement showing the expected receipts and proposed expenditures of the government in the coming financial year. In India, a financial year is from 1st April to 31st March. Article 112 of the Constitution of India has a provision for annual financial statement. The word ‘Budget’ is derived from the French word ‘Bougette’, which means a bag or a wallet containing the financial proposals. These financial proposals are in the form of the Government expenditure and revenue

Question 37

Revenue budget

Answer 37

It consists of revenue receipts and revenue expenditure of the government. Revenue receipts are divided into tax and non-tax revenue. Revenue expenditure comprises of interest paid on Government borrowings, subsidies and grants given to the state governments.

Question 38

Capital budget

Answer 38

The capital budget consists of capital receipts and capital payments. Capital receipts are Government loans raised from the public and the Reserve Bank of India, divestment of equity holding in the public sector enterprises, loans received from the foreign Governments and other foreign bodies, State deposit funds, special deposits etc. Capital payments refer to the capital expenditures on various development projects, investments by the Government, loans given to the state Governments, and Government companies, corporations and other parties. Besides, it includes expenditure on social and community development, defence and general services

Question 39

Balanced budget

Answer 39

Government budget is said to be balanced, when estimated revenue and expenditure of the government are equal. That is, Government Receipts = Government Expenditure. The concept of a balanced budget was advocated by the classical economists like Adam Smith. It was considered as neutral in its effect on the working of the economy and hence, they regarded it as the best. However, modern economists believe that the policy of balanced budget may not always be suitable for the economy. The modern Governments are welfare entities and hence, they cannot keep their expenditure at the level of their receipts

Question 40

Surplus budget

Answer 40

Government budget is said to be surplus, when estimated Government receipts are more than the estimated Government expenditure. i.e. anticipated Government Receipts > estimated Government Expenditure. A surplus budget may prove useful during the period of inflation. In the period of inflation, there is a tendency for prices to rise rapidly.Thus, inflationary pressures can be controlled. However, a surplus budget should not be used in the situations other than inflation as it may lead to unemployment and low levels of output in an economy

Question 41

Deficit budget

Answer 41

Government budget is said to be deficit, when anticipated Government receipts are less than the estimated Government expenditure. That is anticipated Government Receipts < estimated Government expenditure. A deficit budget may prove useful during the period of depression. In the period of depression, all economic activities are at low level which results in unemployment. This can be checked by increasing Government expenditure, by borrowing money and through deficit financing. This will increase employment and aggregate effective demand for goods and services which would encourage further investment. In modern times, deficit budget is the most commonly implemented policy of any Government. Developing countries like India have consistently resorted to deficit budget technique for economic development

Question 42

Importance of budget

Answer 42

Union Budget is important because it affects people and economy in general in anumber of ways. Taxes are the most interesting part of any budget. Taxes determine the fate of businesses and individuals. budget is important because Governments use it as a medium for implementing economic policies in the country. Budgetary actions of the Government affect production, size and distribution of income and utilization of human and material resources of the country