Economics Ch - 10 Class 12th (Govt. Budget and the Economy) Part - 2

 Ch - 10 (Govt. Budget and the Economy) Part - 2

B) Capital Receipts - Capital Receipts are those money receipts of the government which either create liability for the government or cause a reduction in its assets.

 1. Recovery of loan - The Central government offers loan to the state government to cope with financial crises. When these loans are recovered, assets of the government are reduced. Accordingly, these are classified as Capital receipts.

2. Borrowing and other Liabilities - While lending loan creates assets and borrowing creates liability. Accordingly, borrowing are to be treated as Capital Receipts.

The government borrows money from:

a) The general public.

b) The Reserve Bank of India.

c) The Rest of the World.

3. Other Receipts - These include items like Disinvestment . Disinvestment refers to withdrawal of existing investment. It occurs when the govt. sell of its shares of public sector enterprises to private sector. Money received through disinvestment is treated as Capital receipt because it causes reduction in assets of the government.

2. Budget Expenditure - It refers to the estimated expenditure of the govt. during the Fiscal year.

  The Budget expenditure is Classified as :

  A) Revenue Expenditure

  B) Capital Expenditure

A) Revenue Expenditure - Revenue expenditure are those estimated expenditure of the govt. in a Fiscal year which does not create assets or causes a reduction in Liabilities.

B) Capital Expenditure - Capital expenditure refers to the estimated expenditure of the government in a Fiscal year which creates assets and causes a reduction in Liabilities.

⇒ Budget Expenditure is also Classified as Plan and Non-Plan Expenditure :

1. Plan Expenditure - Plan Expenditure refers to that expenditure which relates to 

  - Specific plans and programs of development.

  - Assistance of central govt. to state govt. includes both revenue expenditure (like assistance to the state) and capital expenditure (like expenditure on the construction of roads, bridges and hospital).

2. Non-Plan Expenditure - All expenditure other than plan expenditure is classified as non-plan expenditure .specifically, non-plan expenditure relates to the expenditure on routine functioning of the govt. Or it includes expenditure on such sources as of law and order, defense and subsidies.

                Budget Expenditure = Revenue Expenditure + Capital Expenditure

                                                            OR

                Budget Expenditure = Plan Expenditure + Non-Plan Expenditure

Budget Deficit : Revenue Deficit, Fiscal Deficit, and Primary Deficit

Budget deficit - It refers to a situation when budget expenditure of the govt. are greater than the budget receipts.

    Budget Deficit = Total expenditure(Revenue expenditure + Capital expenditure) - Total                            receipts(Revenue receipts + Capital receipts)

1.) Revenue Deficit - It is the excess of revenue expenditure over revenue receipts.

            Revenue Deficit = Revenue expenditure - Revenue receipts

Implications :

 

A) Cut in Expenditure - the govt. may have cut its expenditure on several welfare programs in the country. This leads to loss of social welfare.

B) Borrowing - The govt. may have to raise funds through borrowing. This raises liabilities of the govt. and lowers its credit worthiness. The govt. borrows from-

  - General public

  - Reserve Bank of India

  - Foreign

C) Disinvestment - The govt. may be compelled for disinvestment - selling its ownership of public enterprises to private enterprises. The ownership of public enterprises may be lost to foreign companies. Consequently economic control of the foreigners may increase in the domestic economy. 

2.) Fiscal Deficit - Fiscal deficit is the excess total expenditure on over Total receipts(other than borrowing).

       Fiscal Deficit = Total Expenditure - Total Receipts (net of borrowing)

Implications:

A) Inflationary Spiral - Borrowing from RBI in often linked to  Inflationary Spiral  in the economy.

      This is how it happens-

Borrowing from RBI ⇾  Increase in Money supply ⇾  Increase in Prices ⇾  Inflationary Spiral.

Often it takes the form of wages catch prices and prices with wages.This hinders the process of growth as it raises. 

- the cost of labour (Wage Rate) 

- the cost of Raw Material.

- the cost of credit for investment( Rate of interest)

B) National Debt - Fiscal deficit leads to National Debt.It is a burden of future generations. Future generations inherit a Laggard Economy .It is an economy when GDP Growth remains low because a significant percentage of National Income in used upto pay post debts.

C) Vicious Circle of High Fiscal Deficit and Low GDP Growth - Constantly high Fiscal Deficit leads to a situation where 

A) GDP Growth remains low because of high Fiscal Deficit.

B) Fiscal Deficit remains high because of low GDP growth.

High Fiscal Deficit  ⇾ Low GDP growth ⇾ High Fiscal deficit. 

D) Crowding Out -

  a) High Fiscal Deficit leads to Crowing Out effects.

  b) This is a situation when high borrowings by the govt. reduces the availability of funds for the private investors.

  c) Accordingly overall investment in the economy is reduced

High fiscal deficit increases the borrowing by the govt. ⇾ Reduces the availability of funds for private enterprises ⇾ Increase in the rate of interest ⇾ Lowers the level of investment in economy ⇾ economy slips into a state of economic slowdown.

E) Erosion of Government Credibility - High Fiscal Deficit and consequently mounting national debt erodes the credibility of the govt. in the domestic as well as international money market. Credit rating of the govt. and the economy is lowered. Owing to lower credit rating, global investors start withdrawing their money investment from the domestic economy. Consequently, GDP is reduced.

3. Primary Deficit - It is the difference between Fiscal deficit and Interest payment.

             Primary Deficit = Fiscal deficit - Interest payment

Implications - 

  Similar to those of fiscal debt.Primary deficit does not carry the load of interest payment on account of the past loans. Primary deficit just indicates borrowing when.

                                  Current Year expenditure > Current Year revenue.

Zero Primary deficit - When govt. is in loss due to interest payment. There is not any other liability.

       Balanced And Unbalanced Budget

1. Balanced Budget - It is that budget in which govt. receipts are equal to govt. expenditure.

                          

          Government Receipts = Government Expenditure 

  Merits  - 

1. The government does not include in wasteful expenditure.

2. A balanced budget ensures financial stability. It signals fiscal discipline in the economy.

Demerits - 

1. Balanced budget does not offer any solution to the problem of unemployment.

2. Balanced budget is not conductive to growth in less developed countries Kick - start of growth in these economies depends on a big - push of investment expenditure by the govt. This often leads to deficit budget.

2. Unbalanced Budget - It is that budget in which receipts and expenditure of the government are not equal.

A) Surplus Budget

B) Deficit Budget

A) Surplus Budget - This is a budget in which govt. receipts are greater than govt. expenditure.

  Estimated govt. receipts > Estimated govt. expenditure.

Merits -

 

Surplus budget plugs the inflationary gap by lowering the level of AD. AD is lowered on account of Rise in revenue collection by govt. and fall in govt. expenditure.

Demerits - 

AS surplus budget tends to lower the level of AD, it is not desired during  periods of depression. If this policy is constantly pursued by the govt. ,AD may reduce to a level that causes unemployment in the economy. The economy may be driven into a low level equilibrium trap.

B) Deficit Budget - This is a budget in which govt. expenditure are greater than govt. receipts.

    Estimated govt. expenditure > Estimated govt. receipts

Merits - 

According to kynes, deficit budget is a key instrument to correct the state of depression.

    Deficit budget raises the level of AD and ultimately curbs depression in two ways -

1. Directly by way of high govt. expenditure.

2. Indirectly by inducing expenditure on people.

Demerits -

Deficit budget is not desired during periods of Inflation.

It is a period when AD exceeds AS at full employment. Deficit budget in such situation would further increase the gulf between AS and AD. Consequently,Inflationary gap would rise and wage price spiral may set in.