The Public Finance is a much wider title which includes all those matters which are connected with public money.
* The money a government gets, spends, borrows, lends, raises or prints.
* Public Finance gets reference in the ancient treatise Arthashastra of Kautilya which covers Treasury, Sources of Revenue, Accounts and Audit in a very detailed way.
An annual Financial statement of income and expenditure generally used for a government but it could be of a firm company, corporation etc., too
* The constitution of India has a Provision for such a document called Annual financial statement to be presented in the Parliament before the commencement of every new fiscal year popular as the Union Budget.
Data in the Budget:
The Union budget has three sets of data for every concerned sector or sub-sector of the economy.
* Actual data of the preceding year (here preceding year means one year before the year) in which the Budget is being Presented.
* Provisional data of the current year (since the Budget for 2016-17 is presented at the end of the fiscal 2015-16 is provides provisional Estimates for this year).
* Budgetary estimates for the following year.
There are such three other kinds of data.
i) Revised Estimate (RE)
Revised Estimate is basically a current estimation of either the budgetary estimates (BE) or the Provisional or Estimates (PE). It shows the contemporary situation.
* It is an interim data.
ii) Quick Estimate (QE)
Quick Estimate is a kind of revised estimate which shows the most latest situation and is useful in the process of going for future Projections for some sector or sub-sector.
* It is an interim data.
iii) Advance Estimate (AE)
Advance Estimate is a kind of quick estimate. But done ahead (is advance) of the final stage when data should have been collected. It is an interim data.
* Developmental and Non-developmental Expenditure.
* Total expenditure incurred by the governments is classified into two segments- developmental and -non-developmental.
* All expenditures of a productive nature are developmental i.e., factories, dams, bridges, roads, railways, etc. all investments.
* The expenditures which are of consumptive kind and do not involve any production are non-developmental i.e., paying salaries, Pensions, interest payments, subsidies, defence expenses.
Plan and Non-plan Expenditure:
All those expenditures which are done in India in the name of planning is the plan expenditure and rest of all are non-plan expenditures.
Every form of money generation in the nature of income, earnings are revenue for a firm or a government which do not increase financial liabilities of the government.
* The tax incomes, non-tax incomes along with foreign grants is considered as revenue.
Every form of money generation which is not income or earnings for a firm or a government i.e., money raised via borrowings is considered a non-revenue source.
Every receiving or accrual of money to a government by revenue and non-revenue sources is a receipt.
* Their sum is called total receipts.
* It includes all incomes as well as non-income accruals of a government.
Revenue Receipts of a government are of two kinds.
* Tax Revenue Receipts and
* Non-Tax Revenue Receipts
* Consisting of the following income receipts in India.
Tax Revenue Receipts:
This includes all money earned by the government via the different taxes the government collects i.e. all direct and indirect tax collections.
Non-Tax Revenue Receipts:
This includes all money earned by the government from sources other than the tax source.
In India they are:
i) Profits and dividends which government gets from its Public Sector undertakings (PSUs).
ii) Fiscal Services also generate income for the government.
iii) Interest received by the government out of all loans forwarded by it.
iv) General Services also earn money for the government as the power distribution, irrigation, banking, insurance community services, etc.
v) Fees, Penalties and Fines received by the government.
vi) Grants which the governments receive.
* It is always external in the case of the central government and internal in the case of the state governments.
All the expenditure incurred by the government which are of revenue kind or current kind or compulsive kind.
» A board category of things that fall under such Expenditures in India.
i) Interest payment, by the government on the internal and external loans.
ii) Salaries and Pension paid by the government to the government employees.
iii) Subsidies forwarded to all sectors by the government.
iv) Defence expenditures by the government.
v) Postal deficits of the government.
vi) Law and order expenditures (i.e Police & Para-military).
vii) Expenditures Social Services (include all Social Sector expenditures as education, health care, social security, poverty alleviation, etc.) and general services (tax collection, etc.).
viii) Grants given by the government to Indian States and the Foreign Countries.
If the balance of total revenue receipt and total revenue expenditures turns out to be negative it is known as revenue deficit.
The Part of the Budget which deals with the income and expenditure of revenue by the Government.
* This presents the annual financial statement of the total revenue receipts and the total revenue expenditure.
* If the balance emerges to be positive it is a revenue surplus budget and if it comes out to be negative, it is a revenue deficit budget.
The part of the Budget which deals with the receipts and expenditures of the capital by the Government.
* This shows the means by which the capital is managed and the areas where capital is spent.
All non-revenue receipts of a government are known as the capital receipts.
* Such receipts are for investment purposes and supposed to be spent on Plan - development by a government.
* The capital receipts in India include the following capital kind of accruals to the government.
This is one source of the capital receipts.
» The money the Government had lent out in past in India (States, UTS, PSUS, etc.) and abroad their capital come back to the government when the borrowers repay them as capital receipts.
» The interests which come to the government on such loans are part of the revenue receipts.
ii) Borrowings by the Government:
This includes all long-term loans raised by the Government.
Inside the country (i.e., internal borrowings) and outside the country (i.e external borrowings).
iii) Other Receipts by the Governments
This includes many long-term capital accruals to the government through the Provident Fund (PF), Postal Deposits, Various small saving schemes (SSS) and the Government Bonds sold to the public (as Indira vikas Patra, Kisan Vikas Patra, Market Stabilisation Bond etc.,).
All the areas which get capital from the government are part of the capital expenditure.
» It includes so many heads in India.
i) Loan Disbursals by the Government
The loans forwarded by the government might be internal (i.e., to the states, UTS, PSUS, FIS, etc) or external (i.e., to foreign Countries, Foreign banks, Purchase of foreign Bonds, loans to IMF and WB etc).
ii) Loan Repayments by the Government of the Borrowings Made in the Past:
Again Loan Payments might be internal as well as external.
* This consists of only the capital part of the loan repayment as the element of interest on loans are shown as a part of the revenue expenditure.
iii) Plan Expenditure of the Government:
This consists of all the expenditures incurred by the government to finance the planned development of India as well as the central government financial supports to the states for their plan requirements.
iv) Capital Expenditures on Defence by the Government:
This consists of all kinds of capital expenses to maintain the defence forces, the equipment purchased for them as well as the modernisation expenditures.
* The revenue part of expenditure in the defence is counted in the revenue expenditures by the government.
v) General Services:
* These also need huge capital expenditure by the government.
» The railways, postal department, water supply, education rural extension etc.
iv) Other Liabilities of the Governments:
This includes all the repayment liabilities of the government on the items of the other Receipts.
Capital Deficit is the scarcity of capital in day-to-day economic news items.
When balance of the government total receipts (i.e., Revenue + Capital receipt) and total expenditures turns out to be negative it show the situation of fiscal deficit, a concept being used since the fiscal 1997-98 in India.
» The situation of Fiscal deficit indicates that the government is spending beyond its means.
Composition of Fiscal Deficit:
Out of the two broad expenditure obligations of a government -revenue expenditure and -Capital expenditure.
The following combinations of expenditure composition are suggested i) A fiscal deficit with a surplus revenue budget composition of Fiscal deficit and the most suitable time for deficit financing.
ii) The deficit requirements for lower revenue expenditures and higher capital expenditures are the next best situation for deficit financing, provided revenue deficit is eliminated soon.
iii) The last could be the situation when major part of deficit financing is to fulfill revenue expenditures and a minor to go for capital expenditures.
* The total money of the deficit might go in the care of the revenue expenditures which could be the worst from of it.
Fiscal Policy has been defined as the policy of the government with regard to the level of government purchases, the level of transfers, and the tax structure.
Taxes and their impact on the economy
i) Taxes have a direct bearing on the people's income affecting their levels of disposable incomes, purchase of goods and services, consumption and ultimately their standard of living.
ii) Taxes directly affect the savings of individuals, families and the firms which affect investment in the economy
» As investment affect the output (GDP) thereby influencing the per capita income.
iii) Taxes affect the prices of goods and services as factor cost (production cost) is affected thereby affecting incentives and behaviour of the economic activities, etc.
Deficit Financing in India
India was declared to be a planned economy right after Independence.
» deficit financing in India classified as the period into three phases.
The first phase (1947-1970)
Major aspects of this phase were
i) Trying to borrow inside and outside the economy but unable to meet the target.
ii) A serious attempt was made to increase tax collections and check revenue expenditures to be ultimately able to emerge as a surplus revenue budget economy.
(iii) taking resource to heavy borrowings from the RBI and finally nationalisation of banks so that their money could be used by the Government to support the plans.
(iv) Establishing giant PSUs with higher revenue expenditure (salaries) which increased the revenue expenditures of the future governments when the pensions and the P.Fs needed to be serviced.
The Second Phase (1970-1991)
Major highlights of this phase may be summed up as follows.
i) First, many of the South East Asian Economies have officially declared their acceptance of capitalism and privatisation.
* Secondly, China had declared that investment in the government controlled companies are a loss of money at this time.
ii) Upcoming PSUs increased the total expenditure of the government's revenue as well as capital.
iii) the illogical employment creation excessively increased the burden of salaries, pensions and PF.
iv) The governments have failed on both the fronts.
* checking population rise and mass employment generation.
v) Planned development remained highly centralised and devoid of any place for local aspirations.
(vi) majority of the plan expenditure in a sense turned out to be non-economic i.e., non-plan expenditure at the end.
The Third Phase (1991 onwards)
This started with the initiation of the economic reforms process under the conditionalities put forth by the IMF.
* till date the governments had been doing pure politics with the public money in the name of development.
The idea of Zero-Base Budgeting (ZBB) first came to the privately owned organisation of the USA by the 1960s.
* This basically belonged to a long list of the guidelines for managerial excellence and success, others being Management by Objectives (MBO); matrix management portfolio Management, etc to name a few.
» There are three essential principles of the ZBB. Some experts say it in a different way there are three essential questions which must be answered objectively before going for any expenditure as per the techniques of the ZBB.
i) Should We spend?
ii) How much should We spend?
iii) where should We spend?
Types of Budgets
The Proposition that a government should borrow only to invest (i.e., plan expenditure in India) and not to finance current spending (i.e., revenue expenditure in India) is known as the golden rule of public finance.
A budget is said to be a balanced budget when total public sector spending equals total government income (revenue receipts) during the same period from taxes and charges for public services.
A general budget by government which allocates funds and responsibilities on the basis of gender is gender budgeting.
* It is done in an economy where socio-economic disparities are chronic and clearly visible on a sex basis.
* Gender budgeting started in India with the Union Budget 2006-07 which proposed an outlay of 28,737 crore dedicated to the women's cause and created gender budgeting cells in 32 ministries and departments.
In democratic Political systems, there is a provision of cut Motion by the House/ parliament (usually it is the opposition but floor might be crossed by the members of the house belonging to the government due to presence of inner party politics).
* There are different constitutional provisions by which the parliament starts discussion on the demands, grants etc. Proposed by the government in the Budget.
i) Token cut is a cut of 100 by the House from the total demand made by the Government.
ii) Economy cut is a cut of specific amount from the total demands made by the Government.
iii) Disapproval of policy cut is cutting just 1 from the total government demands made in the budget.
» It is a symbolic cut.
iv) Guillotine is the most severe from of the cut motion in which demands by the budget are directly put to vote without any discussion or scrutiny.
CRIS of India:
The Finance Ministry of India has developed and released (January 31, 2012) the Comparative Rating Index of Sovereigns (CRIS).
* A new index of sovereign credit rating together with it,
* The ministry also released and estimation of CRIS over the last five years, for different nations belonging to different blocks of the global economy.
* The CRIS is very different from a comparative rating.