14 The Union and State Budget, Economic Stabilisation

Monica Bansal

1.    Learning Outcome:

 

After completing this module the students will be able to:

 

Understand the concepts of economic stabilization in the country through union and state government budgets.

 

Understand the fiscal policy, its tools and components.

 

Describe the various components of fiscal policy and the government regulations. Understand the various sources of revenue for the government.

 

Understand the places of disbursement of government expenditure. Understand the concept of deficit financing.

 

 

2.  Introduction of Economic Stabilization

 

The problem of stability refers to the recurring phase of upward and downward cumulative movement in income, employment and prices in an economy. Stability means the steady non-inflationary economic expansion. The role of fiscal policy in promoting economic growth and stability was recognized during the great economic depression in 1929. Manipulation of effective demand through deficit financing and surplus budget created the principles of functional finance. The anti-depression policy aims increasing effective demand through expenditure and taxation policy. Public expenditure may be increased though public investment and consumption and with the encouragement of private companies. Expenditure policy says that investment on public works like roads, dams, constructions, can be changed in a planned way. Albeit said that, work cannot be stopped midway without incurring any losses. It is difficult to counteract inflation through expenditure and it is equally difficult to curtail expenditure on welfare and defense.

 

Taxation policy rests on the principle that taxes act as built-in-stabilisers, since taxes depend upon income, prices and production. The system itself creates a surplus during inflation. Increase in the direct and indirect taxes would reduce consumption and investment. It is a noted observation that fiscal policy is more successful in deflation rather than in boom time.

 

Stabilization of Underdeveloped Countries

 

Economic stability is sees generally due to external instability. Exports of under developed countries consist of primary products that are sensitive to demand. Anti-depression policy in this case can be referred to as deficit financing, which is a step to counteract depression. A fall in demand originates abroad and hence stimulating internal demand is not seen as curb to depression. Import restriction may encourage local domestic industries but lack of resources may act as a constraint and therefore the policy should take care of both the imports and expenditure due to import restrictions. Private investment and consumption is encouraged through subsidies. Consumption may also be increased through the transfer of income. A general reduction in taxes or abolition of some would push up profits and reduce prices through a reduction in the cost supply. Prices are expected to increase demand. Reduction in export duties and imposition of import duties would boost up internal market and trade.

 

Taxation policy gives the opportunity of boosting demand on elastic items. For encouraging investments, special tax concessions and schemes are made.

 

3.  Fiscal Policy

 

In a mixed economy pursuing planned economic development fiscal policy plays a central and multidimensional role if the government creates and sustains the public economy consisting of the provision of public services and investment. At the same time it is an instrument for reallocation of resources according to national priorities-redistribution, promotion of private savings and investment and maintenance of stability.

 

Fiscal policy is the policy under which the government uses its expenditure and revenue programme to produce desirable effects on national income, production and employment. In other words, fiscal policy is a technique used to attain full employment by manipulating public expenditure and revenue in such a way so as to keep equilibrium between effective demand and supply of goods and services at a particular time.

 

Tools of Fiscal Policy

 

The following are the major tools of fiscal policy of India

4.    Union Budget

 

The policy of government of India to promote and avoid undesirable effects on the economy through taxation, government expenditure and debt management is called as Fiscal Policy. The implementation of fiscal policy is through annual ‘Union Budget’ exercise. The budget depicts a complete picture of the estimated receipts and expenditure of the government for the ensuring financial year.

 

Union Budget is an important event which has great significance for the entire nation and is normally introduced in the last week of February every year. The budget is prepared and presented by Finance Minister before the Parliament. The Finance Bill of the Budget has to be passed in the Parliament to approve the tax proposals and an appropriation Bill has to be cleared to authorize expenditure.

 

In the budget, a distinction is made between Revenue Account and Capital Account. Revenue account can be classified into Revenue Receipts and Revenue Expenditure. Similarly, Capital Account is classified as capital receipts and capital expenditure. In simple words, the government proposes its plan to raise resources through annual budget and this is divided into two accounts viz., Revenue Receipts and Capital Receipts. These are explained in detail as follows:

  • Ø Current or Revenue Budget: The revenue budget of the central government deals with receipts from taxation and from non-tax sources and expenditure met out of these sources.

o  Tax Revenue come from broadly three sources:

  • Taxes on Income and Expenditure
  • Taxes on Property and Capital transactions
  • Taxes on Commodities and Services
  • o Non Tax Revenue consist of
    • Currency, Coinage and Mint
  • Interest Receipts and Dividends
  • Other Non-Tax Revenue

Current expenditure or revenue expenditure is met out of current revenues. Revenue expenditure is on:

  • o Such general services as general administration including police, judiciary, defense, collection of taxes
  • o Social and community services, such as education, medical and public health, labour and employment
  • o Economic services, like agriculture, industries, transportation, trade etc.
  • Ø Capital Budget: Capital budget of the Government of India, also known as the capital account consists of capital receipts and capital expenditure. The capital receipts of the Central Government are composed of:
  • o Net recoveries of loans and advances made preciously to State Governments,
  • o Net market borrowings (i.e. gross borrowings from the market less repayments of public debt)
  • o Net small savings collections (gross collections less share of the States) and o Other capital receipts such as provident funds, special deposits etc.

 

Capital expenditure of the Union Government consists of expenditure on capital items, mainly in the form of loans to States and Union Territories for financing plan projects and other capital expenditure on economic development, on social and community development and capital expenditure on defense.

 

The following table depicts the summarized Central Government Budgets since 1950-51 for selected years to show the growth of receipts and disbursements of the Government of India during the last 60 years. From this table, the following tables may be noted:

There was an enormous increase in public expenditure of the Central Government which was due to expansion of government machinery, new responsibilities, new departments, increase in Government staff, increase in defense expenditure and continuous increase in the salaries and dearness allowances of government servants because of rise in prices and the consequent rise in the cost of living, and huge increase in interest payments.

 

It is clear that between 1951 and 1981, capital disbursements exceeded capital receipts-thus; there was deficit in the capital account too before 1981. The overall deficit was calculated by considering both revenue deficit and capital deficit. The overall deficit was calculated by considering both revenue deficit and capital deficit.

In 2010-11 the budget provides for a surplus in the capital account to the tune of Rs 276512 crores which covers fully the deficit in the current account or revenue account. The overall budgetary deficit is nil. This is just an artificial method of raising capital surplus through market borrowings, collection of small savings etc., to cover up the revenue deficit. Actually, borrowings from the market, mobilizing small savings and incurring other liabilities are bad for the economy. This is now designated as fiscal deficit. Formerly it was called deficit financing.

 

Revenues of the Central Government

 

In this section of the module, we shall describe in the revenue budget. The estimates of receipts on revenue account have been grouped under two broad categories viz., tax revenues and non tax revenues. The following table shows that the total current revenue of the Central Government consists of tax revenue and non tax revenue. This has been raising quiet fast, partly on account of more taxes and higher rates of taxes, and partly due to inflation.

 

Revenue of Central Government in the Revenue Account

The total revenue receipts of the central government was a little more than Rs 400 cores in 1950-51 but it rose to Rs 12830 cores in 1980-81 and in the 2010-11 budget, it was Rs 682212 crores. Between 1981 and 2010, the total revenue receipts has increased by 53 times.

  • Ø Tax Revenues: Tax revenue includes taxes on income e.g. income tax, corporation tax, interest tax, central taxes on property, wealth tax, estate duty, taxes on commodities and services, central excise duties, service tax etc.

Comparative Position of Direct and Indirect Taxes of Central Government

 

Ø  Non-Tax Revenues: Besides taxes on income, property and commodities, the central government gets revenue from other sources also, which are collectively called non tax revenues. These non tax revenues include receipts from fiscal services, interest receipts, dividends and profits of government enterprises, general services etc. The growth of non tax revenue in recent years can be seen from the following table.

Interest receipts comprise of interest on loans to states and union territories, interest payable by railways and postal services and other interest payments. Profits and dividends relate to profit of RBI, profits of nationalized banks, LIC etc. Fiscal services include the revenue received by the central government from currency, coinage and mint etc.

 

Expenditure of the Central Government

 

The following table summarizes the revenue expenditure of the central government for selected years.

The central government adopted a new classification of public expenditure from 1987-88 budget. Under this classification, all public expenditure is classified into

 

Ø  Non-Plan Expenditure

Ø   Plan Expenditure

  1. Budgets of State Governments

In India, each state government prepares it own budget of income and expenditure every year.

The following table summonses the budgetary position of the states since 1951-52.

 

The table indicates that the receipts and expenditure of the States on the revenue account have been continuously increasing. For instance, in 1951-52, the current recenue of the states was a mere Rs 396 crores, but it went upto Rs 16290 crores in 1980-81 and finally it has increased to Rs 804943 crores in 2009-10. The expenditure has also increased a lot and the reasons may be expansion in civil administration, higher salaries etc. The States have generally managed to get over-all budgeted surplus meaning that the aggregate disbursements are below aggregate receipts.

 

Current Revenue of State Governments

 

State Governments in India collect revenue from different sources to meet their revenue expenditure. The following table shows that the important sources of revenue for the states are:

  • Ø States own taxes states share in central taxes
  • Ø States share in the tax proceeds of the central government
  • Ø Grants-in-aid and other contributions from the centre and
  • Ø States own non tax revenue

Revenue of the State Governments on Revenue Account

The tax revenue of the states consists of two parts:

 

  • o Revenue from state taxes, comprising broadly taxes on income, taxes on property and  capital transactions and taxes on commodities and services
  • o Share in Central Taxes. This source of tax revenue to the states is known as non tax revenue and consists of:
    • Grants from the central government
  • States own non-tax revenue, which includes interest receipts, dividend and profits, general services of which state lotteries are the most important for some states, social and economic services.

 

Current Expenditure of State Governments

 

Under the Indian Constitution, the State Governments have been entrusted with the important function of maintaining law and order and also with many nation building activities such as education, public health and medicine, irrigation, agriculture etc. Like the union government, the state governments too have adopted the policy of building up welfare states i.e. raising agriculture and industrial prosperity of the states and looking after the needs of the poor and the downtrodden. The following table shows the revenue expenditure of the states:

Ø  Non-Development Expenditure: The single largest non-development expenditure of the states is payment of interest. E.g. in 2009-10 the states are expected to pay Rs. 1164427 crores or 36.8 per cent of the total non-development expenditure on interest payments. These payments are made partly to the central government and partly to the market for loans raised. The second largest item of non-development expenditure is pensions. It was Rs 100357 crores or 31.7 per cent of the non-development expenditure. The third largest item of non-development expenditure of the states is on the administrative services which include secretarial general services, district administration, police and public works etc.

  • Ø Development Expenditure: The development expenditure is divided into two parts, , social and community services and economic services. Expenditure on social and community services is incurred on such services as education, family planning, public health, housing, labour employment, social security and welfare, natural calamities. These form an essential part of the expenditure of the states. Expenditure on economic services consists of expenditure on agriculture, veterinary and co-operation, irrigation, electricity, rural and community development projects, civil works, industries and minerals etc.
  1. Trends in Revenue and Expenditure of Central and State Governments

 

The following table gives the combined picture of the total revenue and expenditure of the centre and the state union territories:

 

Budgetary Transactions of the Centre and State Governments and Union Terrotories

 

In less than five decades between 1960-61 and 2009-10, the combined total expenditure of the centre and the states has risen from Rs 36850 crores to 1892880 crores, which is over 40 times. Now the combined total expenditure of the centre and state consists of development expenditure and non-development expenditure of all types and compensation and assignments made by the states to local governments and panchayati raj institutions. During the same period, the combined current revenue receipts of the centre and the states rose from Rs 24570 crores to 1208804 crores. The total revenue consists of tax revenue of the centre and the states, non tax revenue receipts of the centre and the states, non-debt capital receipts consisting of loans and advances.

 

 

7.  Conclusion & Summary

 

The major challenges of the centre and the state budget are to quickly revert to the high GDP growth path of 9 per cent and then find the means to cross the double digit growth barrier. Further, to harness economic growth to consolidate the recent gains in making development more inclusive and finally, to address the weakness in government systems, structures and institutions at different levels of governance. There is requirement of economic stabilization in the country. Stability in the economy helps in achieving the objective of economic growth because investment decisions are taken favourably under conditions of stability. Also, long-term growth demands high investment rate. On the contrary, investment in these areas would mean generating lesser employment and inflation as compared to the investments in short-term. Economic growth refers to the increase in total output of goods and services over a period of time. It depends upon the aggregate demand a rise in the capacity of the economy. For aggregate demand stability is the policy that can be used for raising output and total investment. The policy says that reduction in personal taxation will encourage the disposable income in the hands of the consumer and that investment allowances and reduction in corporate taxation encourages investment in the corporate sector. The centre and the state governments try to maintain economic stabilization in the economy with the help of budgets.

Learn More

 

Few important sources to learn more about the Union and State Budget, Economic Stabilisation are:

 

  1. Shaikh Saleem (2009). Business Environment. New Delhi-110017: Pearson Education.
  2. Bagchi Amaresh (2011). Readings in Public Finance. New Delhi-110020. Oxford University Press.
  3. Jha Praveen (2011). Progressive Fiscal Policy in India. New Delhi-110044. SAGE Publications India India Pvt. Ltd.
  4. Kapila Uma (2007). India’s Economic Development Since 1947. New Delhi-110002. Academic Foundations.
  5. Datt & Sundharam (2011). Indian Economy. New Delhi-110055. S. Chand & Company Ltd.
  6. Agrawal A.N. (2007). Indian Economy-Problems of Development and Planning. New Delhi-110002. New Age International (P) Limited.
  7. Paul Justin (2009). Business Environment-Text and Cases. New Delhi-110008. Tata McGraw Hill Education Private Limited.
  8. Mala P. (2014). Agricultural Economics. New Delhi-110051. Dominant Publishers & Distributors Pvt. Ltd.
  9. Rane, Deorukhkar ( 2007). Economics of Agriculture. New Delhi-110002. Atlantic Publishers & Distributors Pvt. Ltd.
  10. Prasad C.S. (2006). Sixty Years of Indian Agriculture 1947 to 2007. New Delhi-110005. New Century Publications.
  11. Agrawal Raj (2006). Business Environment. New Delhi-110028. Excel Books.
  12. https://www.mruni.eu/upload/iblock/2f8/001_nagaj_szkudlarek.pdF
  13. www.britannica.com/topic/government-economic-policy
  14. ec.europa.eu/economy_finance/eu_borrower/efsm/index_en.htm

 

Points to Ponder

 

  1. Fiscal policy is the policy under which the government uses its expenditure and revenue programme to produce desirable effects on national income, production and employment.
  1. The revenue budget of the central government deals with receipts from taxation and from non-tax sources and expenditure met out of these sources.
  • Revenue from state taxes, comprising broadly taxes on income, taxes on property and capital transactions and taxes on commodities and services
  • Under the Indian Constitution, the State Governments have been entrusted with the important function of maintaining law and order and also with many nation building activities such as education, public health and medicine, irrigation, agriculture etc.