Unit 5 :- Public Finance Infrastructure And National Income

Public Finance

"Public Finance" is that branch of general economics

which deals with the financial activities of the state or government at
national, state and local levels. With the broadening of the activity base of
governments over the past three centuries or so, the study of "public
finance" has assumed lot of importance. Economic theorists, right from the
classical times to the modern, have been influenced in determining the
subject matter and scope of "public finance" by their views regarding the
role of the state in the life of a nation. Consequently there has been lack of
unanimity among them.

According to Bastable, " Public Finance deals with

expenditure and income of public authorities of the State and their mutual
relations as also with the financial adminstration and control."

Importance of Public Finance

Every body realises necessity of money. The importance

of money is too much not only for individual but for state also. The state has
to perform number of functions for which money (funds) is required. In
under developed countries like India, Govt. is performing many important
functions like education, industrial and agriculture developments but lack of
funds is one of the constraints. For beginning of any function funds is must
and in view of this the public finance nowadays has vital importance. Its
importance can be easily understood from functions of public finance. They
are as follows :-

1) Allocative Function

2) Distribution Function

3) Stabilisation Function

Public Finance Infrastructure : Public Private Partnerships (PPP's)

 PFI is an acronym for Public Finance Infrastructure. PFI
cannot be defined without talking about Public Private Partnership (PPP).
PPP can be defined as "contractual relationship where a private party takes
responsibility for all or part of governments functions. In essence, it is a
contractual agreement between a public sector agency and a private sector
concern, whereby resources and risk are shared for the purpose of
delivering a public or for the developing public infrastructure". Hence the
PFI is a PPP special case where all the finance needed for the capital funding
and its basic operation is supplied by the private sector in return for a
service charge.

According to IMF, "The PPP is the transfer to the private

sector of investment projects that traditionally have been executed or
financed by public sector."

Public Private Partnership in India

The steps taken to encourage public-private partnerships

are as follows :-

1) Standardising contractual documents as sector specific model contracts/

concession agreements.

2) Standardising bidding documents.

3) Establishing institutional mechanism like the Indian Infrastructure

Finance Company Limited to facilitate infrastructure development and PPP.

4) Creating the Indian infrastructure development fund.

5) Relaxing the restrictions on foreign direct investment in most

infrastructure sectors.

6) Fiscal incentives including the Income Tax Act, 1961 and state laws to
developers and lenders of infrastructure projects.

National Income
 National Income is the money value of all the final goods
and services produced by a country during a period of one year. National
income consists of a collection of different types of goods and services of
different types. Since these goods are measured in different physical units it
is not possible to add them together. Thus we cannot state national income
is so many millions of meters of cloth, so many million litres of milk, etc.
Therefore, there is no way except to reduce them to a common measure.
This common measure is money.

Definition of National Income

According to Prof. Fisher, "The national dividend or

income consists solely of services as received by ultimate consumers,
whether from their material or from their human environment."

Terms Related to National Income

There are many concepts of national income which are

used by different economists and all of which are inter-related. National
income or national product is defined as the total market value of all the
final goods and services produced in an economy in a given period of time.
This suggests that the labour and capital of a country, working on the
natural resources produces certain net amount of goods and services, terms
of National Income used for finding the rate of economic growth changes to
average living standards and distribution of income between groups within
the population. Various important terms of national income are discussed
below.

1) Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) or Gross Domestic

Income (GDI) is a measure of country's overall economic output. It is the
market value of all final goods and services made within the borders of a
country in a year. It is often positively correlated with the standard of living,
alternative measures to GDP for that purpose.
 GDP is commonly used as an indicator of the economic
health of a country, as well as to gauge a country's standard of living. Critics
of using GDP as an economic measure say the statistics does not take into
account the underground economy-transactions that, for whatever reason,
are not reported to the government. Others say that GDP is not intended to
gauge material well-being, but serves as a measure of a nation's
productivity, which is unrelated.

GDP is the monetary value of all the finised goods and

services produced within a country's borders in a specific time period,
though GDP is usually calculated on an annual basis. It includes all of private
and public consumption, government outlays, investments and exports less
imports that occur within a defined territory.

GDP = C + G + I + NX

Where,

C = All private consumption, or consumer spending, in a nation's economy

G = Sum of government spending

I = Sum of all the country's businesses spending on capital

NX = Nation's total net export, calculated as total exports minus total

imports. ( NX = Exports - Imports )

2) Purchasing Power Parity

Purchasing Power Parity (PPP) is an economic technique

used when attempting to determine the relative values of two currencies. It
is useful because often the amount of goods a currency can purchase within
two nations varies drastically; based on availability of goods, demand for
the goods, and a number of other, difficult-to-determine factors. PPP solves
this problem by calculating the price of a specific item so that the price is
the same when expressed in two different currencies.

It is a method of measuring the relative purchasing

power of different countries currencies over the same types of goods and
services, despite differential rates of inflation. PPP allows making more
accurate comparisons of standards of living across countries, because goods
and services may cost more in one country than in another. Purchasing
power parity is a theory about exchange rate determination based on a
plain idea that the two currencies involved in the calculation of the
exchange rate have the same purchasing power for the same good sold in
the two countries.

PPP Income of India = (Measured Income of India)*(Official Rupee - Dollar

Rate/PPP of Indian Rupee)

2) Growth Rate

Economic growth is an increase in a country's real level

of national output which can be caused by an increase in the quality of
resources, increase in the quantity of resources and improvements in
technology or in another way an increase in the value of goods and services
produced by every sector of the economy. Economic growth can be
measured by an increase in a country's GDP.

Growth rate is the increase in the amount of the goods

and services produced by an economy over time. It is conventionally
measured as the per cent rate of increase in real gross domestic product, or
real GDP. Growth is usually calculated in real terms, i.e, inflation-adjusted
terms, in order to net out the effect of inflation on the price of the goods
and services produced. The most commonly used indicator of national
output is the Gross Domestic Product (GDP) and Gross National Product
(GNP) which helps in measuring the growth rate.

3) Other Terms

i) Net Domestic Product (NDP)