ECONOMIC THEORY AND

PUBLIC FINANCE

TOPIC: PUBLIC FINANCE

SUBMITTED TO- PROF.DR. GAJENDRA

SUBMITTED BY- SNEHA
2ND YEAR BA.LL.B

DATE- 6th November, 2019

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 CERTIFICATE
This is to certify that the assignment titled “PUBLIC FINANCE” submitted to the CHRIST
ACADEMY INSTITUTE OF LAW, Bangalore by Sneha for the degree of law, is a bonafide
research work carried out by her under my guidance.

Bangalore PROF.DR. GAJENDRA

Date- CHRIST ACADEMY INSTITUTE OF LAW,

BANGALORE

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 DECLARATION

I hereby declare that the assignment titled ‘PUBLIC FINANCE’, which I am submitting
CHRIST ACADEMY INSTITUTE OF LAW is the outcome of the research carried under
guidance of Prof. Dr.Gajendra. The extent of information collected from existing literature
has been cited and fully acknowledged at the appropriate places. I further declare that this
assignment wholly or impart has not been submitted to any other college.

Bangalore Sneha

Date-

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 ACKNOWLEDGEMENT
First and foremost, I bow down with all my praise before my Lord Almighty for having
helped me to complete this task at the prestigious CHRIST ACADEMY INSTITUTE OF
LAW, Bangalore. I express my sincere and heartfelt gratitude to my guide Prof. Dr.
Gajendra, for his helpful guidance, original ideas and encyclopedia knowledge to complete
this work and the insight throughout my research work. The idea of taking up this topic was
seeded in my mind by Prof. Dr. Gajendra. More than anyone else, his influence has
contributed to my development in this field. Lastly I would like to express my gratitude
towards my parents and friends for their kind co-operation and encouragement which help me
in completion of this assignment.

SNEHA

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 TABLE OF CONTENTS

1. INTRODUCTION……………………………………………………………

2. MEANING…………………………………………………………………..

3. DEFINITION………………………………………………………………..

4. IMPORTANCE……………………………………………………………..

5. SOURCES……………………………………………………………………

6. MATTER…………………………………………………………………….

7. PUBLIC FINANCE OF INDIA……………………………………………..

8. SYSTEM MANAGEMENT…………………………………………………

9. CONCLUSION ……………………………………………………………..

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INTRODUCTION

Public Finance is a study of income and expenditure of a government. It studies the income
raised through revenue and expenditure incurred or spent on the activities of public
authorities. Income and expenditure of the government are regulated through marginal
adjustments so as to give the maximum public benefit. The term ‘public authorities’ connotes
all sorts of governments though they differ in their functions, operations, sources of income
and objectives of expenditure. Further, it relates to the raising and utilisation of their
resources. In a narrow sense, they differ widely as concerned to the magnitude of areas and
population which they govern, the nature of functions which they perform, different objects
as well as different methods adopted to achieve the so called objectives in the form of
income, revenue or purposes of expenditure and financial relations with other public
authorities at national level or at international level. In a broad sense, these distinctions are
only secondary. Basically, there is a difference in the central or Federal, State and Local
Governments.
In the modern era, the various governments all over the world have entered and are
entering into a number of public projects for the economic and social security of their citizens
such as railways, post & telegraphs, dams, heavy electrical, atomic energy projects etc.
Moreover, with the adoption of planning in almost all the countries, the scope of state activity
has considerably expanded. In this way, with the gradual expansion of the functions of the
modern governments, the total public expenditure is increasing at a very rapid rate. On the
other hand, the total expenditure and revenue of a government are much larger than the
revenue and expenditure of a single man or single economic and social organisation. Thus,
various tools of public finance can be utilised as an instrument for bringing about the desired
economic and social changes in a country.

OBEJECTIVES OF THE STUDY

1. To introduce students to the public sector reform agenda with a focus on public finance
issues;
2. To demonstrate administrative, political, and economic constraints to public finance
reforms;
3. To develop analytical skills of the students in three major areas of public finance reforms
(performance-based budgeting, mid-term financial planning, budget decentralization);
4. To train students how to develop budgeting and performance evaluation systems for
public
Sector institutions;
5. To develop students’ skills on how to write a public policy paper and make a presentation
on public policy issue

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MEANING

The word public refers to general people and the word finance means resources. So Public
Finance means resources of the masses, how they are collected and utilized. Thus, it is the
branch of economics that studies the taxing and spending activities of government. It is that
branch of general economics which deals with the financial activities of the state or
government at national, state and local levels. The discipline of public finance describes and
analyses government services, subsidies and welfare payments, and the methods by which the
expenditures to these ends are covered through taxation, borrowing, foreign aid and the
creation of money.
It was Adam Smith who gave a detailed account of the problems of ‘public finance’ and
recognized the close connection between science of finance and the theory of economics.
Following Smith, other classical economists went on writing on one issue or the other in the
field of ‘public finance’.

Public finance can be defined as the study of government activities, which may include
spending, deficits and taxation. The goals of public finance are to recognize when, how and
why the government should intervene in the current economy, and also understand the
possible outcomes of making changes in the market. In addition, public finance can involve
issues outside of the economy, including accounting, law and public finance management.
Understanding the role of the government and how changes may affect the economy are a
few important aspects of public finance professionals. When the government intervenes and
takes action within the economy, the outcomes are classified into one of three categories:
economic efficiency, distribution of income or macroeconomic stabilization.

Definition

According to Findlay Shirras

“Public finance is the study of principles underlying the spending and raising of funds by
public authorities”.
According to H.L Lutz
“Public finance deals with the provision, custody and disbursement of resources needed for
conduct of public or government function.”
According to Hugh Dalton
“Public finance is concerned with the income and expenditure of public authorities, and with
the adjustment of the one to the other.

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IMPORTANCE OF PUBLIC FINANCE

The importance of public finance was not so recognized in the 19th century as the
Government in those But in the 20th century, every Government ensures ‘Social Welfare ‘to
its citizens and therefore, the scope of governmental activities has been increasing day by
day. Modern days confined itself to the maintenance of law and order situation in the
courtyard to the defence of the country from external aggression. The Government in those
days did not intervene in economic Governments do not only confine themselves to law and
order situation but they also actively intervene in economic matters to justify themselves as,
‘Welfare States’. The Governments require money to spend it on the welfare of citizens.
Hence, the importance of public finance has increased greatly in recent years.

The importance of public finance can be justified on the following grounds-

(1) Protection to Infant Industries. The Government of an underdeveloped country protects

its infant Industries against foreign competition through various public finance activities like
imposition of heavy tariff duties on imports, putting restrictions on imports, giving subsidies
to keep the cost low etc. The objective of such operations is to enable these industries to stand
on their legs against foreign competition.

(2) Planned Economic Development. Public finance renders valuable help in the planned
economic development of the country. The planning authorities fix the priorities of
expenditure for the plan period. The Government raises the necessary funds to implement the
plans through direct and indirect taxation. The government takes necessary action to achieve
the plan objectives, through fiscal measures.

(3) Regulating Consumption Habits. Public finance regulates the consumption habits of the
people. It imposes taxes on items of consumption, the use of which is to be discouraged such
as wine, cigarettes, tobacco and bidi, and allows concessions and rebates in taxes if it likes to
encourage the consumption of any commodity. In practice, it can be seen that through tax-
policy, Government is able to encourage or discourage the demand on various commodities.

(4) Reducing Inequalities. Public finance also plays a vital role in reducing social
inequalities, through its fiscal policies. The Government can levy Heavy taxes on the richer
sections of the society because they have capacity to pay, and spend the income so received
on providing various facilities to poorer sections of the society such as providing free medical
facilities, educational facilities, cheap housing, Cheap rations through fair price shops etc.
Thus. on the one hand it reduces the purchasing power of the richer sections and on the other
hand, increases the purchasing power of the poor sections of the society.

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 (5) Maintaining Balance or Trade: The Government always restricts the imports only to the
essential items: hence imports of non- essential items are taxed heavily. On the other hand,
the Government encourages the exports of its surplus production. It reduces the burden on
export items and also supports them with subsidies and grants. These operations restricting
imports and encouraging exports of the Government maintain the balance of trade.

(6) Industrial Development. Public finance helps industrial development of the country as
follows- .

(i) Governments grant Subsidies and grants to various industries these days to enable them to
increase the production of different essential items. These subsidies and grants have special
place in the Government expenditure of underdeveloped and backward countries. On the
other hand, Governments want to discourage the production of non-essential or harmful
commodities, they may impose heavy taxes on such items.

(ii) Public finance induces the investment during the time of depression through its taxation
policy by allowing tax-rebates for investments in desired direction. Through tax-policies, the
Government can also discourage the investment in certain industries producing non-essential
or harmful items of consumption. During boom or inflation, the Government regulates the
flow of investment to anti-social operations.

(iii) The role of public finance in under-developed countries is to bring economic stability to
keep the level of consumption and investment quite up to the level of production. It requires
continuous trimming of the investment process to keep the productive process in the same
speed. Through the help of public policies, the public, expenditure and individual demands
can be tempered and turned according to the need of the economy. (iv) To strengthen the
economic development in developing countries, it is essential to give highest priority to
capital formation because industrial development cannot be imagined without capital. For this
purpose, there must be policies in the store of the government to encourage people to save
more by cutting their wasteful expenditure. The capital formation, its speed and quantum will
ultimately affect the economic development of the country.

(v) Industrial development of a country will bring in more employment opportunities to

people especially in under-developed countries. The government may also provide more jobs
through the deficit budget which is an indispensable measure to increase the volume of
employment during depression Thus, it is evident that the government of a country can push
up the industrial and economic development of the country, provide more employment
opportunities, encourage investments and savings in the desired direction and increase social
benefits through public expenditure. On the reverse, it can have an influential check over
infrastructure economic and social activities, mitigate the inflationary and deflationary trends
in the economy regulates the consumption and production of unwanted items, and can
regulate the flow of imports to protect its own industries and so on. It therefore, affects the
overall economic and social system of the country. Public financial management systems are
now well defined.

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1. Steady state economic growth:
Government finance is important to achieve sustainable high economic growth rate. The
government uses the fiscal tools in order to bring increase in both aggregate demand and
aggregate supply. The tools are taxes, public debt, and public expenditure and so on.

2. Price stability:
The government uses the public finance in order to overcome form inflation and deflation.
During inflation it reduces the indirect taxes and genera expenditures but increases direct
taxes and capital expenditure. It collects internal public debt and mobilizes for investment. In
case of deflation, the policy is just reversed.

3. Economic stability:
The government uses the fiscal tools to stabilize the economy. During prosperity, the
government imposes more tax and raises the internal public debt. The amount is used to repay
foreign debt and invention. The internal expenditures are reduced. During recession, the case
is just reversed.

4. Equitable distribution:
The government uses the revenues and expenditures of itself in order to reduce inequality. If
there is high disparity it imposes more taxes on income, profit and properties of rich people
and on the goods they consume. The money collected is used for the benefit of poor people
through subsidies, allowance, and other types of direct and indirect benefits to them.

5. Proper allocation of resources:

The government finance is important for proper utilization of natural, manmade and human
resources. For it, on the production and sales of less desirable goods, the government imposes
more taxes and provides subsidies or imposes taxes lightly on more desirable goods.

6. Balanced development:
The government uses the revenues and expenditures in order to erase the gap between urban
and rural and agricultural and industrial sectors. For it, the government allocates the budget
for infrastructural development in rural areas and direct economic benefits to the rural people.

7. Promotion of export:
The government promotes the export imposing less tax or exempting form the taxes or
providing subsidies to the export oriented goods. It may supply the inputs at the subsidized
prices. It imposes more taxes on imports and so on.

8. Infrastructural development:
The government collects revenues and spends for the construction of infrastructures. It has to
keep peace, justice and security too. It has to bring socio-economic reformation too. For all
these things it uses the revenues and expenditures as fiscal tools. he main sources of public
revenue are: Tax and Non-tax revenue

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SOURCES OF PUBLIC REVENUE

A) Tax Revenue:

The chief source of public revenue is Tax. To define tax, it is said that tax is a mandatory
imposition of duty on public authority by government organizations to meet requirements of
general public as a whole.
Therefore, with the above defined term, some points are highlighted as below:

i) A Tax is a compulsory duty levied by the government. If any individual refuses to comply
with tax payments, he can be punished or penalized

ii) Tax basically involves some understanding and sacrifice on the basis of a tax payer

iii) Tax is a duty and not a penalty

(iv) Most part of revenue income is generated from tax by the central government.

SUBJECT MATTERS OF PUBLIC FINANCE

The subject matters of Public Finance can be broadly classified in to five Categories –a)
Public revenue b) Public expenditure c) Public debt d) Financial Administration e) Economic
stabilization and f) Federal Finance.

Public Revenue:

The income of the states is referred to as Public Revenue. In this branch, we Study the
various ways of raising revenue by the public bodies. We also study the Principles and effects
of taxation and how the burden of taxation is shared among the Various classes of society etc.

Public Expenditure

It deals with the principles and problems relating to the allocation of public Spending. We
study the fundamental principles governing the flow of public funds in to different channels,
classification and justification of public expenditure;
expenditure policies of governments and the measures adopted for welfare state etc.

Public Debt

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The governments borrow when its revenue falls short of its expenditure.Public debts is a
study of various principles and methods of raising debts and their economic effects. It also
deals with the methods of repayments and managements of public debts.

Financial Administration

It deals with the methods of Budget preparation, various types of Budgets, war Finance,
Development Finance etc. Thus, financial administration refers to the mechanism by which
the financial functions are carried on. In other words, financial administration studies the
organizing and disbursing of the finances of the State.

Economic stabilization and Growth

The use of Public revenue and Public expenditure to secure stability in levels of Prices by
controlling inflationary as well as deflationary pressures is studied. Similarly the income and
expenditure policies adopted by the government so as to attain full employment, optimum use
of resources, and equitable distribution of income
etc. are also studied.

Federal Finance

Under federal finance we study the principles and policies governing the Distribution of
functions and funds among the public authorities in a federal set up. In a federal set up there
are different levels of governments-centre, state and local.

Public Finance and Private Finance

The understanding and the study of public finance is facilitated by a comparison of the public
or government finance with private or individual finance. Such a comparison will help us to
know how the aims and objectives and methods of public Finance operation are similar or
differed from the financial operations of the individual. Public Finance pertains to that section
of the Finance Ministry that concerns itself with the objective of allocating resources, while
staying within the constraints of the budget.

PUBLIC FINANCE IN INDIA

Public Finance in India also comes under the purview of a branch of economics which
determines and assesses the policies of the Indian government stipulated in the annual finance
budget. Public finance identifies that types and consequences of tax measures and
expenditure on citizens, institutions, and the entire economy. Public finance is also concerned
with improving and upgrading economic procedures that support governmental policies.

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Indian public finance is usually praised and welcomed by the business community since the
budget tends to be market friendly. However, in recent years, the government's infrastructural
reforms have been criticized. According to financial analysts, the government spends the
majority of its revenue on current expenditure and loses focus on public finance/investment.
For example, in 2001-02, as per CIA estimates, the Indian government accumulated revenues
of about $48 billion and incurred expenditures of around $78 billion. On the whole, the
government experienced a deficit of about $30 billion and external debt amounted to $100.6
billion.

PUBLIC FINANCE MANAGEMENT SYSTEM

The Public Financial Management System (PFMS) portal has processed record Rs 71,633
crore transactions on a single day. This was a historical record breaking volume of digital
transactions achieved by PFMS.
It is end-to- end solution for processing payments, tracking, monitoring, accounting,
reconciliation and reporting. It is implemented by Controller General of Accounts and
administered by the Department of Expenditure, both in Ministry of Finance. Various
ministries/departments utilise this platform to monitor utilisation of funds provided to the
implementing agencies and states governments.

It provides unified platform to scheme managers for tracking releases and monitoring their
last mile utilisation. It also provides single platform for efficient management of funds by
tracking them and real time reporting of expenditure and receipts through treasury and bank
interface. It is also used for Direct Benefit Transfer (DBT) payments under MGNREGA and
other notified schemes of the Centre.

PUBLIC FINANCE IN UNDERDEVELOPED COUNTRIES

The objectives of fiscal policy are more or less the same in developed and underdeveloped
countries. It is true that there is almost a basic difference between advanced and
underdeveloped economies. In developing countries, the chief motto of the government is to
encourage production in order to fight the grave problems of unemployment, price-hike and
to check the problem of poverty.

‘It is now only accepted but excepted that government should take strong positive action to
faster development. –A.R.PREST
In an underdeveloped economy, on the other side, there is scarcity of productive resources
and paucity of capital formation and investment. Some economists argue that fiscal policy
may not be effective in an underdeveloped economy as the economic and financial
institutions are not so well developed.
But truly, fiscal policy has a positive role to play in an underdeveloped economy as stated
under:
(a) Firstly, the state is called upon to play a prominent role in promoting economic
development especially through control and regulations of economic life. It is seen

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 that fiscal policy is the most powerful weapon which the state can employ to promote
economic development.
(b) Secondly, capital accumulation is the key problem of an underdeveloped country and
this can be done through taxation.
(c) Lastly, under democratic planning, fiscal policy plays a crucial role as financial plan
is as much important as physical plan and the implementation of the financial plan
will obviously depend upon the uses of fiscal measures.
Hence, public finance has assumed a great importance and is increasing day-by-day. For that
reason the state has started performing manifold functions. In such economies, to push capital
formation, state authorities adopt various measures such as curtailing of expenditure on
public work and compulsory saving schemes etc. these measures are also useful to check the
inflationary trend.

CONCLUSION

Outcomes-focused management and financial management actions such as budgeting and

revenue management involve asking how to ensure that government decision-making and
actions impact on the nation. The conceptual analysis of public financial performance
management and the suggested financial performance management model provide solutions
to how decision-makers in public financial management can give account of their
performance with specific reference to the area of effectiveness and outcomes.
In the development of a public financial performance management model, important areas
were highlighted. Since the start of human civilisation, the field of public administration has
changed to a landscape of modern public administration unrecognisable to second-generation
theorists and their normative theories. The comprehensive, functionally uniform, hierarchical
organisations governed by strong leaders who are democratically responsible and staffed by
neutrally competent civil servants who deliver services to citizens to the extent these citizens
never existed are long gone. These organisations have been replaced by an organisational
society in which many important services are provided through multi-organisational
programmes. These programmes are essentially interconnected clusters of firms,
governments and associations, which come together within the framework of these
programmes. These implementation structures operate within a notion of governance as a
focus far broader than government. Public effectiveness now relies on public management
practices by which governance theory is put into action and on networks as an alternative for
collective action.
Public financial performance management must be viewed as the next logical evolution in the
field of public management. Public financial performance management must be viewed as an
essential component of successful management, leading to cultural, operational and human
resource management change. The transition requires recognition that rationality (not
politics) is the underlying force of financial performance management. The development of
public financial performance management capacity is a means and not an end in itself; it is an
integral part of the overall development agenda.
Consequently, a capacity development strategy must be based on a broader vision of
improved financial performance management and increasing organisational effectiveness
leading to good governance. While country ownership is critical, the capacity development
efforts have to be tailored to match the existing human resources, institutions, legal system,

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as well as the administrative and political culture. Furthermore, the motivation for capacity
development should transcend the mode by which it is to be delivered. Future research fields
could deal with the people side of public financial management and the interrelated financial
performance management interactions of operational managers. Public finance management
is an essential part of the governance process and includes resource mobilisation. Rising
aspirations of people are placing more demands on effective mobilisation of financial
resources and the emphasis of the citizenry is on value for money measured in terms of
economy, efficiency and effectiveness, thus making public financial performance
management increasingly vital.

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