INDEX

SL NO TOPICS PAGE NO

1. INTRODUCTION 5

2. HISTORY OF BUDGET INDIA 6

3. TYPES OF BUDGETS 8

4. COMPONENTS OF BUDGET 9

5. DEFICITS 13

6. EFFECTS OF DEFICITS ON THE ECONOMY AND GOVERNMENT AND ITS 15

REMEDIES

7. ESTIMATED BUDGET EXPENDITURE FOR 2021-2022 16

8. ESTIMATED RECIEPTS AND DEFICITS 17

9. NEEDS FOR GOVERNMENT BUDEGT 18

10. ADVANTAGES OF GOVERNMENT BUDGET 20

11. DISADVANTAGES OF GOVERNMENT BUDGET 21

12. BUDGET SITUATION IN INDIA 22

13. SOURCES AND TRENDS OF BUDGET IN INDIA 23

14. TRENDS OF RECEIPTS IN INDIA 24

15. TRENDS AND COMPOSITION OF EXPENDITURE IN INDIA 25

16. CONCLUSION 26

17. BIBLIOGRAPHY 27
 Introduction
A government budget is a document prepared by the government and/or other entities presenting its
anticipated revenues, tax revenues income tax, corporation tax, import taxes) and proposed government
expenditures, spending/expenditure for (Healthcare, Education, Defence, Roads, State Benefit) for the
coming financial year. In most parliamentary systems, the budget is presented to the legislature and often
requires approval of the legislature. Through this budget, the government implements economic policy and
realises its program priorities. Once the budget is approved, the use of funds from individual chapters is in
the hands of government, ministries and other institutions. Revenues of the state budget consist mainly of
taxes, customs duties, fees and other revenues. State budget expenditures cover the activities of the state,
which are either given by law or the constitution. The budget in itself does not appropriate funds for
government programs, hence need for additional legislative measures.

The two basic elements of any budget are the revenues and expenses. In the case of the government,
revenues are derived primarily from taxes. Government expenses include spending on current goods and
services, which economists call government consumption; government investment expenditures such as
infrastructure investment or research expenditure; and transfer payments like unemployment or
retirement benefits.

Government budgets have economic, political and technical basis. Unlike a pure economic budget, they are
not entirely designed to allocate scarce resources for the best economic use. They also have a political
basis wherein different interests push and pull in an attempt to obtain benefits and avoid burdens. The
technical element is the forecast of the likely levels of revenues and expenses.

The practice of presenting budgets and fiscal policy to parliament was initiated by Sir Robert Walpole in
his position as Chancellor of the Exchequer, in an attempt to restore the confidence of the public after the
chaos unleashed by the collapse of the South Sea Bubble in 1720.

The Union Budget of India, also referred to as the Annual Financial Statement in Article 112 of the
Constitution of India, is the annual budget of the Republic of India. The Government presents it on the first
day of February so that it could be materialised before the beginning of new financial year in April. Until
2016 it was presented on the last working day of February by the finance minister in Parliament. The
budget, which is presented by means of the Finance bill and the Appropriation bill has to be passed by Lok
Sabha before it can come into effect on 1 April, the start of India’s financial year.

An interim budget is not the same as a 'Vote on Account'. While a 'Vote on Account' deals only with the
expenditure side of the government's budget. An interim budget is a complete set of accounts, including
both expenditure and receipts. An interim budget gives the complete financial statement, very similar to a
full budget. While the law does not disqualify the Union government from introducing tax changes,
normally during an election year, successive governments have avoided making any major changes in
income tax laws during an interim budget.
 History of Budget in India
The first Indian Budget was presented by James Wilson on February 18, 1869. Wilson, whose designation
was Finance Member of the India Council that advised the Indian Viceroy, was also the founder of The
Economist and described by Karl Marx as an "economical mandarin of high standing". But he was also a
largely self-taught man who had worked in his family occupation making and selling hats, before becoming
a scholar and a writer largely based on his brilliance and knowledge of economics and commerce.

Since 1947, there have been a total of 73 annual budgets, 14 interim budgets and four special budgets, or
mini budgets. The first union budget of independent India was presented by R. K. Shanmukham Chetty on
26 November 1947. Total revenues stood at ₹171.15 crore, and the fiscal deficit was ₹24.59 crore. The
total expenditure was estimated at ₹197.29 crore with Defence expenditure at ₹92.74 crore. The union
budgets for the fiscal years 1959–61 to 1963–64, inclusive of the interim budget for 1962–63, were
presented by Morarji Desai. On 29 February in 1964 and 1968, he became the only finance minister to
present the Union budget on his birthday. Desai presented budgets that included five annual budgets and
an interim budget during his first term and three final budgets and one interim budget in his second tenure
when he was both the finance minister and the Deputy Prime Minister of India. After Desai's resignation,
Indira Gandhi, the then Prime Minister of India, took over the Ministry of Finance to become the first
woman to hold the post of the Finance Minister.

Hirubhai M. Patel presented the shortest budget speech for the interim budget of 1977, which was mere
800 words long. Pranab Kumar Mukherjee, the first Rajya Sabha member to hold the Finance portfolio,
presented the annual budgets for the financial years 1982–83, 1983–84 and 1984–85. Rajiv Gandhi
presented the budget for 1987–89, after Vishwanath Pratap Singh quit his government, and in the process
became the third Prime Minister to present a budget after his mother and grandfather. N. D. Tiwari
presented the budget for 1988–89, Shankarrao Bhavrao Chavan for 1989–90, while Madhu Dandavate
presented the Union budget for 1990–91.
Manmohan Singh became the Finance Minister and presented the interim budget for 1991-92 as elections
were forced. Due to political developments, early elections were held in May 1991 following which the
Indian National Congress returned to political power and Manmohan Singh, the Finance Minister,
presented the budget for 1991–92. Manmohan Singh under P. V. Narasimha Rao, in his next annual
budgets from 1992 to 1993, opened the economy, encouraged foreign investments and reduced peak
import duty from 300 plus percent to 50 percent. After elections in 1996, a non-Congress ministry assumed
office.

Hence the financial budget for 1996-97 was presented by P. Chidambaram, who then belonged to Tamil
Maanila Congress. Following a Constitutional crisis when the Inder Kumar Gujral Ministry was on its way
out, a special session of Parliament was convened just to pass Chidambaram's 1997-98 budget. This budget
was passed without a debate. After the general elections in March 1998 that led to the Bharatiya Janata
Party forming the Central Government, Yashwant Sinha, the then Finance Minister in this government,
presented the interim and final budgets for 1998–99. After general elections in 1999, Sinha again became
the Finance Minister and presented four annual budgets from 1999–2000 to 2002–2003. Due to elections
in May 2004, an interim budget was presented by Jaswant Singh.

Until the year 1999, the Union Budget was announced at 5:00 pm on the last working day of the month of
February. This practice was inherited from the colonial era. Another reason was that until the 1990s, all
that budgets seem to do was to raise taxes, a presentation in the evening gave producers and the tax
collecting agencies the night to work out the change in prices. It was Yashwant Sinha, the then Finance
Minister of India in the NDA government (led by Bharatiya Janata Party) under Prime Minister Atal Bihari
Vajpayee, who changed the ritual by announcing the 1999 Union Budget at 11 am. The tradition started
from 2001.
 Types of Budget
BALANCED BUDGET
A government budget is said to be a balanced budget if the estimated government expenditure is equal to
expected government receipts in a particular financial year. Advocated by many classical economists, this
type of budget is based on the principle of “living within means.” They believed the government’s
expenditure should not exceed their revenue.
Though an ideal approach to achieve a balanced economy and maintain fiscal discipline, a balanced budget
to achieve a balanced economy and maintain fiscal discipline, a balanced budget does not ensure financial
stability at times of economic depression or deflation. Theoretically, it’s easy to balance the estimated
expenditure and anticipated revenues but when it comes to practical implementation, such balance is hard to
achieve.
Balanced budget ensures economic stability, if implemented successfully and also ensures that the
government refrains from imprudent expenditures. However balanced budget sometimes is unviable at times
of recession and does not offer any solution to problems such as unemployment. They are inapplicable in
less developed countries as it limits the scope of economic growth. They restrict the government from
spending on public welfare.

SURPLUS BUDGET
A government budget is said to be a surplus budget if the expected government revenues exceed the
estimated government expenditure in a particular financial year. This means that the government’s earnings
from taxes levied are greater than the amount the government spends on public welfare. A surplus budget
denotes the financial affluence of a country. Such a budget can be implemented at times of inflation to
reduce aggregate demand.

DEFICIT BUDGET
A government budget is said to be a deficit budget if the estimated government expenditure exceeds the
expected government revenue in a particular financial year. This type of budget is best suited for developing
economies, such as India. Especially helpful at times of recession, a deficit budget helps generate additional
demand and boost the rate of economic growth. Here, the government incurs the excessive expenditure to
improve the employment rate.
This results in an increase in demand for goods and services which helps in reviving the economy. The
government covers this amount through public borrowings (by issuing government bonds) or by
withdrawing from its accumulated reserve surplus.
Deficit budget helps in addressing public concerns such as unemployment at times of economic recession
and also enables the government to spend on public welfare. However, these can encourage imprudent
expenditures by the government and can also increase burden on the government by accumulating debts.

Components of budget
The budget is classified into two segments.
(i) Revenue budget – The revenue budget contains revenue expenditure and receipts. In these receipts, both
tax revenue (such as excise duty, income tax) and non-tax revenue (like profits, interest receipts) are
recorded.
(ii) Capital budget – The capital budget includes the capital receipts (such as disinvestment, borrowing) and
lengthy capital expenditure (for instance, long-term investments, creation of assets). Capital receipts are
government liabilities or decreased financial assets, such as the recovery of loans, market borrowing, etc.

There are two types of Revenue budget- Revenue receipts and revenue expenditure

Revenue receipt
Revenue receipts are those which do not create any liability for the government or causes any reduction in
assets of the government.
Revenue receipts may be divided into tax revenue and non-tax revenue.

Receipts from tax revenue: A tax is a legally compulsory payment imposed by the government example
income tax and sales tax.

Taxes are of 2 types one is direct tax and other indirect tax.

Direct tax
They are levied by the government on the property and income of persons. The burden of tax cannot be
shifted in case of direct tax. It is paid directly by person concerned. It is paid after the income reaches in the
hands of the taxpayer. Tax collection is difficult. Example Income tax, wealth tax etc.
Indirect tax
Indirect taxes are those taxes that affect the income and property of persons through their consumption
expenditure. The burden of tax shifted for indirect taxes. It is paid by one person, but he recovers the same
from another person i.e., person who actually bear the tax ultimate consumer. It is paid before goods/service
reaches the taxpayer. Tax collection is relatively easier. Example GST, excise duty custom duty sale tax
service tax

Non-tax revenue
Other than taxation being a primary source of income, the government also earns a recurring income, which
is called non-tax revenue. While sources of tax revenue are few, the sources of non-tax revenue are many,
with the number of collections per source. Although there are many sources of non-tax revenue, the amount
per source is much less than that for tax revenue. For example, when citizens use services offered by the
government, they pay bills, which are categorised as non-tax revenue, as the government provides
infrastructure support to implement the services. Non-tax revenue also includes the interest collected by the
government on the loans or funds offered to states.

Revenue expenditure
Revenue expenditure refers to the expenditure which neither creates any asset nor causes reduction in any
liability of government. It is recurring in nature. It is incurred on normal functioning of the government. The
expenditure must not create an asset of the government. These are short period expenditures. These do not
create any physical or financial assets. All grants given to state governments are treated as revenue
expenditure. Payment of salaries or pension is revenue expenditure as it does not create any asset.

Capital budget are of two types - Capital receipts and Capital expenditure
Capital receipts
The capital receipts of the government refer to all those receipts which either create a liability or cause
reduction in the asset value. ie government is under obligation to return the amount in the future. It is non-
repetitive and non-routine in nature.
The capital receipts of the government refer to all loans raised by the government from the public.
Borrowings by the government from the Reserve Bank of India, and other parties, through the sale of
treasury bills, loans received from foreign governments, and bodies, (example world bank, etc).

Capital Receipts are broadly classified into three groups:

1. Borrowings: borrowings are the funds raised by government to meet excess expenditure
i) Government Open Market
ii) Reserve Bank of India
iii) Foreign Government
iv)International Institutions
v) Borrowings are capital receipts as they create a liability for the government.
2. Recovery of Loans: Government grants various loans to state government or union territories assets of
the government.
3. Disinvestment: Disinvestment is when governments or organizations sell or liquidate assets or
subsidiaries. Disinvestments can take the form of divestment or a reduction of capital expenditures.
Disinvestment is carried out for a variety of reasons, such as strategic, political, or environmental.

Capital expenditure: An expenditure which leads to creation of assets or reduction in liabilities is treated as
capital expenditure.
These expenditures are incurred over a long period of time and add to the capital stock to the economy
thereby raising its capacity to produce. For example, expenditure on purchasing land, expenditure on
construction of government hospitals schools, bridges, roads, other infrastructure (create asset) repayment of
loans by government (reduces liability)

Items categorised as revenue and capital receipts

Loans from the world bank: It is a capital receipt as it neither creates any liabilities nor reduces any asset.

Corporation tax: It is a revenue receipt as it neither creates any liability nor reduces any assets.
Grant received from world bank: It is a revenue receipts as it neither creates any liability nor reduces any
asset of the government.

Profits of the public sector understanding: It is a revenue receipt as it reduces assets of the government.

Foreign did against earthquakes victims: It is a revenue receipts as it neither reduces any asset of the
government.

Items categorized as revenue and capital expenditure

Subsidies: It is a revenue expenditure as it neither creates any asset nor reduces any liabilities of the
government.

Grants given to state government: It is a revenue expenditure as it neither creates any asset nor reduces
any liabilities if the government

Repayment of loans: it is a capital expenditure as it reduces the liability of the government.

Purchase of 50 cranes for the flyover : it is a capital expenditure as it creates an asset to the government.

Expenditure incurred on administration: it is a revenue expenditure as it does not reduce any liabilities.

Payment of salary to staff: it is a revenue expenditure as it neither creates any asset nor reduces any
liability of the government.

Construction of school building: it is a capital expenditure as it increases the asset of the government.

Deficits
Budget Deficit refers to a situation when budget expenditures of the government exceeds budget receipt. The
term may be applied to the budget of a government, private company, or individual. Government deficit
spending is a central point of controversy in economics.

There are 3 types of Deficits - Fiscal deficit, Revenue deficit and Primary deficit.

Revenue deficit - It refers to a situation where revenue expenditure exceeds revenue receipts.
If a government has a revenue deficit that means its income isn't enough to cover its basic operations. When
that happens, it may make up for the revenue it needs to cover by borrowing money or selling existing
assets.

High Revenue deficit gives warning to the government to either to cut its expenditure or increase its tax/non-
tax receipts. To remedy a revenue deficit, a government can choose to raise Taxes or cut expenses. If not
remedied, a revenue deficit could adversely affect the Credit Rating of a government. That's because
consistently running a deficit could imply that a government is unable to meet its current and future
recurring obligations. It also implies that the government will have to disinvest or cover the shortage by
borrowing. 
Especially in less developed countries like India, often the situation arises when the government has to
incur huge expenditure on administration and maintenance, and it is difficult to force the poor people to
pay taxes, so the government has to resort to borrowings or disinvestment. Revenue deficits may thus
increase the liabilities of the government or reduce its assets. Borrowings increase the liability of the
government and disinvestment reduces the assets. It can also increase the revenue deficit further in future
through expenditure on interest payments on the borrowings. The whole financial system of the economy
may get destabilised.

Fiscal deficit – Fiscal deficit in a government budget refers to the excess of total expenditure over the
sum of revenue receipts and non-debt capital receipts. Total expenditure includes both revenue and
capital expenditure.

The fiscal deficit indicates the amount of borrowing the government has to do. A large fiscal deficit implies
a large amount of borrowings. This creates a large burden of interest payment in the future. In the present
a large fiscal deficit may cause inflationary pressure. Fiscal deficit is in fact equal to the total borrowings
and other liabilities of the government.

Fiscal Deficit is estimated to know about the extent of borrowing requirements by the government.
Greater fiscal deficit implies greater borrowings by the government. It shows the extent of dependence of
the government on borrowings to meet its total/ budget expenditure. Payment of interest increases the
Revenue Expenditure, and this may lead to higher Revenue deficit. This may lead to more borrowings
thereby resulting in a vicious circle which may result in a debt trap.

A large fiscal deficit may also cause inflation because of increased supply of money. Fiscal deficit can also
increase foreign dependence if the government borrows from the Rest of the World. It increases our
dependence on other countries and leads to economic slavery.

Fiscal Deficit = Total Expenditure (Revenue + Capital) – Total Receipts other than borrowings (Revenue +
Capital receipts other than borrowings.
Primary Deficit - It is the difference between the current year’s fiscal deficit (total income – total
expenditure of the government) and the interest paid on the borrowings of the previous year. It therefore
indicates how much government borrowing is going to meet expenses other than interest payments.
Normally, when the government raises a loan, it includes the interest amount. When that amount is
deducted from the principal loan amount, that is the primary deficit. In simpler terms, the government’s
borrowings excluding the interest payment is the primary deficit.
Primary Deficit = Fiscal Deficit (Total expenditure – Total income of the government) – Interest payments
(of previous borrowings)

A decrease in primary deficit shows progress towards fiscal health. The deficit is also mentioned as a
percentage of GDP. It is needed to get a proper perspective and facilitate comparison. The difference
between the primary deficit and fiscal deficit reflects the amount of interest payment on public debt
generated in the past. It is used as a basic measure of fiscal irresponsibility.
Hence, when the primary deficit is zero, the government has to resort to borrowing only to fulfil its earlier
commitments of interest payments. It is not adding to the existing loans for the purpose other than meeting
its existing obligation of interest payment. It is a sign of fiscal discipline or fiscal responsibility on the part
of the government.

Effects of deficit on the economy and government

A budget deficit implies lower taxes and increased Government spending (G), this will increase AD, and this
may cause higher real GDP and inflation.
In the future, the government may have to increase taxes or cut spending in order to reduce the deficit.
If the government borrows more, this can cause interest rates to increase. This is because they will need to
increase interest rates in order to attract investors to buy the extra debt.

Increased government borrowing may cause a decrease in the size of the private sector. The government
borrow by selling bonds to the private sector. Therefore, if the private sector (banks/private individuals)
buy government bonds, they have less money to invest in private sector projects. If there is crowding out,
government borrowing will not cause higher aggregate demand.
In extreme circumstances, the government may increase the money supply to pay the debt, and this will
lead to inflation.

Payment of interest increases the Revenue Expenditure, and this may lead to higher Revenue deficit.
This may lead to more borrowings thereby resulting in a vicious circle which may result in a debt trap
Fiscal deficit can also increase foreign dependence if the government borrows from the Rest of the World
It increases our dependence on other countries and leads to economic slavery.

Remedies
All deficits need to be financed. This is initially done through the sale of government securities, such as
Treasury bonds (T-bonds). The sale of government securities used to finance the deficit has a direct impact
on interest rates. Government bonds are considered to be extremely safe investments, so the interest rate
paid on loans to the government represent risk-free investments against which nearly all other financial
instrument must compete. If the government bonds are paying 2% interest, other types of financial assets
must pay a high enough rate to entice buyers away from government bonds. This function is used by the
Federal Reserve when it engages in Open Market Operations to adjust interest rates within the confines of
Monetary Policy.

Most governments prefer to finance their deficits instead of balancing the budget. Government bonds
finance the deficit. Most creditors think that the government is highly likely to repay its creditors. That
makes government bonds more attractive than riskier Corporate Bonds. As a result, government interest
rates remain relatively low. That allows governments to keep running deficits for years. 
Another way of financing budget deficit is by monetary expansion.

Monetary expansion means printing money to the extent of the deficit. This increases the money supply,
lowers interest rates, and increases demand. It boosts economic growth. The process of monetary
expansion involves the government borrowing from the central bank through the issue of treasury bills to
the central bank. The central bank purchases the treasury bills in return for cash, which the government
uses to fund the deficit.

ESTIMATED BUDGET EXPENDITURE FOR 2021-2022

SL.N MINISTRY/DEPARTMENT REVENUE CAPITAL TOTAL ( revenue +
EXPENDITURE EXPENDITURE capital )
O

1. CENTRAL EXPENDITURE (2+3+4) 2132609.02 539994.89 2672603.91

2. ESTABLISHMENT 600756.99 8257.12 609014.11

3. CENTRAL SECTOR SCHEMES 607968.41 443735.00 1051703.41

4. OTHER CENTRAL EXPENDITURE 923883.62 88002.77 1011886.39

5. TRANSFERS (6+7+8) 796390.87 14240.85 810631.72

6. CENTRALLY SPONSORED 381235.45 69.10 381304.55

SCHEMES

7. FINANCE COMMISSION 220843.00 ------------ 220843.00

TRANSFERS

8. OTHER TRANSFERS 194312.42 14171.75 208484.17

9. TOTAL EXPENDITURE THROUGH 2928999.89 554235.74 3483235.63

BUDGET (1+5)

10. RESOURCES OF PUBLIC -------------- 582831.13 582831.13

ENTERPRISES

11. TOTAL EXPENDITURE THROUGH 2928999.89 1137066.87 4066066.76

BUDGET AND RESOURCES OF
PUBLIC ENTERPRISES (9+10)

( In ₹crores )

ESTIMATED BUDGET RECEIPTS

 ( In ₹crores)
SL NO RECEIPTS 2020-2021 2020-2021 2021-2022
BUDGET REVISED BUDGET
ESTIMATES ESTIMATES ESTIMATES

1. REVENUE RECEIPTS 2020926 1555153 1788424

Tax revenue 1635909 1344501 1545396
Non Tax Revenue 385017 210652 243028

2. CAPITAL RECEIPTS 1021304 1895152 1694812

Recovery of Loans 14967 14497 13000
Other Receipts 210000 32000 175000
Borrowings and other 796337 1848655 1506812
Liabilities

TOTAL RECEIPTS ( 1 + 2 ) 3042230 3450305 3483236

DEFICIT STATISTICS

( In ₹crores )
2020-2021 2020-2021 2021-2022
SL NO TYPES OF DEFICITS BUDGET REVISED BUDGET
ESTIMATES ESTIMATES ESTIMATES

1 FISCAL DEFICIT 796337 1848655 1506812

2 REVENUE DEFICIT 609219 1455989 1140576

3 EFFECTIVE REVENUE DEFICIT 402719 1225613 921464

4 PRIMARY DEFICIT 88134 1155755 697111

TOTAL DEFICITS FOR THE YEAR 1896409 5686012 4265963

2021-2022

Needs for government budget:

Reallocation of resources:
Private enterprises will always desire to allocate resources to those areas or production where profits are
high. However, it is possible that such areas of production (like production of alcohol) may not promote
social welfare. Thus, budgetary policy is required so that the government of the country will be able to
allocate resources in a manner such that there is a balance between the goals of profit maximisation and
social welfare.
Government can influence allocation of resources through: 
(i) Tax concessions or subsidies: 
To encourage investment, government can give tax concession, subsidies etc. to the producers. For
example, Government discourages the production of harmful consumption goods (like liquor, cigarettes
etc.) through heavy taxes and encourages the use of ‘Khaki products’ by providing subsidies. 
(ii) Directly producing goods and services:
If private sector does not take interest, government can directly undertake the production.

Redistribution of income and wealth:

The budgetary policy of the government is also required to reduce income inequalities to achieve the goal
of social equity and regional equalities.
Equalities in income distribution primarily require that the rate of growth of real income of low-income
sections of the society should be faster than the rate of growth of the high-income sections of the society.
The government uses fiscal instruments off taxation and subsidies with a view to improve the distribution
of income and wealth in the economy.
To correct inequality the government pursues the policy of progressive taxation. It implies greater tax
burden on the rich than the poor.
Progressive taxation of income and wealth will help the government to mobilise more resources. These
resources can be spent on the social sector of the economy. Free education, medical facilities drinking
water, sanitation and transport facilities add to the real income of the poor.
In fact, those with low-income group are exempted from payment of tax. On the expenditure side
government offers subsidies to the poor.
Subsidies are offered so that their real disposable income is raised. Also, essential food items are sold to
the Below poverty line families at subsidised rates.

Stabilising activities:
The budgetary policy of the government is required prevent business fluctuations and maintain economic
stability.
During the period of depression & inflation, government adopts the policy of deficit & surplus budgeting
respectively. The government adopts certain policies through budget to save the economy from the
clutches of business cycles.
Government tries to maintain high level employment and price stability.
The economic stability is indispensable for the stimulation of savings & investment which further raises the
level of economic growth & development.

Management of public enterprise:

The budgetary policy of the government shows interest of the government to increase the rate of growth
through public enterprises.
Often public-sector enterprises are encouraged in areas of natural monopolies.
Government undertakes commercial activities that are of the nature of natural monopolies (Natural
monopolies refer to those areas of production where a single firm can produce at a lower average cost
than many competing firms).
The management of such enterprises comes under state regulation because it left unregulated there is a
tendency of the monopolist to curtail output in pursuit of maximising profits. This will lower social welfare.

Economic growth:
Economic Growth implies a sustainable increase in real GDP of an economy, i.e., an increase in volume of
goods and services produced in an economy.
Budget can be an effective tool to ensure the economic growth in a country.
i) If the government provides tax rebates and other incentives for productive ventures and projects, it can
stimulate savings and Investments in an economy.
ii) Spending on infrastructure of an economy enhances the production activity in different sectors of an
economy.
iii) The government itself may set up production units and these will add to the production potential and
the volume of output.
(iv) Government expenditure is a major factor that generates demand for different types of Goods and
services in an economy which induces growth in private sector too. However, before planning such
expenditure, rebates and subsidies government should check the rate of inflation and tax rates. Also, there
may be the risk of debt trap if loans are too high to finance the expenditure.

Advantages of Government Budget

Some major advantages of Government Budget are: -
Planning orientation: The process of creating a budget takes management away from its short-term, day-to-
day management of the business and forces it to think longer-term. This is the chief goal of budgeting, even
if management does not succeed in meeting its goals as outlined in the budget - at least it is thinking about
the company's competitive and financial position and how to improve it.

Profitability review: It is easy to lose sight of where a company is making most of its money, during the
scramble of day-to-day management. A properly structured budget points out what aspects of the business
produce money and which ones use it, which forces management to consider whether it should drop some
parts of the business or expand in others.

Assumption’s review: The budgeting process forces management to think about why the company is in
business, as well as its key assumptions about its business environment. A periodic re-evaluation of these
issues may result in altered assumptions, which may in turn alter the way in which management decides to
operate the business.

Performance evaluations: You can work with employees to set up their goals for a budgeting period, and
possibly also tie bonuses or other incentives to how they perform. You can then create budget versus
actual reports to give employees feedback regarding how they are progressing toward their goals. This
approach is most common with financial goals, though operational goals (such as reducing the product
rework rate) can also be added to the budget for performance appraisal purposes. This system of
evaluation is called responsibility accounting.

Funding planning: A properly structured budget should derive the amount of cash that will be spun off or
which will be needed to support operations. This information is used by the treasurer to plan for the
company's funding needs. • Cash allocation. There is only a limited amount of cash available to invest in
fixed assets and working capital, and the budgeting process forces management to decide which assets are
most worth investing in.

Bottleneck analysis: Nearly every company has a bottleneck somewhere, and the budgeting process can be
used to concentrate on what can be done to either expand the capacity of that bottleneck or to shift work
around it.

Disadvantages of Government Budget

The disadvantages of budgeting include the following:
Time required: It can be very time-consuming to create a budget, especially in a poorly organized
environment where many iterations of the budget may be required. The time involved is lower if there is a
well-designed budgeting procedure in place, employees are accustomed to the process, and the company
uses budgeting software. The time requirement can be unusually large if there is a participative budgeting
process in place, since such a system involves an unusually large number of employees.

Gaming the system: An experienced manager may attempt to introduce budgetary slack, which involves
deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve
favourable variances against the budget. This can be a serious problem and requires considerable oversight
to spot and eliminate.

Blame for outcomes: If a department does not achieve its budgeted results, the department manager may
blame any other departments that provide services to it for not having adequately supported his
department. • Expense allocations. The budget may prescribe that certain amount of overhead costs be
allocated to various departments, and the managers of those departments may take issue with the
allocation methods used.

Spend it or lose it: If a department is allowed a certain amount of expenditures and it does not appear that
the department will spend all of the funds during the budget period, the department manager may
authorize excessive expenditures at the last minute, on the grounds that his budget will be reduced in the
next period unless he spends all of the amounts authorized in the current budget.

Only considers financial outcomes: Budgets are primarily concerned with the allocation of cash to specific
activities, and the expected outcome of business transactions - they do not deal with more subjective
issues, such as the quality of products or services provided to customers. These other issues can be stated
as part of the budget, but this is not typically done.

Strategic rigidity: When a company creates an annual budget, the senior management team may decide
that the focus of the organization for the next year will be entirely on meeting the targets outlined in the
budget. This can be a problem if the market shifts in a different direction sometime during the budget year.
In this case, the company should shift along with the market, rather than adhering to the budget.

Budget situation in India

Capital account surplus improves to record high level in Q3FY2021 (third quarter for year 2021)
India's current account balance recorded a deficit of US$ 1.7 billion (0.2% of GDP) in Q3FY2021 after a
surplus of US$ 15.1 billion (2.4% of GDP) in Q2FY2021 and US$ 19.0 billion (3.7% of GDP) in Q1FY2021; a
deficit of US$ 2.6 billion (0.4% of GDP) was recorded a year ago [i.e., Q3FY2020].

Underlying the current account deficit in Q3FY2021 was a rise in the merchandise trade deficit to US$ 34.5
billion from US$ 14.8 billion in the preceding quarter, and an increase in net investment income payments.

The deficit stood at 0.2% of gross domestic product in the latest quarter, compared with a deficit of $2.6
billion, or 0.4% of GDP, in the same period a year ago. India moved to a current account surplus for the first
time in over a decade in the January-March quarter last year and touched a record $19.2 billion in the
April-June quarter.

The three consecutive current account surpluses were largely caused by a decline in India’s trade deficit,
which narrowed due to the COVID-19 pandemic and was also impacted by a related drop-in domestic
economic activity.

Net services receipts increased, both sequentially and on a year-on-year basis, primarily on the back of
higher net export earnings from computer services. Private transfer receipts, mainly representing
remittances by Indians employed overseas, declined marginally on a y-o-y basis but improved sequentially
by 1.5% to US$ 20.7 billion in Q3FY2021.Considering the 2020-21 fiscal year, the current account recorded
a surplus of USD 24.0 billion or 0.9 percent of GDP compared with a deficit of USD 24.6 billion or 0.9
percent of GDP in 2019-20.

Net outgo on the primary income account, primarily reflecting payments of investment income, increased
to US$ 10.1 billion from US$ 7.4 billion a year ago. With repayments exceeding fresh disbursals, external
commercial borrowings to India recorded net outflow of US$ 1.7 billion in Q3FY2021 as against an inflow of
US$ 3.2 billion a year ago.

In the financial account, net foreign direct investment (FDI) recorded robust inflow of US$ 17.0 billion as
compared with US$ 9.7 billion in Q3FY2020. Net foreign portfolio investment (FPI) was US$ 21.2 billion as
compared with US$ 7.8 billion in Q3FY2020, primarily reflecting net purchases by foreign portfolio
investors in the equity market. There was an accretion of US$ 32.5 billion to the foreign exchange reserves
(on a Bop basis) as compared with that of US$ 21.6 billion in Q3FY2020.

Sources and trends of Deficit in India

Trends of receipts in India
Trends and composition of expenditure in India
CONCLUSION
BIBLIOGRAPGY