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Government Budget &The Economy

2022-23

;-Meaning,Objectives,Components,Budget Receipts, Budget expenditure,Types of Budget

Budget deficit
Budget –A government budget is an annual financial statement showing item –wise estimated
receipts and anticipated expenditure of the government during a fiscal year.

Features of Government Budget

1) It is prepared Annually.
2) It is an estimate and not an actual statement.
3) It has to be approval by the parliament.
4) It is presented By union finance Minister on 1st day of February.
Objectives:-
a) Redistribution of income & wealth(Distribution Function):-Inequalities of income and
wealth reflect a section of society being deprived of even basic necessities. Government
uses fiscal instruments of taxation & subsidies to improve the distribution of income &
wealth. Equitable distribution of income &wealth brings social justice.
Imposition of heavy Taxes-
 The government affects the personal disposable income of households by progressively
taxing the rich & lower rates of taxation on lower income groups. Thereby it bridges the gap
between the rich & the poor.
 It also brings redistribution through its excise tax policy, necessities of life are exempted or
taxed at low rates, comforts& semi-luxuries are moderately taxed,&luxuries, tobacco&
petroleum products are taxed heavily.

Expenditure Policy- The amount collected through taxes can be used by the government for
spending on welfare of the poor people. It can provide them transfer payments and
subsidies.Eg.

 Welfare schemes like free education, free medical facilities etc. to the poor.
 The Govt. spends lot of money in providing food grains to BPL population at a very nominal
price
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 Free LPG kitchen gas connections and subsidized LPG gas to the families living below the
poverty line.
 .Budgetary allocation to welfare schemes such as MGNREGA is another budgetary initative
to combat inequalities.

b) Reallocation of resources (Allocation Function);-

 Reallocation of resources in the manner that there is a balance between the goals of profit
maximization & social welfare.
Imposition of heavy taxes-
Government uses budgetary policy to allocate resources. This is done by imposing higher rate
of taxation on goods whose production is to discouraged. Production of goods which are
harmful to health (e.g., liquor ,cigarettes etc.)
Subsidies and Tax Concession-
Subsidies and tax concessions can be given to private sector industries to encourage production
of those products which are beneficial to people.Eg. Government can give subsidies and tax
concessions to the enterprises who are willing to undertake electricity generation, especially in
backward areas.
Expenditure Policy(Direct participation in Production)
There are many economic activities which are not undertaken by the private sector either due
to lack of profits or due to huge investment expenditure involved like sanitation, roads,parks
etc.Government can undertake production of these goods & services in order to create social
welfare.Eg.More expenditure by the government on maintaining law and order raises the sense
of security among the people.
c)Economic Stability or Price Stability-
 Economic stability means absence of fluctuations in prices. Such fluctuations creates
uncertainties’ in the economy.Govt. can exercise control over these fluctuations through
Taxes & expenditure.
 In an inflationary situation, govt. can reduce its own expenditure or increase tax and
reducing its own expenditure. This will decrease AD to correct inflationary situations.
 . In times of deflationary conditions, Govt. can give tax concession or increase expenditure
to leave more disposable income in the hands of people to encourage demand.Govt. can also
use subsidies to encourage spending by people. It will increase the personal disposable
income of people and thus will raise the level of AD.
 In inflation,Surplus budgetary policy & during deflation, deficit budgetary policies are
used to maintain stability in the economy.
d) Management Of Public Enterprises-
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 Govt.undertakes activities that are of the nature of natural monopolies, through its public
enterprises for social welfare.
 A natural monopoly is a situation where a single firm can produce at a lower average cost
than other competing firms.
 Eg. railways, electricity etc.Generally,public enterprises are set up in the areas of natural
monopolies.
e)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.
Budgetary policy is being used to achieve this goal. The growth rate depends on the rate of
saving &investment.Budgetary policy helps to increase the rate of savings & investment. This
increases capital formation & thereby growth.
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. 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.
f) Generation of Employment This is the objective of budgetary policy.Govt. needs to
promote labour absorbing technology, public works like construction of roads,dams,canals & to
undertake employment specific programme.Programmes like MGNREGA are launched to the
poorer sections of the society.

Balanced Regional Development -Govt.may promote development activities in backward

areas for ensuring balanced regional development in the economy.

Govt may:-.

(a) grant tax concessions to those production units which are established in these areas

(b) M allocate more funds for infrastructural development in these backward areas.

Components of Government Budget

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N Revenue Budget
Revenue budget is a statement of
Estimated revenue receipts & estimated
revenue expenditure of the govt. during
a fiscal year.
Revenue budget entries are financial
Types of Budget

transactions that do not affect assets or

liabilities of the govt.

Revenue Receipts & Capital Receipt

Tax receipts
Capital Budget
Capital budget is a statement of
estimated capital receipts & estimated
capital expenditure of the govt. during a
fiscal year
Revenue budget entries are financial
transactions that do affect assets or
liabilities of the govt.

Components of Revenue Receipts

 Receipts from all types of direct and indirect taxes

sources other than taxes
Meaning of Tax
Non tax receipts

Receipts from
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A tax is a legally compulsory payment imposed by the government on individuals or

corporations, without expectations of direct benefit to the tax payer.Thus tax is
 Tax is a legal compulsory payment
 Is spend for public welfare
 Payment of tax is a personal responsibility of an individual
 The objective of tax is to increase public revenue, bring equitable distribution of
national income, discourage use of harmful goods, regulate foreign trade & conserve
resources of an economy
 There is no proportionate relationship between tax & benefit
 There are various types of taxes like direct & indirect tax, progressive, proportional &
regressive tax, Vat & specific tax.


Basis Direct tax Indirect tax

Meaning They are directly paid to They are paid to the
government by the persons on government by one person
whom it is imposed, Incidence but their burden is borne by
and impact of tax is on the same another person, Incidence
person and impact of the tax is on
the different person.
Scope Levied on the property and Levied on production and
income of persons and firms sales of the commodities
Shifting The burden of the tax cannot be The burden of tax can be
shifted shifted to price rise
Nature They are generally progressive, They are generally regressive
the rate of tax increases with in nature, as real burden is
increase in income more on poor.
They are compulsory and cannot They can be avoided by
be escaped refraining from consumption
of goods and services.

Effect on These tax do not effect the market Indirect tax have a direct and
market price of the product positive effect on the market
price price of the product
Examples Income tax, corporate tax, wealth Sale tax, excise tax, custom
tax duties etc.

Non tax revenue receipt:-

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Non tax revenue receipt are those receipts which are received from sources other than taxes like
fees, fine, escheat etc.. Some of the non-tax receipts are as follows:-

a )Fees, license and permits;-

i ) fees:- A fees is a payment to the government for the services rendered to public, e.g. land
registration fees, birth and death registration fees, court fees etc.

 Fee is a compulsory payment.

 Fee provides specific benefit to the payer.
 Fee is not a payment for commercial services.(profit making)

ii)License and permit fee:- it is payment made to government to seek permission for
something, e.g. license fee paid to get licence to drive vehicles or for permission of keeping gun
etc.

b) Special assessment:-It is that payment which is made by the owners of those properties
whose value has appreciated due to developmental activities of the government. For ex:- When
as a result of development of IT sector, value of the neighboring property or its rental value
appreciates, then a part of the developmental expenditure is recovered from the owners of such
property by the of special assessment.

c) Escheat:-It refers to that income of the government which accures out of the property which
does not have a legal heir. Income from such property belongs to the government.

d) Fines and Penalties:-Fines and penalties are those payments which are made by those who
break laws. Its actual aim is to force the people to be law-abiding. It is determined by the
government in an arbitrary manner, depending on the degree of offence.

e) Gifts and grants:- Government receives gifts and grants from within the country and
abroad. This is not a permanent source of revenue. This is generally received during natural
calamities like flood, earthquake.

f)Income from public enterprise:-Profits from public enterprise e.g. Indian railways, Indian
oil, Bhilai steel plant etc. owned by the government.

Difference between tax revenue and Non tax revenue

Basis Tax Revenue NON-tax revenue

Source Tax revenue includes receipts Non- tax revenue is the
from all types of taxes revenue of the government
form sources other than taxes.
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Nature of
payment

Corresponding
benefit
Examples

Source of
revenue
A tax is a legal compulsory
payment imposed by the
government
No direct benefit is received in
exchange of tax paid
Income tax, wealth tax, sales tax
etc.
It is a major part of governments
revenue

country and abroad.

It is not a compulsory
payment

It is paid in lieu of the benefit

or services received
Fees, fines, licence etc.

Its share in government

revenue is very small

Capital receipts: -capital receipts are those estimated receipts of the government during the
fiscal year which affect asset or liability status of the government

These receipts;-

 Creates corresponding liability of the government e.g. borrowings from within the

 Lead to reduction in assts of government e.g.:- disinvestment, recovery of loans,

i) Borrowing and other liabilities:-Borrowing creates liability of the government, therefore

treated as capital receipts. It is a debt-creating capital receipts

The government borrowsmoney from:-

 General public (market borrowing)

 Reserve bank of India.
 The rest of the world.
Non debt creating Capital receipts- are those capital receipts which are not borrowings
and therefore do not give rise to debt.

ii) Recovery of loans:-The debtor are asset of the government. Recovery of loans causes a
reduction in assets (debtors) of the government. Hence, recovery of loans is a capital receipt. It
is a non-debt creating capital receipt.
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iii) Other receipts:- It includes proceeds from ‘Disinvestment’. It occurs when government
sells off its share of public sector enterprise to private sector. It is called privatization. It is
treated as capital receipts because it causes reduction in assets of the government. It is non-debt
creating capital receipt.

iv) Small savings- Small savings refers to funds raised from the public in the form of post
office deposits, National Savings certificates, KisanVikasPatras etc. They are treated as capital
receipts as they increase the liability.

Difference between revenue receipt and capital receipt:-

Basis Revenue Receipt Capital receipt

Creation of liability Those receipts do not create any These receipts create
corresponding to liability for the corresponding liability for the
government,ie There is no future government.
obligation to return the amount. In case of certain capital
receipt (like borrowing) there
are future obligations to return
the amount along with
interest.
Reduction in asset These do not cause any reduction in These cause reduction in
assets of the government, eg;- assets of the government eg:-
Licence fees, gifts and penalties. recovery of loans,
Etc. Disinvestment
Examples Revenue receipts are from 2 Capital receipts are from
sources-tax receipts & non-tax borrowing, recovery of
receipts.eg:- Tax receipt,Licence loans ,disinvestment.
fees etc.
Nature They are regular & recurring in They are irregular & non –
nature. recurring in nature.
Finance It is financed out of revenue receipts It is financed out of borrowing
from the public and foreign
government bodies.
Components ofBudget Expenditure

Capital
Revenue expenditure
expenditure
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Or, reduces a
Either creates
Neither creates Nor reduces liability (L )
an asset
an asset ( A) liability (L )

Development
expenditure

Non
development

Revenue Expenditure;-Revenue expenditure refers to estimated expenditure of the

government in a fiscal year which does not create assets or cause a reduction in liabilities.

Example- Wage bill of the govt.,Interest payments, Expenditure on subsidies, Defense

purchases,grants given to state government,

Capital Expenditure Capital expenditure refers to the estimated expenditure of the govt. in a
fiscal year which creates assets or causes a reduction in liabilities.

Example- Expenditure on land & building, machinery & equipment, purchase of shares, Loans
by the central government or state government.

Basis Revenue expenditure Capital expenditure

Meaning Revenue expenditure is an Capital expenditure is an
expenditure that neither creates an expenditure either creates an
asset nor reduces a liability asset or reduces a liability.
Nature They are regular and recurring in It is irregular and non recurring
nature in nature
Finance It is financed out of revenue It is financed out of borrowings
receipts. from the public and foreign
government bodies
Example Salary of employees, Pension, Repayment of loans, expenditure
interest Payments, subsidies, on construction of roads, bridges
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etc.
Type Revenue expenditure is a non It is a development expenditure
development expenditure

Plan Expenditure and Non-Plan Expenditure:-

Plan expenditure Non plan expenditure

 Plan e Plan expenditure refers to the  Non plan expenditure incurred on project
expenditure incurred on various projects covered under the central plan relating to
& development programmes covered different sector of the economy
under the current five year plan.

 Plan expenditure includes both revenue  Non- plan expenditure also include both
expenditure and capital expenditure revenue and capital expenditure
 Example:- expenditure of the government  Example: expenditure on defense service,
on construction of hospital building, subsidies, expenditure on earth quake,
expenditure incurred on energy, mineral,
irrigation etc.

Total Government expenditure:- revenue expenditure + Capital expenditure

OR

Total government expenditure:- Plan expenditure + Non- plan expenditure

Development and non development expenditure:-

Development expenditure Non development expenditure

Development expenditure directly Development expenditure directly contributes to flow
contributes to flow of goods & of goods & services.
services.
Development expenditure is Development expenditure is not productive in nature
productive in nature as it adds to the as it does not add to flow of goods & services.
flow of goods & services.
Examples-Expenditure on Examples-Expenditure on
development of agricultural administration,defence,justice etc.
sector,industries,transport etc.
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Fiscal Discipline It refers to a state of an ideal balance between revenue & expenditure s of the
government. Lack of fiscal discipline often causes excess expenditure. It leads to inflationary
spiral, a situation when wages catch mprices and prices catch wages. High cost of production
starts hurting the process of investment. Reduction in investment causes unemployment. The
economy sinks into a low level of equilibrium trap.

Budget Deficit & Its Types

Budget deficit is defined as the excess of total estimated expenditure over total estimated
revenue.

Budgetary Deficit= Total expenditure(Revenue exp.+ capital exp.)-Total Receipts(Revenue

receipts+ Capital Receipts)

It is financed by deficit financing or by borrowing from internal& external sources.

Types Of Deficit

Revenue Deficit- Revenue deficit refers to excess of revenue expenditure over revenue receipts
during the given fiscal year. Revenue Deficit= Revenue expenditure-Revenue receipts

Implication-

 Revenue deficit indicates the inability of the govt. to meet the expenditure on routine
functioning of the economy.
 It implies dis-saving on govt. account because govt. is using up savings of other
sectors of the economy to cover the gap between revenue expenditure & revenue
receipts.
 Revenue expenditure is a committed expenditure,It cannot be reduced.So govt.
reduces productive capital expenditure.This would mean lower growth & adverse
welfare implications.
 Use of capital receipts may lead to inflationary situations of the economy.
 Higher borrowings would increase the future burden to repay the loan amount &
interest payments.

Fiscal Deficit Fiscal deficit refers to the excess of total expenditure over total receipts
(excluding borrowings) during the given fiscal year.

Fiscal Deficit= Total expenditure –Total Receipts other than borrowings & other
liabilities

Or
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=(Revenue expenditure+ Capital expenditure)-(Revenue receipts+ capital receipts

other than borrowing & other liabilities)

Or

=(Revenue expenditure+ Capital expenditure) –(Revenue receipts +non debt capital

receipts)

Implications

Debt Trap Fiscal deficit refers to the total borrowing requirement of the government.
Borrowings create problem of repayment of loans & also of regular interest
payments.Interest payments increase the revenue expenditure,which leads to revenue
deficit.The govt. resort to further borrowing to repay the further loans.The country is
caught in debt trap.

Foreign dependence Government also borrows from the rest of the world, which is
associated with economc interference by the lending countries.

Causes Inflation The govt. resort to borrowing from the RBI to meet its fiscal deficit.It
is done by

Deficit Financing. This increases the circulation of money in the economy & creates
inflationary pressure, if there is excess supply of money.

Financial Burden for Future GenerationsBorrowings lead to burden for future

generations as payment of loans & interest on loans get accumulated whose burden is to
be borne by the future generations in the form of more tax & non tax revenue.

 Q.Do you agree with the view that demonetization of 500 & 1000 rupee notes would
help the Govt. in lowering its fiscal deficit?
 Ans.It is true that demonetization would help the government to lower its fiscal
deficit.Black money economy will shrink.Unaccounted output would be accounted as
a part of GDP.This would increase revenue receipts of the government by way of
direct & indirect taxation.Accordingly fiscal deficit must reduce.

Primary Deficit It is defined as fiscal deficit minus interest payments on previous

borrowings.

PrimaryDeficit= Fiscal deficit – Interest payment

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Primary deficit refers to borrowings requirements exclusive of interest payments. It

implies that if primary deficit is zero,then fiscal deficit is equal interest payments which
indicates that interest payments on previous loans have led to borrowings.

Measures to reduce primary deficit---1.Primary deficit indicates borrowing

requirements of the govt. to meet deficit .Other than interest payments,therefore
efforts should be made to reduce fiscal deficit.

2.To reduce fiscal deficit, interest payments should be reduced through repayment of
loans as early as possible.

Basis Fiscal Deficit Primary Deficit

Meaning Fiscal deficit is the excess It is defined as fiscal
of total expenditure over deficit minus interest
total receipts of the govt. payments
excluding borrowings
during a given fiscal year.
Indicator Fiscal deficit refers to the Primary deficit refers to
s total borrowing the total borrowing
requirement of the requirement of the
government including the government excluding the
interest payment. interest payment
Formula Fiscal Deficit= Total Primary Deficit=
expenditure –Total Fiscal deficit –
Receipts other than Interest payment
borrowings & other
liabilities

Measures to Reduce budget deficit

 Govt.Wasteful expenditures need to be curtailed.

 Tax base to be broadened.
 Taxes to be increased,tax evasion to be checked.
 Sale of shares of PSU.
 Invite private sector to participatein areas where PSU are inefficient.
 Monetary expansion & deficit financing.
 Borrowings from the public by issuing bonds & other certificates.

.
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Q) The worst effect of depression is unemployment. How can govt. budget be helpful in
fighting it?Explain.

A. Govt. can fight depression through taxes, subsidies& govt. expenditure. Throughtaxes,govt.
can lower rates of income tax etc.to leave more disposable income in the hands of people. It
will encourage people to spend more. Through subsidies,govt. can give subsidies to new
production units for providing employment. Throughgovt. expenditure,govt can raise its own
expenditure on administration & new projects. It will raise demand & employment.

Q.The Government under ujjwala Yojna is providing free LPG Kitchen gas connections to the
families below the poverty line. What objective the government is trying to fulfill through the
government budget and how? Explain. (Inequalities of income and wealth)

Q2.The government decides to give budgetary incentives to investors for making investment in
backward regions. Explain these possible incentives and the reasons for the same.A. Economic
growth and Allocation of resources

NCERT

BUDGET(National policy statement)(-(Extra Points)

There is a constitutional requirement in India (Article 112) to present before the Parliament
a statement of estimated receipts and expenditures of the government in respect of every
financial year which runs from 1 April to 31 March. This‘Annual Financial Statement’
constitutes the main budget document.
Public Goods-Certain goods, referred to as PUBLIC GOODS (such as national defence, roads,
government administration cannot be provided through the market mechanism.(Allocation
function)

2. The benefits of public goods are not limited to one particular consumer, as in the case of
private goods. if we consider a public park or measures
to reduce air pollution, the benefits will be available to all. The consumption of
such products by several individuals IS NOT ‘RIVALROUS’ in the sense that a person can
enjoy the benefits without reducing their availability to others.
3. In case of public goods, there is no feasible way of excluding anyone from enjoying the
benefits of the good (they are non-excludable). Since non-paying users usually cannot be
excluded, it becomes difficult or impossible to collect fees for the public good. This leads to
the ‘free-rider’ problem.
2. PUBLIC PROVISION ----means that they are financed through the budget and made
available free of any direct payment.
3.Public Goods---These goods may be produced directly under government management or by
the private sector.
4.Revenue expenditure---Committed expenditure(Defence expenditure)
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5. Non-plan expenditure, the more important component of revenue expenditure, covers a

vast range of general, economic and social services of the government. The main items of non-
plan expenditure are interest payments, defence services, subsidies, salaries and pensions.
6.Subsidies are an important policy instrument which aim at increasing welfare. Apart from
providing implicit subsidies through under-pricing of public goods and services like
education and health, the government also extends subsidies explicitly on items such as
exports, interest on loans, food and fertilisers.
7. Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)
8. Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt
creating capital receipts)
Gross fiscal deficit = Net borrowing at home + Borrowing from RBI +
Borrowing from abroad
Fiscal Deficit = Revenue Deficit + Capital Expenditure - non-debt creating capital
receipts). A large share of revenue deficit in fiscal deficit indicated that a large part of
borrowing is being used to meet its consumption expenditure needs rather than investment.
9Goal of measuring primary deficit is to focus on present fiscal imbalances
Gross primary deficit = Gross fiscal deficit – Net interest liabilities
Net interest liabilities consist of interest payments minus interest receipts by
the government on net domestic lending.
10.Deficit-Flow Debt—Stock
11. proportional income tax, thus, acts as an automatic stabiliser. less sensitive to fluctuations
in GDP
12. deliberate action to stabilise the economy is often referred to as DISCRETIONARY
FISCAL POLICY
13.IS FISCAL DEFICIT inflationary in Nature?
During fiscal deficit when government increases spending or cuts taxes, aggregate demand
increases. Firms may not be able to produce higher quantities that are being demanded at the
ongoing prices. Prices will,therefore, have to rise. However, if there are unutilised resources,
output is held back by lack of demand. A high fiscal deficit is accompanied by higher demand
and greater output and, therefore, need not be inflationary.
It has been argued that there is a decrease in investment due to the government invests in
infrastructure, future generations may be better off, provided the return on such investments is
greater than the rate of interest. The actual debt could be paid off by the growth in output. The
debt should not then be considered burdensome. The growth in debt will have to be judged by
the growth of the economy as a whole.
Crowding out effect-The crowding out effect is an economic theory arguing that rising public sector
spending drives down or eliminates private sector spending.
Ex-Rising govt exp raise fiscal deficit will be met through borrowings.
Deficit reduction- Can be done with increasing taxes (direct taxes) and reduce expenditure.Indirect taxes
regressive in nature-they impact all income group equally)
Analysing, Evaluating & Creating Type Questions
1. “Through its budgetary policy government allocates resources in accordance
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with the requirements of the country.” Do you agree with the given statement?
Support your answer with valid reasons.
(CBSE 2019) (3 Marks)
Ans. The given statement is true. Reallocation of resources refers to re-distribution of
resources from one use to another. The government reallocates with a view to
balance the goals of profit maximization (by firms) and social welfare (by
government). Production of goods which are injurious to health is discouraged
through taxation. On the contrary. Production of socially useful goods is
encouraged through subsidies. If the private sector does not taken initiative in
certain activities, government directly controls them like water supply, sanitation
etc.
2. What is the role of Government Budget in allocation of resources?

(1 Mark)
Ans. Government can directly undertake the production of public goods and services
Alternately, it can encourage private sector by giving tax concessions and
subsidies.
3. How does the government reduce inequalities of income and wealth?

(1 Mark)
Ans. Government can reduce inequalities through taxes and expenditure. It can tax rich
or the goods consumed by the rich, It can spend the amount so collected on
providing free services to the poor.
4. State one fiscal measure that can be used to reduce the gap between rich and poor?

(CBSE Sample Question Paper 2018) (1 Marks)

Ans. (a) Increasing government expenditure which will directly benefit the poor.
(b) Increasing the taxes on rich and using the same amount to benefit the poor.
(any one).
5. Name any one step that the government can take through its budget to check inflation that is causing
hardships to the people?

(CBSE 2013) (1 Marks)

Ans. Government can reduce its own expenditure to leave less disposable income in the
hands of people.
6. Government raises its expenditure on producing public goods which economic value does it reflect ?

(CBSE 2014) (3 Marks)

Ans. Government can reduce its own expenditure to leave less disposable income in the
hands of people.
7. Tax rates on higher income group have been increased. Which economic value does is reflect? Explain.

(CBSE 2014) (3 Marks)

Ans.This will reduce the inequalities of income as the difference between incomes of
Higher income and lower income groups will fall. This will also provide more
Resource to the government for spending on welfare of the poor. e.g. free services
like education and health to the poor people.
8. Government has started spending more on providing free services like
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education and health to the poor. Explain the economic value it reflects.
(3 Marks)
Ans. Spending on free services to the poor raises their standard of living and at the
Same time helps in reduction in income inequalities. It also helps in raising
Production potential of the country by raising the efficiency level of the working
Class among the poor.
9. Government decides to give budgetary incentives to investors for making investments in backward regions.
Explain these possible incentives and the reason for the same.

(CBSE 2015) (6 Marks)

Ans. Possible Budgetary incentives: Budgetary incentives refer to concession in
taxation and granting subsidies to those production units which set up their units
in economically backward areas.
• • Tax concessions aim at reducing cost and thus raising profits.
• • Subsidies aim at reducing prices of products to encourage sales and earning more profits.

Clearly, tax concessions and subsidies both aim at rising profits.

Reason for giving tax concession and subsidies by the government.
i i. Economic Growth: The aim of giving tax rebates and subsidies for productive venture and projects is that
it can stimulate saving and investments in the economy growth.
ii ii. Allocation of resources: Government can influence allocation of resources by encouraging industries to
produce selected goods by giving tax concessions and subsidies.
iii
iv 10. The Government under Ujjwala Yojana, is providing free LPG kitchen gas connections to the families
‘below the poverty line’ What objective the government is trying to fulfill through the government budget and
how? Explain .
v (6 Marks)
vi Ans. By providing free LPG kitchen gas connection to the families ‘below the poverty line’, the objective
which the government is trying to fulfill is ‘Reduction in inequalities of income and wealth’
vii Inequalities of income and income and wealth reflect a section of the society being deprived of even
necessities of life Inequalities like food. Clothing and housing. Thus arises the need for reducing inequalities of
incomes in the society, i.e., reducing the gap between rich and poor. The government can impose higher taxes on
the rich reducing their disposable income. The amount so collected through taxes can be used by the government
for spending on welfare of the poor people. It can provide them transfer payments and subsidies.
viii Increased expenditure by the government on such transfer payments and subsidies will have twin effects
First, it will increase their disposable income and thus will reduce the income inequalities i.e., the gap between rich
and poor, Secondly, spending on free service to the poor raises their standard of living and thus increases their
welfare.