Chapter 10 Government Budget

Concept of government budget:

Government budget refers to an annual financial statement that denotes its anticipated
expenditure and expected revenue generation in a fiscal year. It is presented by the government
in Lok Sabha at the beginning of every fiscal year, to give an estimate of its expenditure and
receipts for the upcoming year.
A budget is typically created and re-evaluated on a regular basis and is described as an estimation
of income and expenses over a given future period of time.
Structure or components of the budget:

Budget receipts: Budget receipts refer to the estimated money receipts of the government from
all sources during a given fiscal year. Budget receipts may be further classified as:

I. Revenue receipts
II. Capital receipts
Revenue receipts: Revenue receipts refer to those receipts which neither create any liability nor
cause any reduction in the assets of the government. They are regular and recurring in nature and
government receives them in its normal course of activities.

A receipt is a revenue receipt, if it satisfies the following two essential conditions:

(i) The receipt must not create a liability for the government.
(ii) The receipt must not cause decrease in the assets.

Revenue receipts of the government are generally classified under two

heads:
(i) Tax Revenue
(ii) Non-Tax Revenue

Tax revenue: Tax revenue refers to sum total of receipts from taxes and other duties imposed by
the government. Tax is a compulsory payment made by people and companies to the government
without reference to any direct benefit in return.
Tax Revenue can be further classified as:
(i) Direct Taxes
(ii) Indirect Taxes

Direct Taxes:
Direct taxes refer to taxes that are imposed on property and income of individuals and
companies and are paid directly by them to the government.
Indirect Taxes:
Indirect taxes refer to those taxes which affect the income and property of individuals
and companies through their consumption expenditure. GST is an important example.

Non-Tax Revenue:
Non-Tax revenue refers to receipts of the government from all sources other than those
of tax receipts.

The main sources of non-tax revenue are:

1. Interest:
Government receives interest on loans given by it to state governments, union
territories, private enterprises and general public. Interest receipts from these loans are
an important source of non-tax revenue.

2. Profits and Dividends:

Government earns profit through public sector undertakings like Indian railways, LIC,
BHEL, etc. It earns profit from the sale proceeds of the products of such public
enterprises. Government also gets dividend from its investments in other companies.

3. Fees:
Fees refer to charges imposed by the government to cover the cost of recurring services
provided by it. Such services are generally in public interest and fees is paid by those,
who receive such services. It is also a compulsory contribution like tax. Court fees,
registration fees, import fees, etc. are some examples of fees.

4. License Fee:
It is a payment charged by the government to grant permission for something. For
example, license fee paid for permission of keeping a gun or to obtain National Permit
for commercial vehicles.

5. Fines and Penalties:

They refer to those payments which are imposed on law breakers. For example, fine for
jumping red light or penalty for non-payment of tax. Fines are different from taxes as
the former is levied to maintain law and order, whereas, the latter is imposed to
generate revenue.

6. Escheats:
It refers to claim of the government on the property of a person who dies without
leaving behind any legal heir or a will.

7. Gifts and Grants:

Government receives gifts and grants from foreign governments and international
organisations. Sometimes, individuals and companies also voluntarily gift money to the
government. Such gifts are not a fixed source of revenue and are generally received
during national crisis such as war, flood, etc.

8. Forfeitures:
These are in the form of penalties which are imposed by the courts for non-compliance
of orders or non-fulfillment of contracts etc.

9. Special Assessment:
It refers to the payment made by owners of those properties whose value has
appreciated due to developmental activities of the government. For example, if value of
a property near a Metro Station has increased, then a part of developmental expenditure
is recovered from owners of such property in the form of special assessment.

Capital receipts:
Capital receipts refer to those receipts which either create a liability or cause a reduction in the
assets of the government. They are non-recurring and non-routine in nature.

Sources of Capital Receipts:

Capital receipts are broadly classified into three groups:
1. Borrowings:
Borrowings are the funds raised by government to meet excess expenditure.

Governments borrow funds from

(i) Open Market (Public);

(ii) Reserve Bank of India (RBI);

(iii) Foreign governments (like loans from USA, England etc.);

(iv) International institutions (like World Bank, International Monetary Fund).

Borrowings are capital receipts as they create a liability for the government.
2. Recovery of Loans:
Government grants various loans to state governments or union territories. Recovery of
such loans is a capital receipt as it reduces the assets of the government.

3. Other Receipts:
These include:
(a) Disinvestment:
Disinvestment refers to the act of selling a part or the whole of shares of selected public
sector undertakings (PSU) held by the government. They are termed as capital receipts
as they reduce the assets of the government. Government holds ownership in various
PSU’s in the form of equity shares. When the government sells a part or whole of its
shares, it leads to transfer of ownership of PSU’s to the private enterprises.
(b) Small Savings:
Small savings refer to funds raised from the public in the form of Post Office deposits,
National Saving Certificates, Kisan Vikas Patras etc. They are treated as capital receipts
as they lead to an increase in liability.

Budget Expenditure:
Budget expenditure refers to estimated expenditure of the government during the fiscal
year.
budget expenditure of the government is broadly classified as:
(1) Revenue Expenditure, and
(2) Capital Expenditure.

(1) Revenue Expenditure

Revenue expenditure of the government is that expenditure which shows the following
two characteristics:

(i) It does not create any asset for the government. For example, expenditure by the
government on old-age pensions, salaries and scholarships are to be treated as revenue
expenditure. Because this does not lead to any type of asset formation.

(ii) It does not cause any reduction in liability of the government. Expenditure by way of
grants to the state government to cope with natural calamities (like floods and
earthquakes) does not reduce financial liability of the central government in any
manner. Accordingly, this is to be treated as revenue expenditure.
In short, revenue expenditure refers to estimated expenditure of the government in a
fiscal year which does not create assets or causes a reduction in liabilities.

Important Items of Revenue Expenditure in the Indian Government Budget

These are:
(i) Wage bill of the government.
(ii) Interest payments.
(iii) Expenditure on subsidies.
(iv) Defence purchases.

(2) Capital Expenditure:

Capital expenditure of the government is that expenditure which shows the following
two characteristics:

(i) It creates assets for the government. Equity (or shares) of the domestic or
multinational corporations purchased by the government may be cited as an example.

(ii) It causes reduction in liabilities of the government. Repayment of loans certainly

reduces liability of the government. Accordingly, this is to be treated as capital
expenditure.

In short, capital expenditure refers to the estimated expenditure of the government in a

fiscal year which creates assets or causes a reduction in liabilities.

Important Items of Capital Expenditure in the Indian Government Budget

These are:
(i) Expenditure on land and building.
(ii) Expenditure on machinery and equipment.
(iii) Purchase of shares.
(iv) Loans by the central government to the state governments or state corporations.

Plan and Non-plan Expenditure

Budget expenditure (revenue expenditure + capital expenditure) is also classified as
plan and non-plan expenditure. Following is the difference:
(1) Plan Expenditure: Plan expenditure refers to that expenditure which relates to

(i) specified plans and programmes of development, and

(ii) assistance of the central government to the state governments. It includes both
revenue expenditure (like assistance to the states) and capital expenditure (like
expenditure on the construction of roads, bridges and hospitals).

(2) Non-plan Expenditure: Broadly, all expenditure other than plan expenditure is
classified as non-plan expenditure. Specifically, non- plan expenditure relates to
expenditure on routine functioning of the government. Or, it includes expenditure on
such services as of law and order, defence and subsidies.

Thus, we can write that:

Budget Expenditure = Revenue expenditure + Capital expenditure

Or

Budget Expenditure = Plan expenditure + Non-plan expenditure