Solution

GOVERNMENT BUDGET

Class 12 - Economics

1. (a) (C) - (III)

Explanation:
Deficit Budget - Budget in which expenditure exceeds the receipts of the government.
2.
(b) (a) - (i)
Explanation:
(a) - (i)

3. (a) (a) - (ii), (b) - (iii), (c) - (iv), (d) - (i)

Explanation:
(a) - (ii), (b) - (iii), (c) - (iv), (d) - (i)
4.
(b) D - iv
Explanation:

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D - iv

5.
(c) (a) - (iii), (b) - (i), (c) - (ii)
rc
Explanation: (a) - (iii), (b) - (i), (c) - (ii)
Ci
6. The functional relationship between C and Y is called the consumption function. It reveals the behaviour of household
consumption expenditure with respect to the level of income in the economy.
¯
¯¯¯
a. C = 20 + 0.80 Y [C = 20]
dy

I = 30
c = 0.80
G = 50
Stu

T = 100
Equilibrium level of income
¯
¯¯¯
Y = [C + cT + I + G]
= [20 + 0.80 × 100 + 30 + 50]
1

1 − 0.80

= 1

0.20
× 180
= 180

20
× 100
= 900
Expenditure multiplier = 1

1−c
1 1
= 1−0.80
= 0.20

= 100

20

=5
b. Increase in government expenditure
△G = 30

New equilibrium expenditure

¯
¯¯¯
= 1

1−c
[C + cT + I + G + △G]
1
= 1−0.80
[20 + 0.80 × 100 + 30 + 50 + 30]
= 1

1−0.80
[20 + 80 + 30 + 50 + 30]
= 1

0.20
× 210
210
= 20
× 100

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 = 1050
Equilibrium level of income increases by 150(1050 - 900)
−c
c. Tax multiplier = 1 − c

△Y −c
=
△T 1 − c

So,
−c
△Y = ×△ T
1−c
−0.80
= 1−0.80
× 30
−0.80
= 0.20
× 30
= -120
New Equilibrium level of income = Y + △Y
= 900 + (-120)
= Rs 780
7. (a) Revenue deficit = revenue expenditure - revenue receipts = 100 - 70 = 30 arabs.
(b) Fiscal deficit = total expenditure (revenue expenditure + capital expenditure) - (revenue receipts + non debt capital receipts) =
100 + 120 + 80 - 70 - 80 = 150 arabs .
(c) primary deficit = fiscal deficit - interest payments = 150 - 30 = 120 arabs.
8. Gross fiscal deficit shows estimated borrowing by the government to cope with its expenditures during the year.
Primary deficit is the difference between fiscal deficit and interest payment.
Revenue Deficit = Revenue Exp. - Revenue Receipts
= 70,000 - 50,000

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= 20,000 crore
Interest Payment = 25% of Revenue deficit rc
20,000
= 25 ×
100
= 5,000 crore
a. Fiscal Deficit = Borrowings = ₹15,000 crore
Ci
b. Primary Deficit = Fiscal Deficit - Interest Payment
= 15000 - 5000 = ₹10,000 crore.
9. a. Revenue deficit = Revenue expenditure - Revenue receipt
dy

Revenue deficit = 3700 - 1200 - 2000

Revenue deficit = 500 crores
b. Fiscal deficit = Total expenditure - Total receipt
Stu

Fiscal deficit = 3700 + 500 - 1200 - 2000 - 145 - 120

Fiscal deficit = 735 crores
10. The functional relationship between C and Y is called the Consumption function.it reveals the behaviour of household
consumption expenditure with respect to the level of income in the economy.
a. C = 70 + 0.70 YD
I = 90
G = 100
T = 0.10 Y
Y=C+I+G
Y = 70 + 0.70YD + 90 + 100
Y = 70 + 0.70YD + 190
Y = 70 + 0.70 (Y - T) + 190
Y = 70 + 0.70Y - 0.70T + 190
Y = 70 + 0.70Y - 0.70 × 0.10 Y + 190
Y = 70 + 0.70Y - 0.07Y + 190
Y = 70 + 0.63Y + 190
Y = 260 + 0.63Y
Y - 0.63Y = 260
0.37Y = 260
260
Y= 0.37

Y = 702.7

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 b. T = 0.10Y
= 0.10 × 702.7
= 70.27
Government expenditure = 100
Tax revenue = 70.27
As, G > T, Government has a deficit budget, not a balanced budget.
11. a. Fiscal deficit = Revenue deficit + capital expenditure - Non-Debt creating capital receipt.
11,000 = 5,000 + Capital expenditure - 9,000
Capital expenditure = 11000 + 9000 - 5000
Capital expenditure = 15000 Crores
b. Primary Deficit = fiscal deficit - Interest payment
8000 = 11,000 - Interest Payment
Interest payment = 11000 - 8000
Interest payment = 3000 crores
12. i. Primary deficit = {(i) + (iv) - (ii)} - (v)
= {40 + 220 - 190} - 20
= ₹ 50 crore
ii. The government may need to correct the fluctuations (income, employment and prices) in the economy. These may depend
upon the level of Aggregate Demand, which in turn depends upon the spending decision of households and firms.
To stabilize the economy, under the state of inflation/deflation, Government may alter taxes/expenditure, accordingly.

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13. 1. Revenue deficit : It is equal to revenue expenditure - revenue receipts
= 100 - 80 = Rs. 20 Crore. irc
2. Fiscal Deficit: It is equal to (revenue expenditure + capital expenditure) - revenue receipts - capital receipts other than
borrowings
= 100 + 110 - 80 - 95 = Rs. 35 Crore.
C
3. Primary deficit: It is equal to fiscal deficit - interest payments
= 35 - 10 = Rs. 25 Crore.
14. i. Revenue Deficit
dy

= Revenue Expenditure - Revenue Receipts

= 2,800 - 2,000 = ₹ 800 crores
ii. Fiscal Deficit (Borrowings) = total expenditure- total receipts (other than borrowings)
Stu

= Revenue Expenditure + Capital Expenditure - Revenue Receipts - Recoveries of Loans

= 2,800 + 600 - 2,000 - 200
= 3,400 - 2,200 = ₹ 1,200 crores
iii. Primary Deficit
= Fiscal Deficit - Interest Payment
= 1,200 - 1,000 = ₹ 200 crores
15. a. Non - Debt Creating Capital Receipts = 50% of Revenue Receipts
× 20 = ₹ 10 crore
50
=
100

Fiscal Deficit = (iii) + (i) - Non-Debt Creating Capital Receipts

= 20 + 30 - 10 = ₹ 40 crore
Primary Deficit = Fiscal Deficit - (iv)
= 40 - 10 = ₹ 30 crore
b. Examples of private goods are:
Mobile phone purchased by an individual
Water bottle purchased by an individual
c. Public provision refers to those goods that are financed through the government budget and can be used without any direct
payment by public.
Public production relates to those goods which are directly produced by the government.
16. i. Revenue Deficit = (ii) - {(i) + (iii)}
= 3,700 - 1,200 - 2,000
= ₹ 500 crore

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 Fiscal Deficit = {(ii) + (v)} - {(i) + (iii) + (iv) + (vi)}
= 3,700 + 500 - 1,200 - 2,000 - 145 - 120
= ₹ 735 crore
ii. Public provision refers to those goods that are financed through the government budget and can be used without any direct
payment by public.
Public production relates to those goods which are directly produced by the government.
17. a. Revenue Deficit = Revenue Receipt - Revenue expenditure
6000 = Revenue Receipt - 11000
Revenue Receipt = 5000
b. Fiscal Deficit = Revenue deficit + Capital expenditure - Non-Debt creating capital Receipt
Fiscal deficit = 6000 + 14000 - 8000
Fiscal deficit = 12000
c. Primary deficit = fiscal deficit - Interest Payment
Primary deficit = 12000 - 7000
Primary deficit = 5000
18. a. Revenue deficit = Revenue expenditure - Revenue Receipt
Revenue deficit = 45,000 - 35,000
Revenue deficit = 10,000 crores
b. Fiscal deficit = Borrowings
Fiscal deficit = 12,000 crores

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c. Interest Payment = 10, 000 × 30

100

Interest Payment = 3000 crores irc

Primary deficit = Fiscal deficit - Interest payment
Primary deficit = 12,000 - 3000
Primary deficit = 9,000 crores
C
19. I = 200
C = 100 + 0.75 Y
So, C (Autonomous consumption) = 100
dy

And, MPC (c) = 0.75

a. Equilibrium level of income (AD = AS or I = S)
= (100 − 0.75 × 100 + 200 + 150)
1
Stu

1 − 0.75

= 1

0.25
× 375
= ₹ 1500
b. Government expenditure multiplier
Δy 1 1 1
= = =
ΔG 1−c 1−0.75 0.25

= 1

25
× 100 =4
Government expenditure multiplier is 4
−c
Tax multiplier = Δt

ΔT
=
1−c
−0.75 −0.75
= 1−0.75
=
0.25

= -3
Tax multiplier is 3
c. ΔG = 200
New equilibrium income
= 1 ¯
∣ C − ϵT + I + G + ΔG|
′
1−c

= 1−0.75
1
|100 - 0.75 × 100 + 20(1 + 150 + 200)|
= 1

0.25
× 575

= 100×575

25

= ₹ 2,300
Therefore, change in equilibrium income comes to be = 2300 - 1500 = ₹ 800
20. a. Non - Debt Creating Capital Receipts = 50% of Revenue Receipts
× 50 = ₹ 20 crore
50
=
100

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 Fiscal Deficit = (iii) + (i) - Non-Debt Creating Capital Receipts
= 55 + 60 - 25 = ₹ 90 crore
Primary Deficit = Fiscal Deficit - (iv)
= 90 - 20 = ₹ 70 crore
b. Examples of public goods are:
National Defence
Public parks
c. Public provision refers to those goods that are financed through the government budget and can be used without any direct
payment by public.
Public production relates to those goods which are directly produced by the government.
21. i. Revenue Deficit
= Revenue Expenditure - Revenue Receipt
= Interest Payment + Subsidies + Defence Expenditure - Tax Revenue - Non-tax Revenue
= 1,200 + 300 + 1,700 - 1,600 - 700
= 3,200 - 2,300
= ₹ 900 crores
ii. Fiscal Deficit ( Borrowings)
= Revenue Deficit + Capital Expenditure - Recoveries of Loans - PSU’s Disinvestment
= 900 + 700 - 150 - 120
= 1,600 - 270

le
= ₹ 1,330 crores
iii. Primary Deficit
= Fiscal Deficit - Interest Payment
= 1,330 - 1,200
irc
= ₹ 130 crores
C
Fiscal deficit shows the borrowing requirement of the government inclusive of interest payment on the past loans, primary deficit
shows the borrowing requirement of the government exclusive of interest payment.
22. primary deficit = fiscal deficit - interest payment
dy

primary deficit = 2,40,000 - 1,60,000

primary deficit = 80,000
23. a. Receipts from sale of shares of public sector undertaking is a capital receipt because it results in a reduction of assets.
Stu

b. Borrowing from public is a capital receipt because borrowing creates a liability.

c. Profits of public sector undertaking is a revenue receipt because it neither creates a liability nor reduces any asset.
d. Income tax received by the government is a revenue receipt as it neither creates a liability nor reduces any asset.
24. i. A capital budget estimates inflows and outflows on account of capital expenses. Capital expenses means those expenses which
will not be incurred regularly. For example buying new plant and machinery, addition of new office building, buying cars
trucks etc for business. Capital budget forecasts fixed asset addition and deletion.
ii. Revenue budgets include income and expenditure for the year and those that will be incurred regularly in the running of
businesses. For eg sales, purchase, salaries, wages and rent.
25. Revenue expenditure refers to estimated expenditure of the government in a fiscal year which does not create assets or causes a
reduction in liabilities.
Following are the characteristics of revenue expenditure:
i. Revenue expenditure is the expenditure of recurring nature.
ii. Its purpose is to keep the government machinery running. It does not create any asset.
Following are the examples of revenue expenditure:
i. Expenditure on subsidies
ii. Interest payments
26. i. Economic stability: Free play of market forces are bound to generate trade cycles, also called business cycles. Please refer to
the phases of recession, depression, recovery and boom in the economy. A government budget is used to prevent business
fluctuations of inflation or deflation to achieve the objective of economic stability. The government aims to control the
different phases of business fluctuations through its budgetary policy. Policies of the surplus budget during inflation and
deficit budget during deflation helps to maintain the stability of prices in the economy.

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 ii. Re-distribution of income: Reducing inequality is a major objective of government's budget especially in developing country
like India, where inequality of income and wealth is very high. The government uses its financial tools of taxation and
subsidies to enhance equal distribution of income and wealth. In order to ensure equity of income, the progressive tax
structure is followed in India, which imposes a higher burden of taxes on higher income group and a lesser burden on lower
income group. Also, those who earn below a substantial limit are exempted from payment of taxes. The additional income
generated from the higher income group is re-distributed by the government in the form of subsidies to the poor sections of the
society, to ensure the objective of welfare. LPG subsidy is a good example of such redistribution of income.
27. i. Recovery of loans: It is a capital receipt because it causes a reduction in assets. It is not of recurring nature.
ii. Corporation tax: It is a revenue receipt because it neither creates liability nor leads to a reduction in assets.
iii. Dividends on investment made by government: It is a revenue receipt, as it does not add to liability or reduction in assets.
iv. Sale of public sector undertaking: It is a capital receipt as it involves a reduction in assets.
28. i. Dividends on investment made by government It is a revenue receipt, as it does not add to the liability or not lead to the
reduction in value of assets.
ii. Sale of public sector undertaking It is a capital receipt, as it involves reduction in value of assets.
29. India is suffering from the problem of fiscal deficit for the last many years. Two measures to deal with the problem of fiscal deficit
are:
i. The curtailment of capital expenditure which is measured in projects of capital formation and other developmental activities.
ii. To raise revenue receipts by mobilising resources through taxation.
30. i. It is a direct tax as its impact and incidence lie on the same person.
ii. It is an indirect tax as its impact and incidence lie on different persons.

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iii. It is a direct tax as its impact and incidence lie on the same person.
iv. It is a direct tax as its impact and incidence lie on the same person.
irc
31. Budgetary policies are useful medium to reduce inequalities of income or the fair distribution of income. Government can use tax
policy and public expenditure as a tool. People with higher incomes are levied higher rate of tax and people with lower income are
levied lower rate of tax. People with income below a certain level are not levied any direct tax altogether.
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On the other hand, the government spent these tax receipts on granting subsidies and providing other public services such as
health and education free of cost, to people with lower income groups.It raise the disposable income and welfare of the poor.
32. The basis of classifying government expenditure into revenue expenditure and capital expenditure is increased in the value of
dy

assets and decrease in the value of liabilities.

i. If an expenditure results in neither an increase in the value of assets nor a decrease in the value of liabilities, then it is
classified as revenue expenditure.
Stu

ii. If an expenditure results in increase in the value of assets, or in decrease in the value of liabilities, then it is classified as
capital expenditure.
33. i. It is a direct tax as its impact and incidence lie on the same person.
ii. It is an indirect tax as its impact and incidence lie on different persons.
34. We know, Fiscal Deficit = Total Expenditure - Revenue Receipts - Non-dept creating capital receipts. It means, the fiscal deficit is
financed by debt-creating capital receipts, i.e., the fiscal deficit is met through borrowings.
So, it is rightly said that fiscal deficit gives the borrowing requirement of the government.
35. Fiscal deficits are not necessarily inflationary; though, they are generally regarded as inflationary. Borrowings from RBI increase
the money supply in the economy. increase in the money supply leads to an increase in the general price level. A persistent
increase in the general price level leads to an inflationary spiral. Hence, fiscal deficits are inflationary in this sense.
But on the other hand, initially, if the resources are underutilized (due to insufficient demand) and output is below full
employment level, then with the increase in government expenditure, more factor resources will be employed to cater to the
increasing demand without exerting much pressure on the price to rise. In this situation, a high fiscal deficit is accompanied by
high demand, greater output level and lesser inflationary situation. Hence, whether the fiscal deficits are inflationary or not
depends on how close is the original output level to the full employment level.
36. Primary deficit refers to difference between fiscal deficit of the current year and interest payments on the previous borrowings.
Primary Deficit = Fiscal Deficit - Interest Payments
Implications of Primary Deficit
It indicates, how much of the government borrowings are going to meet expenses other than the interest payments. The difference
between fiscal deficit and primary deficit shows the amount of interest payments on the borrowings made in past. So, a low or
zero primary deficit indicates that interest commitments (on earlier loans) have forced the government to borrow.

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37. Following measures may be taken to reduce revenue deficit:
i. Raising more tax revenue- The government should rely on progressive rates of direct taxes. Direct taxes are more productive
because its cost of collection is quite lower. Taxes should be levied in such a manner that people should spend less.
ii. Reduction in revenue expenditure- The government should cut down its expenditure on non productive activities such as
law and order. The government should make its activities more efficient through better planning.
iii. Disinvestment- by way of selling its ownership of public enterprises.

38. Direct Tax Indirect Tax

Direct tax is a tax whose liability to pay and incidence lie on The liability to pay and incidence of indirect tax does not lie on
the same person. the same person.
Its incidence can not be shifted to some other person, i.e. Its incidence can be shifted to some other person, i.e. burden of
actual burden of taxes cannot be shifted. these taxes can be shifted to others.
Example : Income Tax, corporation tax. Excise duty, VAT.

39. Basis Direct tax Indirect tax

A direct tax is one which is levied directly on the individuals and firms An indirect tax is one in which the burden
Meaning
and its burden is borne by those on whom it is levied. of tax can be shifted.

Nature It is progressive in nature. It is regressive in nature.

Value Added Tax and Goods and Service

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Example Income tax, wealth tax and corporation tax are examples of direct tax.
tax are examples of indirect tax.
40. Economic Growth: Economic Growth implies a sustainable increase in the real GDP of an economy, i.e. an increase in volume of
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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.
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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.
dy

41. Developing countries like India prepare a deficit budget because In developing countries like India, the development levels are
less than what is desired, also there are several goods and services like street lights, roads which cannot be provided through the
market mechanism, hence government has to incur huge amounts on developmental activities. Also, due to poverty, many people
Stu

do not contribute in tax payments, hence revenues of government are less than the expenditures. As a result of which, with
government expenditures more than receipts, developing countries like India prepare a deficit budget.
42. Payment of interest is a recurring annual expenditure and is treated as a revenue expenditure because:
i. It does not reduce the liability of the payer.
ii. It does not add assets of the payer.
43. Yes, a large fiscal deficit will leads to a higher revenue deficit in the future.
Reason for this:
A large fiscal deficit means large amount of borrowings. This creates a large burden of repayment of loans in future and interest
payments. More interest payments will increase revenue expenditure. Hence, revenue deficit in future will increase.
44. Loan granted by the Central Government to a State Government is a capital expenditure, as it creates assets for the Central
Government in the form a source of regular income. However, grants given to the State Government is a revenue expenditure as it
neither reduces liabilities nor creates assets.
45. A tax is a compulsory payment to the government without expectation of any direct return or benefits to the taxpayer.
Following are the two main features of a tax:
i. A tax is a compulsory contribution from the people to the government. A taxpayer will have to pay it otherwise the
government would take legal action against the defaulter.
ii. Mere payment of tax does not entitle the taxpayer to get certain benefits from the government. There is no direct quid- pro-
quo between the taxpayers and the public authority.
46. Direct Taxes are the taxes that are levied on the income of individuals or organisations. They include Income tax, corporate tax,
wealth tax and inheritance tax. Indirect taxes are those paid by consumers when they buy goods and services.
47. i. Differences between revenue expenditure and capital expenditure are

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 Basis Revenue Expenditure Capital Expenditure

Revenue expenditure is the government's expenditure Capital expenditure is the government's expenditure
Meaning
which neither creates any assets nor reduces any liability. which either creates assets or reduces liability.

Revenue expenditure is spent on the normal functioning of Capital expenditure is spent on acquisition or
Purpose government departments and for providing various creation of assets, repayment of borrowings and
provisions for social welfare. granting of loans and advances

Expenditure on the construction of the school

Example Salary of employees, interest payments, subsidies etc. building, re-payment of loan taken by government
etc.
ii. Differences between fiscal deficit and primary deficit are
Basis Fiscal deficit Primary deficit

It is defined as fiscal deficit minus

It is defined as the excess of total budget expenditure over the
Meaning interest payments on previous
total budget receipt excluding borrowing during a fiscal year.
borrowings.

Fiscal Deficit = Total Budget Expenditure - Total Budget Receipt Primary Deficit = Fiscal Deficit - Interest
Calculation
(excluding borrowings) Payments

Burden of
Primary deficit does not carry the burden

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Interest Fiscal deficit carries the burden of interest payment
of interest payment.
payment
irc
48. The economic value that is reflected in the rise m the production of public goods is 'Social Welfare'. The main objective of the
budgetary policy of the government is to enhance the welfare of society as a whole.
For this, it performs the allocative function. The allocative function is concerned with allocating the resources between private and
C
public sectors. As the public goods cannot be provided by the private sectors through a market mechanism, hence, the need for
providing such goods is to be fulfilled by the government.No one can exclude people from consuming the public good. So,
everyone in society can use it. Thus, leading to social welfare. Moreover, the quantity of public goods is not reduced when
dy

consumed by anyone. So, it continues to provide social welfare. In addition to this, private goods cannot be afforded by all, i.e.
only those who can pay for these goods can avail the benefits of such goods. In case, public goods are produced by the private
sector, private welfare is achieved. But, as public goods are required by all and are essential from welfare point of view, thus, the
Stu

government provides these goods.

49. Public goods such as roads, public parks, water supply, bridges, national defense etc. are the goods which people urgently need for
their day to day living, but, market mechanism cannot produce these goods in sufficient quantities due to its properties of non-
rivalrous and non-excludable in consumption.Therefore, these goods need to be provided by the government.
50. Inequalities of income and wealth are necessary to reduce to promote social-welfare and to ensure that the benefits of
development are reaped by even those standing far below on the economic ladder.
For reducing inequalities of income and wealth, the government can initiate the following budgetary measures:
1.High taxes on higher income: The government may levy higher taxes on people with higher incomes. Thus, snatching extra
purchasing power from the rich and spending it on the poor. Therefore, reducing the gap between the two.
2. Providing subsidies to lower income groups: To reduce inequalities, the government may provide subsidies on necessary
consumption items to lower income groups By doing so, the income of the lower income group tends to increase. As a result, their
savings start increasing. Thus, they become relatively wealthy. Hence, the disparity between the two groups gets reduced.
51. A surplus budget implies that the revenue generated by the government from tax and non-tax sources is higher than the
expenditure incurred by it. This reduces the supply of money prevailing in the economy as people are left with less money to
spend due to an increase in revenue generated by government from people. A fall in money supply leads to a decrease in general
price level and hence, a decrease in inflation. The vice-versa of above holds true in case of deficit budget.
52. Implications of Revenue Deficit
It indicates the inability of the government to meet its regular and recurring expenditure in the proposed budget.
It implies that government is dissaving, i.e. government is using up savings of other sectors of the economy to finance its
consumption expenditure.
It also implies that the government has to make up this deficit from capital receipts, i.e. through borrowings or
disinvestments. It means, revenue deficit either leads to an increase in liability in the form of borrowings or reduces the

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 assets through disinvestment.
Measure to Reduce Revenue Deficit
i. Reduce Expenditure: Government should take serious steps to reduce its expenditure and avoid unproductive or unnecessary
expenditure.
ii. Increase Revenue: Government should increase its receipts from various sources of tax and non-tax revenue.
53. The government can levy high taxes on the rich thereby shifting purchasing power from them to the poor and use that money for
the upliftment of the latter. On the other hand, the government spends these tax receipts on granting subsidies and providing other
public services such as health and education, to people with lower income groups. As a result, the poor need to spend a minimum
on basic necessities, thereby increasing their savings. Wealth gets re-distributed and reduction in inequalities are achieved.
54. Fiscal deficit is the difference between what government spends and what it takes in as revenues. when a government spends more
than it takes in, the most responsible thing to do is to borrow the difference. If the government does this then fiscal deficit is the
amount government needs to borrow so that its revenues added to what it borrows, will equal what it spends. Therefore fiscal
deficit is equal to borrowings
55. Revenue deficit:-
Revenue Deficit is a situation where the revenue does not match with the expenses to be incurred. A dissimilarity in the expected
revenue and expenditure can result in revenue deficit. The shortage of total revenue receipts compared to total revenue
expenditure is defined as Revenue deficit.
Fiscal deficit:-
The difference between total revenue and total expenditure of the government is called as fiscal defici. It is also defined as the
excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year.

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Fiscal Deficit is justified as long as the expenditures are being incurred to finance activities leading to creation of national asset.
High Fiscal deficit becomes a matter of worry , for if incurred year after year, they cumulatively create a huge debt for the
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government. Further it also leads to high trade deficit.
56. Revenue Expenditure
Revenue expenditure refers to the expenditure which neither creates any asset nor causes reduction in any liability of the
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government.
It is recurring in nature.
It is incurred on normal functioning of the government and the provisions for various services.
dy

Examples: Payment of salaries, pensions, interests, expenditure on administrative services, defence services, health
services, grants to state, etc.

57. Basis Primary Deficit Revenue Deficit

Stu

It shows the excess of reserve expenditure over the revenue

It shows the difference between fiscal payment.
Meaning receipts.
Primary Fiscal deficit - Interest payments
Revenue Deficit = Revenue expenditure Revenue Receipts

It indicates the total borrowing requirements of the It indicates the inability of the government to meet its
Indicator
government excluding interest. regular and recurring expenditure.

Scope Primary deficit = Fiscal deficit - Interest payment Borrowing and deficit financing.
58. Government budget is of immense help in fighting the inflationary and deflationary tendencies. Inflationary tendencies emerge in
the economy when aggregate demand exceeds aggregate supply. Thus government tries to decrease aggregate demand to remove
inflationary pressures in the economy. To curb the inflationary tendency, the government can prepare a surplus budget. A surplus
budget is one in which estimated receipts exceed the estimated expenses. Such a budget reduces the money supply in the
economy. With a fall in the money supply, the purchasing power of people also falls, leading to a fall in the level of aggregate
demand. As aggregate demand falls, the price level or the rate of inflation also falls.
Deflationary pressures emerge in the economy when aggregate demand falls short of aggregate supply. So, the government
through its budgetary policies tries to increase AD. To curb the deflationary tendency, the government can prepare a deficit
budget. A deficit budget is one in which estimated expenses exceed the estimated receipts. Such a budget increases the money
supply in the economy. With the increase in money supply, the purchasing power of people also rises, leading to an increase in the
level of aggregate demand. As aggregate demand rises, the price level also rises and the rate of deflation begins to fall.
59. a. Revenue deficit = (ii) - (iv + v) = 100 - (60 + 20) = ₹ 20 arab
b. Fiscal deficit = (ii + vi) - (iv + v + i) = (100 + 110) - (60 + 20 + 95) = ₹ 35 arab

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 c. Primary deficit = Fiscal deficit - Interest payments = 35 - 10 = ₹ 25 arab
Thus revenue deficit is 20arab, fiscal deficit is 35 arab and primary deficit is 25 arab
60. Economic stability is an objective of government budget. Government tries to establish economic stability by its budgetary
policies. It refers to a situation where there is no fluctuation in price level in an economy. Economic stability is achieved by saving
the economy from harmful effects of various trade cycles and its phases, i.e. boom, recession, depression and recovery, through
various budgetary tools.
61. Budget is a comprehensive statement of the expected receipts and expenditure of the government during financial years (1st April
to 31st March).
Following are the principal objectives that the government pursues through the budget:
i. Reallocation of resources: The government tries to reallocate resources with a view to maximising social welfare.
ii. Redistribution of income: Distribution of income is sought to be improved through subsidies and taxation.
iii. Economic stability: Using its revenue and expenditure policy the government tries to achieve/maintain economic stability in
the economy.
iv. Public expenditure and economic growth: The government seeks to manage the pace of growth through public expenditure
through particularly on economic and social infrastructure.
62. India is suffering from the problem of inequalities in the distribution of income and wealth. A budget can be used as an instrument
to reduce the inequalities in the distribution of income and wealth in the following ways:
i. Tax rates should be made progressive, i.e. rate of tax should increase with increase in income.
ii. Strict measures should be adopted to check tax evasion by the rich people.
iii. Subsidies should be provided wherever needed.

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63. Government Budget is a financial statement showing estimates of the expected government's receipts and expected government's
expenditure for the coming financial year or fiscal year which runs from 1st April to 31st March. 'Re-allocation of resources' is
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one of the important objectives of the government budget.
Through its Budgetary policy, the government directs the allocation of resources in a manner such that there is a balance between
the goal of profit maximization and social welfare. The government can provide subsidy and reduction in tax rate to motivate
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investment into areas where private sector initiate is not coming. Production of goods which are injurious to social life is
discouraged through heavy taxation. The government levies tax on the richer sections of society. The money collected from taxes
is spent on providing public goods and giving subsidies on necessary goods to the poorer section of society. So, the government
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re-allocates resources by collecting taxes from the rich and giving subsidies to the poor and tries to achieve equitable distribution
of income.
64. Differences between direct tax and indirect tax are as under:
Stu

Basis Direct tax Indirect tax

A direct tax is one which is directly levied on the individuals and An indirect tax is one in which the burden of
Meaning
firms and its burden is borne by those on whom it is levied. tax can be shifted.

Nature It is progressive in nature. It is regressive in nature.

Income tax, wealth tax and corporation tax are examples of direct Value Added Tax, sales tax and Goods and
Example
tax. Service Tax are examples of indirect tax.
Differences between revenue expenditure and capital expenditure are as under:
Basis Revenue Expenditure Capital Expenditure

Revenue expenditure is the expenditure of government which Capital expenditure is the expenditure of government
Meaning neither cause increase in government assets nor cause any which leads to increase in government assets or
reduction in government liabilities. reduction in government liabilities.

Expenditure on old age pensions, expense on administrative Expenditure on the construction of national highways,
Example services, expense on national security, expense on health and re-payment of government loans, establishment of
education etc. factories etc.

65. Basis Tax Revenue Non-Tax Revenue

Tax revenue refers to sum total of receipts from taxes Non-Tax revenue refers to receipts of the government from
Meaning
and other duties imposed by the government. all sources other than those of tax receipts.

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 Nature It is a compulsory payment imposed by the It is not a compulsory payment. It becomes payable only
government. when services offered by the government are availed.

No direct benefit is received from the government in

Benefit It is paid in exchange of services received.
exchange of tax paid.

Income Tax, Corporate Tax, Goods and Services Tax

Examples Interest, Profits and Dividends, Fees, etc.
(GST), etc.
66. Primary deficit = fiscal deficit - interest payment
5,000 = fiscal deficit - 4,000
fiscal deficit = 5,000 + 4,000
fiscal Deficit = ₹ 9,000 crores

67. Basis Direct tax Indirect tax

A direct tax is one which is levied directly on individuals An indirect tax is one in which the burden of tax can be
and firms and the burden of which is borne by those on shifted so that those who pay this tax to the
Meaning
whom it is levied. Therefore in case of direct taxes burden government do not bear the whole burden but pass it
cannot be shifted to others. on wholly or partly to others.

Nature Direct taxes are progressive in nature. Indirect taxes are regressive in nature.

Direct taxes cannot be escaped because we have to pay the Indirect taxes can simply be escaped by not purchasing
Escape
tax on an income. the goods on which tax is imposed.

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Income tax, wealth tax and corporation tax are examples of Value Added Tax, sales tax and Goods and Service Tax
Example
direct tax. are examples of indirect tax.
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Government Budget is a statement of the estimates of the government's expected receipts and government's expected expenditure
during the financial year or fiscal year which runs from 1st April to 31st March. One of the important objective of the government
budget is 're-allocation of resources'.
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The government of a country, through its budgetary policy, directs the allocation of resources in a manner such that there is a
balance between the goals of profit maximisation and social welfare by ensuring that there should be production of necessity
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goods as well as comfort and luxury goods and the goods which cannot be provided through market mechanism e.g. roads, parks,
street lights (public goods) etc are provided by the government. So, the government levies a tax on the richer sections of society.
The money collected from taxes is spent on providing public goods and giving subsidies on necessary goods to the poorer section
Stu

of society. So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to the poor and tries to
achieve equitable distribution of income.
68. i. Revenue Deficit = Total Revenue expenditure - Total revenue Receipt = Revenue Expenditure - (Tax revenue + Non Tax
revenue) = 1500 - (1000 + 150 ) = Rs 350 crores
ii. Fiscal deficit = Total expenditure – (Revenue Receipt + Disinvestment proceeds)
= (1500+480) - (1000+150+50) = Rs 780 crores ( Note: Fiscal Deficit is also equal to borrowing)
69. Taxation is an effective tool to reduce the inequalities of income. Government budget refers to the annual statement of government
estimated revenue and estimated expenditure during a financial year . Reducing inequality is a major objective of government's
budget especially in developing country like India, where inequality of income and wealth is very high. Government uses its
financial tools of taxation and subsidies to enhance equal distribution of income and wealth. Equitable distribution is a way to
attain social justice and in India. This is a principal objective of welfare, and it is the responsibility of the government to ensure a
fair distribution of income.In order to ensure equity of income progressive tax structured is followed in India, which imposes
higher burden of taxes on higher income group and lesser burden on lower income group. Also, those who earns below a
substantial limit are also exempted from payment of taxes, and the additional income generated from higher income group is
redistributed by the government in the form of subsidies to the poor sections of the society, to ensure the objective of welfare.
LPG subsidy is a good example of such redistribution of income.
70. A deficit is simply when an economic entity has an income (revenue) which is below their expenditure. A budget deficit occurs
when expenses exceed revenue and indicate the financial health of a country.
A deficit budget may be financed in either of the following ways:
i. Monetary Expansions: This way of amounts to printing of currency notes to the extent of the deficit. The process involves
the government borrowing from the central bank thought the issue of treasury bills to the central bank. The central bank
purchases the treasury bills in return for cash which the government used to fund the deficit.

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 ii. Borrowing from the public: The government may raise loans from the general public by issuing bonds of various types. This
involves the burden of interest payment called Public debt interest.
iii. Disinvestment: The government may chose to sell its existing shares in public sector or joint sector enterprises. This process
is popularly known as privatisation.
71. a. Revenue deficit = Revenue expenditure - Revenue receipts = 2811 - 2037 = ₹ 774 crore
= 1037 + (400 + 600) = ₹ 2037 crore
b. Gross Fiscal deficit = Total expenditure - Total receipts excluding borrowings
= (Revenue expenditure + Capital expenditure) - (Revenue receipts + Non-debt capital receipts)
= (2811 + 574) - (2037 + 235) = 3385 - 2272 = ₹ 1113 crore
Note: Non-debt creating capital receipts = (vii) + (v) = 100 + 135 = ₹ 235 crore
c. Gross Primary deficit = Gross Fiscal deficit - Net interest payments (viii - iii) = 1113 - (1,013 - 400) = ₹ 500 crore
72. a. Budget of a government shows its comprehensive exercise on the taxation and subsidies.
b. A government uses fiscal instruments of taxation and subsidies with a view of improving the distribution of income and
wealth in the economy.
c. A government reduces the inequality in the distribution of income and wealth by imposing taxes on the rich and giving
subsidies to the poor, or spending more on welfare of the poor.
d. It will reduce income of the rich and raises the living standard of the poor, thus, leads to equitable distribution of income.
e. Expenditure on special anti poverty and employment schemes will be increased to bring more people above poverty line.
f. Public distribution system should be inferred so that only the poor could get foodgrains and other essential items at subsidized
prices.

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g. Equitable distribution of income and wealth is a sign of social justice which is as the principal objective of any welfare state in
India. irc
73. As indicated in the given chart:
i. I. Agriculture and Allied Activities: The expenditure on agriculture and allied activities accounted for ₹ 1.43 lakh crore in
the year 2021-22. In the year 2022-23, revenue expenditure ₹ 1.36 lakh crore was allocated for this sector. Out of total
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budget expenditure in the year 2023-24, ₹ 1.44 lakh crore was allocated for the development of this sector.
II. Transport: The expenditure on transport accounted for ₹ 3.32 lakh crore in the year 2021-22. In the year 2022-23, a
Revenue expenditure of ₹ 3.90 lakh crore was allocated for this sector. Out of the total budget expenditure of the year
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2023-24, ₹ 5.17 lakh crore was allocjgted to transport.

ii. Revenue Deficit refers to the excess of government’s revenue expenditure over revenue receipts for a fiscal year.
Primary deficit refers to the difference between fiscal deficit and interest payments.
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74. Government Budget is a statement of the estimates of the government's expected receipts and government's expected expenditure
during the financial year or fiscal year which runs from 1st April to 31st March. One of the important objectives of the
government budget is 're-allocation of resources'.

Re-allocation of Resources:

Through the budgetary policy, Government aims to re-allocate resources in accordance with the economic (profit maximisation)
and social (public welfare) priorities of the country. Government can influence the allocation of resources through:
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. So, the government levies a tax on the richer sections of society. The money collected
from taxes is spent on providing public goods and giving subsidies on necessary goods to the poorer section of society. So, the
government re-allocates resources by collecting taxes from the rich and giving subsidies to the poor and tries to achieve equitable
distribution of income.
Distribution of income in society: Reducing inequality is a major objective of government's budget especially in developing
country like India, where inequality of income and wealth is very high.
Government uses its financial tools of taxation and subsidies to enhance equal distribution of income and wealth. In order to
ensure equity of income, the progressive tax structure is followed in India, which imposes a higher burden of taxes on higher
income group and a lesser burden on lower income group. Also, those who earn below a substantial limit are exempted from
payment of taxes. The additional income generated from the higher income group is re-distributed by the government in the form
of subsidies to the poor sections of the society, to ensure the objective of welfare. LPG subsidy is a good example of such re-
distribution of income.

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75. i. Yes. The government budget objective of ‘Redistribution of Income’ aims to bring about equality in the distribution of
income. Government can reduce inequalities of income through taxes and public expenditure. It may impose high taxes on the
rich to reduce their disposable income. Furthermore, government may incur more public expenditure for the welfare of the
poor, like providing free services etc. By adopting these measures, the government tries to bridge the gap between the rich and
the poor
ii. Primary deficit refers to the difference between fiscal deficit and interest payments. Primary Deficit = Fiscal Deficit - Interest
Payments

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C irc
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Stu

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