SSC MTS Exam

S t u d y M a t e r i a l f o r Genral Awareness
 PUBLIC FINANCE IN INDIA
● Public finance is a study of the financial aspects of Government. It is a branch of economics
which deals with government revenue and government expenditure.
● Public finance gets the reference in the ancient treatise Arthashastra of Kautilya which
covers ‘treasury, sources of revenue, accounts and audit’ in a very detailed way.

Budget
● The budget is an annual financial statement which shows the estimated income and
expenditure of the Government for the forthcoming financial year.
● India is a federal economy; hence public budget is divided into two layers of the
Government.
● According to the Indian Constitution, the Central Government has to submit annual financial
statement, i.e., Union Budget under Article 112 to the Parliament and each State
Government has to submit the same for the State in the Legislative Assembly under Article
202.

● On the basis of expenditure on revenue account and other accounts, a budget can be
presented in two ways:
o Revenue Budget: It consists of revenue receipts and revenue expenditure. Moreover,
the revenue receipts can be categorized into tax revenue and non-tax revenue.
Revenue expenditure can also be categorized into plan revenue expenditure and
non-plan revenue expenditure.
 o Capital Budget: It consists of capital receipts and capital expenditure. In this case, the
main sources of capital receipts are loans, advances etc. On the other side capital
expenditure can be categorized into plan capital expenditure and non-plan capital
expenditure.
Revenue Receipts
● Revenue receipts are those receipts that do not lead to a claim on the government. They are
therefore termed non-redeemable. They are divided into tax and non-tax revenue.
● Tax revenues, an important component of revenue receipts. The types of taxes are:
o Direct taxes - Personal income tax, Corporation tax, wealth tax, gift tax, etc.
o Indirect taxes - customs duties (taxes imposed on goods imported into and exported
out of India), GST, etc.
● Non-tax revenue of the government mainly consists of interest receipts on account of loans
by the central government, dividends and profits on investments made by the government,
fees and other receipts for services rendered by the government. Cash grants-in-aid from
foreign countries and international organisations are also included.

Revenue Expenditure
● Revenue Expenditure is expenditure incurred for purposes other than the creation of
physical or financial assets of the government.
● It relates to those expenses incurred for the normal functioning of the government
departments and various services, interest payments on debt incurred by the government,
and grants given to state governments and other parties.
● Budget documents classify total expenditure into plan and non-plan expenditure.
● Plan revenue expenditure related to central Plans (Five Year Plans) and central assistance for
State and Union Territory plans.
● Non-plan revenue 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.

Capital Receipts
● All non-revenue receipts of a government are known as capital receipts.
● The government receives money by way of loans or from the sale of its assets. Loans will
have to be returned to the agencies from which they have been borrowed. Thus, they create
liability.
● Sale of government assets, like sale of shares in Public Sector Undertakings (PSUs) which is
referred to as PSU disinvestment, reduce the total amount of financial assets of the
government.
● All those receipts of the government which create liability or reduce financial assets are
termed as capital receipts (Provident fund (PF), Postal Deposits, various small saving
schemes and the government bonds sold to the public).

Capital Expenditure
 ● There are expenditures of the government which result in creation of physical or financial
assets or reduction in financial liabilities. This includes expenditure on the acquisition of
land, building, machinery, equipment, investment in shares, and loans and advances by the
central government to state and union territory governments, PSUs and other parties.
● Capital expenditure is also categorised as plan and non-plan in the budget documents.
● Plan capital expenditure, like its revenue counterpart, relates to central plan and central
assistance for state and union territory plans.
● Non-plan capital expenditure covers various general, social and economic services provided
by the government.

Balanced, Surplus and Deficit Budget

Balanced Budget
● The government may spend an amount equal to the revenue it collects. This is known as a
balanced budget.
Government’s estimated Revenue = Government’s proposed Expenditure.

Surplus Budget
● The budget is a surplus budget when the estimated revenues of the year are greater than
anticipated expenditures.
● Government Estimated revenue > Estimated Government Expenditure

Deficit Budget
● Deficit budget is one where the estimated government expenditure is more than expected
revenue.
Government estimated Revenue < Government proposed Expenditure

Budgetary Deficits
● When a government spends more than it collects by way of revenue, it incurs a budget
deficit.
● In reference to the Indian Government budget, the budget deficit is of four major types:
o Revenue Deficit
o Budget Deficit
o Fiscal Deficit
o Primary Deficit
Revenue Deficit
● The revenue deficit refers to the excess of government’s revenue expenditure over revenue
receipts.
Revenue deficit = Revenue expenditure – Revenue receipts

Budget Deficit
 ● Budget deficit is the difference between total receipts and total expenditure (both revenue
and capital)
Budget Deficit = Total Expenditure – Total Revenue

Primary Deficit
● Primary deficit is equal to fiscal deficit minus interest payments.
● It shows the real burden of the government and it does not include the interest burden on
loans taken in the past.
Primary Deficit (PD) = Fiscal deficit (PD) - Interest Payment (IP)
Fiscal Deficit
● Fiscal deficit is the difference between the government’s total expenditure and its total
receipts excluding borrowing.

Fiscal Policy
● Fiscal policy has been defined as the ‘the policy of the government with regard to the level
of government purchases, the level of transfers, and the tax structure’.
● Fiscal policy is also defined as ‘changes in government expenditures and taxes that are
designed to achieve macroeconomic policy goals’.
● As an instrument of macro-economic policy, fiscal policy has been very popular among
modern governments. The growing importance of fiscal policy was due to the Great
Depression and the development of ‘New Economics’ by Keynes.

Fiscal Instruments
● Fiscal Policy is implemented through fiscal instruments also called ‘fiscal tools’ or fiscal
levers: Government expenditure, taxation and borrowing are the fiscal tools.
● Taxation: Taxes transfer income from the people to the Government. Taxes are either direct
or indirect. An increase in tax reduces disposable income. So, taxation should be raised to
control inflation. During depression, taxes are to be reduced.
● Public Expenditure: Public expenditure raises wages and salaries of the employees and
thereby the aggregate demand for goods and services. Hence public expenditure is raised to
fight recession and reduced to control inflation.
● Public debt: When Government borrows by floating a loan, there is transfer of funds from
the public to the Government. At the time of interest payment and repayment of public
debt, funds are transferred from Government to public.

Objectives of Fiscal Policy

● Full Employment
● Price stability
● Economic growth
● Equitable distribution
● External stability
 ● Capital formation
● Regional balance

Finance Commission
● Finance commission is a quasi-judicial body set up under Article 280 of the Indian
Constitution. It was established in the year 1951, to define the fiscal relationship framework
between the Centre and the state.
● Under Article 280 of the Constitution the finance commission recommends the distribution
of the net proceeds of taxes between the Centre and the states every five years.
● Finance Commission aims to reduce the fiscal imbalances between the centre and the states
and also between the states. It promotes inclusiveness.
● A Finance Commission is set up once in every 5 years. It is normally constituted two years
before the period.
● The 15th Finance Commission has been set up in November 2017.
● Chairman of 15th finance commission - N. K. Singh.