NIOS Economics (318) Notes/Answer| Chapter-21|Government budgeting

NIOS Economics (318) Notes/Answer| Chapter-21|Government budgeting. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-21|Government budgeting.

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-21|Government budgeting

Intext Questions

1. Choose the correct alternative. 

(a) A government budget is a statement of:

  1. Expected expenditures 
  2. Expected receipts
  3. Both expected expenditures and expected receipts
  4. Actual expenditure and receipts

Ans. (3) Both expected expenditures and expected receipts 

(b) Revenue receipt comprise of:

  1. Taxes only
  2. Interest only
  3. Dividends and profit only 
  4. All of the above

Ans. (4) All of the above 

(c) Capital receipt comprise of:

  1. Borrowing only
  2. External assistance only
  3. Recovery of loans only 
  4. All of the above

Ans. (4) All of the above

(d) Expenditure on construction of bridges by the government is:

  1. Revenue expenditure 
  2. Capital expenditure
  3. Both revenue and capital expenditure 
  4. Neither revenue nor capital expenditure

Ans. (2) Capital expenditure 

(e) Expenditure on routine function of government is

  1. Non-plan expenditure
  2. plan expenditure 
  3. Both non-plan and plan expenditure
  4. Neither plan  nor non-plan expenditure

Ans. (1) Non-plan expenditure

2. Fill in the blanks with appropriate word from the brackets:

(a) A deficit in the budget arises when expected expenditures ___________ (exceed, fall short of)

Ans, exceed 

(b) Excess of___________ (total expenditure, total receipts) over___________ (total expenditure, total receipts) equals budgetary deficit. 

Ans. total expenditure, total receipts

(c) Fiscal deficit is calculated on the basis of receipts ___________ (including, excluding) borrowings. 

Ans. excluding

(d) Borrowing from the Reserve Bank is ___________ (preferred, not preferred) to borrowing from the public to cover the budget deficit. 

Ans. non preferred

(e) Fiscal deficit is___________ (better, not better) measure of deficit as compared to budget deficit. 

Ans. better

Terminal Exercise

1. Explain the meaning of a government budget. Give an outline of the structure of a government budget.

Ans. A government budget is a statement of expected expenditures and the sources of financing these expenditures during the year. A government budget has two parts: 

  1.  Receipts and 
  2. Expenditures. Receipts are broadly classified into revenue and non-revenue receipts. Expenditures are classified as revenue & non-revenue and plan & non-plan expenditures.

Central Budget Receipts and Expenditures of the Central Government (R. Crores)

2. Distinguish between revenue receipts and capital receipts.

Ans. Distinguish between revenue receipts and capital receipts are

1. Meaning

Receipts generated from investing and financing activities are capital receipts, on the other hand, receipts from operating activities are revenue receipts.

2. Nature

Capital Receipts do not frequently occur, as it is non recurring and irregular. But, revenue receipts do not occur again and again; they are recurring and regular.

3. Term

The benefit of capital receipt can be enjoyed in more than one year, but the benefit of revenue receipt can be enjoyed only in the current year.

4. Shown in

Capital Receipts appear on the liabilities side of the Balance Sheet whereas Revenue Receipts appear on the credit side of the Profit and Loss Account as income for the financial year.

5. Received in exchange of

The capital receipt is received in exchange for the source of income. Unlike revenue received which is a substitution of income.

6. Value of asset or liability

Capital receipt either decreases the value of an asset or increases the value of liability, but revenue receipt neither increases nor decreases the value of asset or liability.

3. Explain the composition of revenue receipts and capital receipts.

Ans. The receipts of the government show the different sources from which the government raises revenue. These receipts are of two kinds: 

  1.  Revenue receipts and 
  2. Capital receipts.

(1) Revenue Receipts

Revenue receipts are current incomes of the government, which neither create liabilities nor cause any reduction in the assets of the government. These receipts are classified into 

  1. Tax Revenue and 
  2. Non-tax Revenue.
(a) Tax Revenue: 

A tax is a legal compulsory payment by the people and firms to the government of a country without reference to any direct benefit in return.. It is imposed on the people by the government. A government collects revenue from various taxes like income tax, sales tax, service tax, excise duty, custom duty etc. Traditionally the revenue from taxes has been the primary source of government income. 

(b) Non-Tax Revenue

The incomes accruing to government from sources other than taxes are non-tax revenues. The major sources of non tax revenues of the central government of India are:

(i) Commercial Revenue: 

It is received by the government in the form of prices paid by people for goods and services that the government provides e.g. people pay for electricity and for services of Railways, postal stamps, toll etc.

(ii) Administrative Revenue: 

It arises on account of administrative services of the government. They are as follows: 

  1.  Fees in the form of passport fees, government hospital fees, education fees, court fees, etc.
  2. fine and penalties: charged by the government on law breakers for disobeying rules and regulations.
  3.  licence fee and permit 

(2) Capital Receipts

As stated earlier, capital receipts are those receipts of the government which either create liability or cause any reduction in the assets of the government. The major sources of capital receipts of the central government are: 

  1.  Borrowings 
  2. Recovery of Loans and 
  3. Disinvestment – Resale of shares of public sector undertakings.

(i) Borrowings: 

There are two sources from which the central government borrows. They are:

  • Domestic Borrowings: 

The government borrows from domestic financial market by issuing securities and treasury bills. It also borrows from people through various deposit schemes such as Public Provident Fund, Small Savings Schemes, and National Savings Scheme etc.

  • External Borrowings: 

In addition to domestic borrowings the government also borrows from foreign governments and international bodies like the International Monetary Fund (IMF), World Bank etc.

(ii) Recovery of Loans: 

Quite often state and local governments borrow from the central government. The loans recovered by the central government from state and local governments are capital receipts in the budget because recovery of loans reduces debtors (assets).

(iii) Disinvestment – 

Resale of shares of public sector undertakings: This is a very recent source of capital receipts by which the central government has been mobilizing financial resources since 1991. Prior to 1991, the central government owned 100 percent of the shares of public sector undertakings.

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

4. Distinguish between capital and revenue expenditures.

Ans. Distinguish between revenue and capital expenditures are

1. Meaning

Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefits for the current year only.

2. Term

Capital Expenditure is long term expenditure. Conversely, Revenue Expenditure is a short term expenditure.

3. Shown in

Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income Statement (depreciation), but Revenue Expenditure is shown only in the Income Statement.

4. Investment

The major difference between the two is that the Capital expenditure is a one-time investment of money. On the contrary, revenue expenditure occurs frequently.

5. Capitalization

Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is not capitalized.

6. Earning capacity

Capital Expenditure attempts to improve the earning capacity of the entity. On the contrary, revenue expenditure aims at maintaining the earning capacity of the company. 

5. Distinguish between plan and non-plan expenditures.

Ans. Distinguish between plan and non-plan expenditure are 

  1. Plan expenditure refer to those expenditure that are incurred every year according to the priorities laid down in the current five-year plans. Beside plan expenditure, the government also incurs routine expenditure such as expenditure on police, judiciary, water supply, sanitation and health, legislatures, defence, various government departments, etc. Such routine expenditure is termed as non-plan expenditure.
  1. Examples of plan expenditure are expenditure on agriculture and allied activities, irrigation, communication etc.    

Examples of non-plan expenditure are payment on expenditure on defence service, subsidies, etc. interest,

  1. Expenditure is plan expenditure, if it arises due to planned proposals. An expenditure is non-plan expenditure, if it is out of scope of government plans

6. Explain the concept of budgetary deficit and fiscal deficit. 

Ans. Budgetary deficits are the difference between all receipts and expenses in both the revenue and capital account of the government.

Budgetary deficits are the sum of revenue account deficits and capital account deficit. If revenue expenses of the government exceed revenue receipts, it results in revenue account deficits. Budgetary deficits are usually expressed as a percentage of GDP.

A fiscal deficit occurs when a government’s total expenditure exceeds the revenue that it generates, including money from borrowing. 

The difference between total revenue and total expenditure of the government is termed as fiscal deficits.

The gross fiscal deficits are an excess of total expenditure including loans net of recovery over revenue receipts and non debt capital receipts.

7. State the different sources of financing deficit in the budget. 

Ans. Following are the different ways to finance deficit in government budget

  1. Borrowing from Public and Foreign Governments 
  2. Withdrawing Cash Balances held with the Reserve Bank of India (R.B.I.)
  3. Borrowing from the Reserve Bank of India (R.B.I) 

The Government ordinarily prefers to borrow either from its citizens or from foreign governments instead of withdrawing cash balances held with the R.B.I. or borrowing from it. The latter two ways to finance the deficit increase the supply of money. The increase in supply of money increases the prices in an economy. On the other hand, borrowing domestically from the public has no effect on the supply of money and consequently on prices because when the government borrows, the money held by people is transferred to the government with no change in the supply of money. However, the money supply would increase when the government borrows from foreign countries. The last two ways to finance the deficit increase the supply of money. Any money that flows out of the R.B.I. increases the supply of money in the economy and increases the prices in the domestic economy.

8. Explain the meaning and objective of budgetary policy.

Ans. The selection of items of expenditure and source of finance in tune with government policies and programs is broadly referred to as budgetary policy.

Following are the objectives of budgetary policy 

1. To promote economic growth:

Government promotes economic growth by setting up basic and heavy industries like steel, chemicals, fertilizers, machine tools, etc. It also builds infrastructure like roads, canals, railways, airports, education and health services, water and electricity supply, telecommunications, etc. that foster economic growth.

Both basic and heavy industries and infrastructure require huge amount of investment which normally the private sector does not take up. Since these industries and infrastructure facilities are essential for economic growth in the country, the burden to set up and develop them falls on the government. 

2. To reduce income and wealth inequalities:

Government reduces inequalities in income and wealth by taxing the rich more and spending more on the poor. Further, it provides employment opportunities to the poor that help them to earn.

3. To provide employment opportunities:

Employment opportunities are increased by the government in various ways, One, jobs are created when it sets up public sector enterprises. Two, it provides subsidies and other incentives like tax holidays, low rates of taxes etc. to the private sector that encourage production and employment. It also encourages setting up of small-scale, cottage and village industries by people which are employment oriented. This it does by providing them tax concessions, subsidies, grants, loans at low rates of interest, etc. Finally, it creates jobs for the poor when it undertakes public works programmes like construction of roads, bridges, canals, buildings, etc. 

4. To ensure stability in prices:

Government ensures stability of prices of essential goods and services by regulating their supplies. Hence, it incurs expenditure on ration and fair price shops that keep sufficient stock of food grains. It also subsidizes cooking gas, electricity, water and essential services like transport and maintains their prices at a low level affordable to the common man. 

5. To correct balance of payments deficit:

The balance of payments account of a country records its receipts and payment with foreign countries. When payments to foreigners are more than receipts from foreigners, the balance of payments account is said to be in deficit. Quite often this deficit is caused when a country imports more than it exports. Consequently, the payments on imports to foreigners are more than the receipts from exports. In such a situation, to reduce the deficit in the balance of payment account, the government discourages imports by increasing taxes on them and encourages exports by increasing subsidies and other export incentives. However, it should be noted that tax on imports is not a popular measure now as it is treated as an obstacle to free flow of goods and services between countries. 

6. To provide for effective administration:

Government incurs expenditures on police, defense, legislatures, judiciary, etc. to provide effective administration.

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