GOVERNMENT BUDGET

 

GOVERNMENT BUDGET 

Government budget is an annual financial statement in which government shows its anticipated receipts and estimated expenditure during the financial year from 1 April XXXX to 31^st March XXXX.

TYPES OF RECEIPTS

There are basically two types of receipts which are as follows

*Revenue receipts which neither increase the liabilities of the government nor decrease the assets of the government are known as revenue receipts. For example:- interest received on borrowings, tax receipts etc.

TYPES OF REVENUE RECIEPTS

Tax receipt

Tax is a compulsory payment which every individual is ought to pay and there is no quid-pro-quo.

There are two types of taxes that is direct tax and indirect tax.

Non tax receipt- Those receipts which increase the revenue of the government apart from the tax reception known as non tax receipts

Some of the non-tax receipts are as follows

*Fees- Government receives many types of fees in the form of registration like licence fee.

*Fines and penalties- Important source of non tax receipts is fines and penalties received by the government in the form of challan when an individual violate the guidelines or does not abide with the rule of the government.

*Escheat- It is a type of receipts received by the government when somebody dies without leaving a legally binding will All legal heir than the estate of the particular person goes to the government.

*Gifts and grants- Several grants(financial help) are received by the government from the various international organisations like WHO and UNICEF and such grants are not a fix source of revenue and generally received during a war or national crisis or pandemic.

*Income from PSUs- Apart from the above receipts government also generate revenue by providing services such as transportation, storage and administrative services. For example:- Metro, Cold storage, E-stamping, etc.

*Special assessment- Government also receive revenue in the form of developmental charges when any type of developmental activities done by the government like construction of road, electrification, cricket stadium, etc is done in your area which leads to appreciation in value of the property is known as special assessment.

Capital receipts

It refers to all those receipts or inflows to the consolidated fund of India which either create a liability of repayment or involve reduction in the asset of the government. These are of  three types:-

*Recovery of loans: - Government also receive payment in against of loan given to different countries for developmental activities like construction of bridges and ports etc.

*Borrowings and other Liabilities:- Government also borrow funds from other countries for developmental activities in our country, like loan taken for construction of metro, roads etc.

*Disinvestment :- It refers to selling of shares a public undertakings to the private company for better productivity or if it was a loss making sector for the government. In other words, it refers to selling of shares of public enterprises to private fully or partly. This happens when government needs to improve efficiency and productivity of the organisation or when government are in need of funds. Basically sale of public enterprises is known as disinvestment.

Types of expenditure

There are two types of expenditure which are as follows

# Revenue expenditure- Those expenditure which neither leads to increase in assets of the government nor decrease the liabilities of a government is known as revenue expenditure.

 For example:- Interest paid on borrowings or Maintenance expenditure on PSUs.

# Capital expenditure- Those expenditure which leads to increase in assets of the government or decrease in liabilities of the government are known as capital expenditure, these expenditure are long term expenditure and increases the efficiency of the government. For example:- construction of metro or repayment of loan by the government, etc

Types of expenditure

*Development expenditure:- It is the expenditure made on growth of developmental activities taken by the government sectors expenditure on education, health, agriculture, etc

*Non developmental expenditure:- It refers to expenditure on non developmental activities of the government which includes expenditure on administration, defence expenditure and collection of taxes, etc

*Plan expenditure:- It refers to expenditure which is already planned and already present in the budget to be spent on various projects, programs and schemes included in the central government plans it includes both consumption and investment expenditure of the government like salary to staff or construction of roads etc.

*Non plan expenditure- Those expenditure which are not covered or not included in the plan. It includes both expenditure during disaster management and expenditure on reconstruction of the economy after the effect of epidemic or loss occurred by pandemic.

Objectives of Government Budget

*Reallocation of Resources:-  It help us to distribute resources keeping in view that social and economic advantages of the country. The factors that influence the allocation of resources are:

i) Allowance or tax Concessions:- Government give allowances and tax concessions to the manufacturers to encourage investment.

ii) Direct production of goods and services- Government can do the production process itself if the private sector do not show any interest. This objective is satisfied by keeping in mind  that the resources are being utilised in an efficient manner.

*Economic stability- The budget is also utilised to avoid business fluctuations / cycle that is inflation or deflation to accomplish the aim of financial stability. Fiscal policy is used to maintain money supply in the economy which helps in maintaining the price stability in the economy.

*Success of planning / economic growth- The main objective of the Planning is to achieve planning targets like success of five years plan and the country’s economy growth is based on the amount of investment and savings, more the saving and investment in the economy better the economic growth.

*Managing Public Sector Undertakings:- Many PSUs are built for the social welfare of the people. The budget is maintained to deliver the expenses required for operating such businesses.

* Reduction in income inequalities in the economy:- Through its fiscal policy, the government can bring positive effects on distribution of income in favour of the poor. So the government impose taxes on the elite classes who have more ability to pay and spend that money on the upliftment of the weaker sections of people in the form of education, free health facilities etc.

*Reduction in regional disparities:- It aims to diminish the regional inequalities by implementing taxations and expenditure policy which helps in promoting the installation of production units in underdeveloped Nations or states and improvement in infrastructure of those particular region. 

Budgetary Deficit

It is defined as the excess of the total estimated expenditure over the total estimated receipts and making difference to budget of India. They are of 3 Types which are follows:-

 Revenue deficit:-     

It is concerned with the revenue expenditure and the revenue receipts of the government.  When the revenue expenditure becomes excess of the revenue receipts during the fiscal year cause revenue deficit.

Revenue deficit = Revenue Receipts – Revenue Expenditures

Implications / effects

Now the government is unable to meet regular recurring expenditure in the proposed project, it leads to dis-saving that is the government will use its past saving of its PSUs to finance its consumption expenditure. Higher revenue deficit gives warning signal to the government that there is need to increase its revenue receipts.

Fiscal deficit- It refers to excess of total expenditure over total receipts excluding borrowings during the fiscal year.

Fiscal deficit = Total Expenditure – Total Receipts(Excluding Borrowings) 

Implications:-

# Increase in interest burden- As the government will borrow to meet out the deficit that leads to increase in interest burden on the economy.

# Inflationary spiral- After the borrowing, the government will spends money in the economy which cause in increase in the money supply of the economy that leads to inflationary pressure in the economy.

# Foreign dependence- Government also borrow from rest of the world which raises its foreign dependence on other countries as well as foreign interference of other countries that will be bad for economic growth.

# Hampers the future growth- Due to increase in borrowings the financial burden on future generation will increase that may affect the future growth and the development prospective the country as most of the receipts will be spent on meeting out its past burden.

Primary deficit

It refers to the difference between fiscal deficit of the current year and the interest payable on the previous borrowings.

It reflects the interest commitments that have come to such extent which have forced or compelled the government to borrow even to makes the interest payment.

Primary deficit= Fiscal Deficit – Interest Payments

Implications of Primary Deficit

It indicates that the government has made the economy in the position of dead trap that future generation will also suffer for the interest payment of borrowing made in past. A low or zero primary   deficit shows that the interest commitment on earlier loan have force the government to borrow.

Types of Budget:-

# Balanced budget- When the expenditure of the government is equal to its receipt is known as balanced budget this budget is useful for developed economy as there the government wants to increase the national income of the nation by spending of devlopment expenditure. Ex:- US.

# Surplus budget- When  the  receipt of the government are excess of its expenditure are known as surplus budget. This type of budget is not suitable for any economy as what the government do by saving money when it may be used for economic growth.

# Deficit budget- When the estimated expenditure of the government are more than its anticipated receipts it is known as deficit budget. It is always good for a developing economy as its help in creation of better infrastructure and assets in the economy.

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BALANCE OF PAYMENT

BALANCE OF PAYMENTS

BALANCE OF PAYMENTS DEFINED

The balance of payments of a country is a systematic record of all economic transactions between of one country and resident of foreign countries during a given period of time.

It is important to note three things in the definition of balance of payment:

1.      Balance of payments refers to systematic record of all economic transactions of one country with other countries. Economic transactions refer to flow of economic goods, services and the assets. Normally, an economic transaction involves a payment and receipt of money in exchange of these flows. Thus, balance of payments is a record of all receipt and all payments of our country with other countries refers to “Double Entry Book Keeping System”.

2.      Economic transactions reflected in the balance of payments are between of a country and residents of other countries. The term residents of country mean the normal residents of the reporting country. It is comprehensive account.

3.      Business of payment is a flow concept is a flow concept as it refers to a certain time period usually a calendar year.

COMPONENTS OF BALANCE OF PAYMENTS

The items included in the balance of payments are called components of balance of payments. Each transaction in the balance of payments, such as export of import of goods, is recorded and classified according to the payments and receipts that would arise from it. Payments made by a country residents to foreigners are called debits and receipt from the foreigners are termed as credits.

Any item that enables a country to acquire foreign currency is recorded as a credit items and any item that gives rise to use or spending of foreign currency is recorded as debit item in the balance of payments.

Various items in the balance of payments are generally categorized into two main groups as below:

1.      Current Account: The current account records transaction relating to export and import goods, services, unilateral transfers and international incomes. Thus, the balance on current account is the value of exports minus the value of imports , adjusted for international incomes and net transfers.

2.      Capital Account: The capital account records all international economic transaction relating in change in assets both financial and physical. It is a record of short-term and long-term capital transaction, both private officials. 

COMPONENTS OF BALANCE OF PAYMENTS

CREDIT	DEBIT
Current	Account
Visible trade
1.      Export of goods	2.      Import of goods
Invisible trade
3.      Export of services	6. import of services
4.      Unilateral transfer receipt (gifts, indemnities from foreigners).	7. Unilateral transfer payments( gifts, indemnities to foreigners).
5.      Income receipts.	8. income payments
Capital	Account
1.      Foreign investment from foreigners.	4.      4. Investment in foreign countries and loans to foreigners.
2.      Capital, repayment by foreigners.	5.      Capital repayments to foreigners.
3.      Sale of gold and assets to foreigners.	6.      Purchases of gold and assets from foreigners.

 CURRENT ACOUNT TRANSACTIONS

The current account transactions are classified into broad categories as explained below:

1.      Export and import of goods or Merchandise:  This category includes all types of physical goods exported an imported. A country can acquire foreign currency by exporting goods( row 1. This appears as a credit item in the Indian balance of payments because hereby this exporter earns foreign currency. Row (6) shows that import of goods appears on the debit side because when we pay for imports, foreign currency would be used. Thus, rows(1) and (6) describe the country’s visible trade.

Visible trade comprises of goods, such as cars, aluminum, tea, iron ore etc. which are tangible, have physical from and we can see when they cross the boundaries of a country.

2.      Invisible Items: These are the items which are not tangible and cannot be seen. Hence, they are known as invisible.

These invisible items are classified into three groups. (i) services (ii) unilateral and (iii) income. 

i.)                Services: It includes a large variety of non-factor services sold to and purchased by the residents of a country from rest of the world flow (2) shows the receipt of the country from the sale of services to foreigners during the given period. Export of services comprises of shipping services, banking and insurance, tourism services etc. Payments received for these services are put on the credit side. In the same way / rows (7) covers payments which residents of the country in question make to foreigners for similar services, i.e. shipping, banking, tourism, insurance and payments the resident have to make as tourist abroad. They are items on the debit side.

ii.)              Unilateral transfer: Unilateral transfers are those receipts and payments which take plae without any service in return in the current period. It includes transfers both at private and official (government) level. The items in row (3) are called unilateral transfer. These are the receipts which the residents of a country receive “for free”, without any payment in return. Example of this kind of receipts are gift, donations, grants, indemnities etc. which residents receive from foreigners- from relatives, friends and governments of other countries. Cash remittances by the people settled in other countries to their families is also a transfer receipt. These are the items on the credit side. In the same way, rows (8) comprises payments which the country in question makes as gif, assistance, aid, indemnities, etc, to other countries and they appear on the debit side.

iii.)             Incomes: Incomes are classified into investment income and compensation of employees investment income comprises of interest, dividends, profit, etc., which residents of a country earn from investment made abroad. Compensation of employees includes wages and salaries etc. received by residents of a country, from non-residents. These earning are entered on the credit side (row 4) since a country is able to acquire foreign exchange thereby.

iv.)             In this way, rows (9) covers payments which residents of the country in question make to non- residents for labour services in the form of wages, salaries, etc. Similarly, payments for capital services like interest and dividends on foreign capital made by the resident of the country to the foreign country are items on the debit side.

Thus, capital account of India records the capital inflows from other countries (foreign investment in India) and outflow in other countries (Indian Investment abroad).

Items (1), (2), (3), (4), (6) and (7),(8),(9) comprise all the payments and receipts made for the current period of time. They are flow items and are all expressed over a period of time. These are transaction in the current account. 

CAPITAL ACCOUNT TRANSACTION                         

Capital account transactions are different from current account transactions. They would change in stock change in stock magnitude. They refer to capital receipt and payments. These relate to movements of long-term and short-term capital.

    When the residents of a country want to borrow from abroad, we say they are importing capital. They would acquire foreign currency, and it will be entered as credit item in (5). On the other hand, when the residents of a country want to invest abroad, we say that they are exporting capital. In order to do this they need to obtain foreign currency. They are demanders of foreign currency. This transaction is therefore, debit item in the balance of payments account under row (10). 

Capital movement may be divided in several ways:

1.      First, the government; corporation or individual of the country in question may take loans from government, corporation and individual of foreign countries or from the international financial instructions.

2.       Second, foreigners might acquire assets in the currency such as land, house plants, shares, etc.

3.      Third, Government Corporation or individual residents may receive sums from abroad in repayment for a loan that it might be abroad.

4.      Fourth, changes in a country’s stock of gold or reserve of foreign currency are also included here. All these transaction will be entered as credit item in row (5).

If residents of the country acquire foreign assets in the form of land abroad or foreign shares or of the government, corporation or individual were to give loans to residents other countries or if the loans taken earlier were to be repaid, all the transaction will be entered as debit items in row (10).These capital movements are classified into two categories viz. Direct and Portfolio Investment, Direct foreign investment refers to investment undertaken in the firms belonging to other countries by acquiring control over them.

For example residents of a foreign country may undertake investment in India either by setting up a plant or either by setting up a plant or through acquisition of an Indian firm. Similarly, Indians may invest in the foreign firms.

Portfolio investment, on the other hand, is the form of investment under which companies and residents of a country purchase shares in foreign companies or buy bonds issued by foreign governments.

It also includes foreign purchases of shares (stock) issued by firms and of bonds of the government of this country.

The Reserve Bank of India (RBI) gives a detailed classified of various items in the capital account. The main component of capital account is as follows:

1.      Foreign Investment: It consists of direct and portfolio investment from abroad in Indian companies, in Indian branches of foreign companies, in real estate, etc. by non-residents on the ‘credit ‘side. Likewise. Direct and portfolio investment made by Indian residents abroad appears on the ‘debit’ side.

2.      Loans: Borrowing by private individuals, non-financial institutions, government etc. from abroad and loan repayment by foreigners are included under ‘credit’ item. All lending by private individual, non-financial institutions, government, etc., to abroad and repayment of foreign loans are included under ‘debit’ item.

3.      Banking Capital: Banking capital refers to the capital transaction in the form of foreign exchange and investment in foreign currency and securities by the foreign branches of Indian commercial banks.

4.      Rupee Debt Service: Some borrowing by India (mostly government) is done in rupee terms. Such loans are repaid through exports of goods and services. Servicing of this debt involves flow of foreign exchange.

5.      Monetary Movement: RBI overcomes disequilibrium in the balance of payments by what it terms as monetary movements. Monetary movements consist of (i) purchase and repurchase from IMF (ii) changes in foreign exchange reserves.

i.)                Purchase and repurchases from IMF: Purchase from IMF means purchasing foreign currency from IMF by making payments in rupee. It is sort of loan from IMF because the country is under obligation to buy back its own currency in exchange for foreign exchange. When it buys back its currency by making payment in foreign exchange, it is called repurchase.

ii.)              Changes in foreign exchange reserves: RBI holds foreign exchange reserve consisting of foreign currency gold and SDR (Special Drawing Rights) with IMF. SDR is a sortexchange  international currency issued by IMF. If the country has deficit in the balance of payments, the deficit can be met by withdrawing from the foreign exchange reserve. A withdrawal  from this reserve is recorded as a ‘credit’ item in the balance of payment because it causes in flow of foreign exchange into the country. An increase in the foreign exchange reserves, on the other hand, is recorded as a ‘debit’ item because it would cause outflow of foreign exchange reserves.

DISTINGUISH BETWEEN CURRENT ACCOUNT & CAPITAL ACCOUNT OF BOP

CURRENT ACCOUNT	CAPITAL ACCOUNT
·        The current account deals with payments for currently produced goods and services. It also includes interest earned or paid on claims, and transfer payments as well.	·        The capital account on the other hand, deals with payments of debts and claims.
·        The current account of the balance of payments has a direct influence on the level of income of a country. For instance, when India sells its currency produced goods and services to foreign countries the producers of these goods get income, in other words, current account receipts (credit items) have the effects of increasing the flow of income in the country. On the other hand, when India import goods and services from foreign countries and pays for them, money which would have been used to demand goods and service within the country flows out to foreign countries. Hence, current payments (debit items) to foreigners involve reduction of the flow of income within the country and constitute a leakage. Thus current account of the balance of payments has direct influence on the level of income in a country.	·        The capital account, however, does not have such a direct effect on the level of income. It influences the volume of assets which a country.
·        Current account includes all items of a flow nature; hence current account is a flow concept.	·        Capital account includes all items expressing changes in stocks, hence it is a stock concept.

 

METHOD TO CORRECT DISEQUILIBRIUM IN BOP 

1.)    Depreciation: Depreciation of a country’s currency will wipe out deficit in B.O.P. Depreciation means rise in the price of foreign exchange or fall in the price of domestic currency. This will make exports changes and imports costlier and hence, rectify the deficit disequilibrium in B.O.P.

2.)    Devaluation: Devaluation means a deliberate reduction in the domestic value of a country’s currency in terms of foreign exchange by the govt. Devaluation and depreciation implies the same things. The only difference is that devaluation takes place under fixed exchange rate by the govt., whereas, depreciation takes place under floating exchange rate system. Devaluation cheapens exports and makes imports expensive, thereby rectifying the disequilibrium in B.O.P.

3.)    Import Control: Import can be restricted by adopting quotes and tariffs. Quotes restrict quantity of import; tariffs raise the price of imports thereby making them costlier. This reduces the demand for imported goods and BOP disequilibrium is rectified.

4.)    Export Promotion: The govt. can adopt several measure to boost exports:

a.)    Reduces export duties to encourage exports.

b.)    Cash assistance and subsidies can be given to exporters to stimulate exports.

c.)    Various facilities like quality control, provision of market information and arranging exhibition of exportable in foreign countries can be provided to promote exports.

d.)    Goods meant for exports can be exempted from various duties to make them cheap. Export industries should be provided with finances and raw materials, so that cost of production goes down and goods become cheaper in the international market.

e.)    Journalism should be encouraged by providing hotels transport in order to earn foreign exchange.

All this can reduce BOP disequilibrium.

5.)    Exchange Control: Exchange control is controlling the outflow of foreign exchange from the country. This can be done in the following ways:

a.)    The govt. can direct the exporters to sell their foreign exchange earnings to the central bank and importer to buy the foreign exchange from central bank.

b.)    Foreign exchange is given out only to those importers who have to import absolute in disequilibrium from abroad.

6.)    Production of import substitutes: Steps should be taken to encourage the production of import substitute in the market. This will save foreign exchange and remove BOP deficit

7.)    Capital Import: Deficit in BOP can also be cleared by borrowing capital (loans) from foreign govt., financial institutions like IMF, World Bank etc. A country can raise etc. A country can raise capital from abroad by increasing domestic interest rate and giving tax concessions to remove deficit in BOP.

8.)    Monetary Policy: A tight monetary policy can be used to remove deficit in BOP. The central bank can reduce credit creation by raising bank rate, cash reserve ratio etc. AN increase in interest rates can decrease credit and lead to fall in investment expenditure. This will reduce income and demand for imports thereby leading to a rectification in BOP.

 

CAUSES OF DISEQUILIBRIUM IN BOP

1.)    Fall in foreign demand: when demand for a country’s goods fall in the foreign market due to changes in tastes, fashion of foreign consumers or fall in their income, exports of the country iin question decline leading to a disequilibrium in BOP.

If products of he other countries are relatively cheaper than the foreigners are inclined towards those goods and the country in question faces an advance BOP e.g. with the invention of ‘Sal’ by ‘Indonesia’ the demand for our jute product went do ………. The global market, causing all decline in our jute exports………………….

2.)    Inflationary Pressures in the economy: Generally, developing countries like India have adverse BOP due to domestic inflation. This encourages imports which are relatively cheaper and exports decline in the foreign markets due to their high prices.

3.)    Development Expenditure: Developing countries have to depend on the developed countries of the world for machinery, technical know-how, raw materials etc. in the initial stages of countries development. This increases their import bills and their exports are pretty low to finance the imports, which causes an advance BOP for the country in question.

4.)    Increase in cost structure industries: When the cost of production of the export industries of a country increase that the sale ability of the export goods in the foreign markets go down leading to a decline in the export earnings of the country in question which causes a deficit in its BOP.

5.)    Appreciation in the Rate of Exchange: Rate of exchange is the rate at which a country’s currency is exchanged with a foreign currency in the global market. Appreciation in the rate of exchange is the rate of exchange is the rise in the external value of the currency. This raises imports as they become cheaper and lowers exports are they are expensive thereby causing a deficit in BOP.

Earlier 1 $ < Rs. 40 and now 1 $ = Rs. 30.

6.)    Decrease in Supplier: Agriculture production may decline due to advance weather condition. Industrial production may decline due to labour problem, strikes, lockout, shortage of raw material etc. As a result export fall and import rise in overcome the scarcity at home, causing a deficit in BOP.

7.)    Demonstration Effect: People of understand country generally try to initiate the consumption pattern, style etc. of the developed nations which leads to large increase of import of consumer durables thereby causing a deficit in its BOP.

8.)    Increased Debt Burden: In order to bring about development, the developing countries are trying to speed up the process of development by attracting large no. of portfolio investment which has created the burden of debt as interest has to be paid out. This has created an advance BOP condition.

9.)    Population Pressure: A rapid increase in population in the country has increased the demand for consumer goods which has lowered the export surplus leading to a decline in export earning and causing a deficit in BOP.

 exchange. exchange from the country to the foreign exchange reserve.

FISCAL POLICY

 FISCAL POLICY   AND WHY ITS REQUIRED

·        Fiscal Policy to maintain equity, stability and growth, in an economy.

Fiscal policy is the policy under which the government uses the instruments of public spending, taxation and public borrowing to achieve various objectives of economic policy. These are mainly three instruments of fiscal policy i.e. taxation policy, public expenditure policy and public debt policy. All these instruments must work together in right balance sound and effective.

·        Fiscal policy and economic stability:

Stability in an economy can be maintained by restricting the fluctuation to occur. The economy should be saved from inflation and depression. 

FISCAL POLICY DURING INFLATION

·        Taxes- Inflation is a situation of persistent rise in price level due to excess of demand over supply when there is excessive money in the economy. Taxes should be raised and some more new taxes should be imposed. This should done to reduce the purchasing capacity of the people and demand to restrict the excessive flow of money on the economy.

·        Public Debt- During inflation when there is excessive flow of money in the economy leading to an increase in aggregate demand over supply, the govt. should float out more bonds, debenture to attract surplus money. The bonds and debentures nearing their maturity date should be postponed for an indefinite period. In this ways inflationary pressure can be checked by public debt.

·        Public Expenditure- During inflation when private expenditure goes up the govt. should lower its own expenditure for a temporally period of time only i.e. the govt. should not undertake public utility works because there is already excessive flow of money in the economy. 

FISCAL POLICY DURING DEPRSSION

·        Taxes- Depression or Deflation is a situation of persistent fall to price level due to excess of supply over demand when there is lack of money supply in the economy. Taxes should be reduced to the maximum and unnecessary taxes should be slashed. This is one to increase the purchasing capacity of the people by raising demand to the level of supply and increasing the flow of money and increasing the flow of money in an economy.

·        Public Debt- During recession or depression when there is lack of money supply in the economy there is a fall in aggregate demand. The govt. should not issue new bonds and debenture, those bonds which are likely to mature should be repaid immediately. There is done to allow more money to remain in people’s hands so that their purchasing capacity can increase thereby leading to a rise in demand to the level of supply.

·        Public Expenditure- During depression when there is lack of money supply in the economy, which proves that private expenditure has gone down, then the govt. should increase its owm expenditure and start undertaking more of public utility works to create employment opportunities in a society. In this way employment would be created and income would be generated to many houses thereby raising the flow of money in an economy. 

FISCAL POLICY &EQUITY

Equity is the prime objective of the government in developing countries. In brief equity means equitable distribution of income and wealth in a society with the aim of reducing inequalities of income. It is done in the following manner:

·        The tax system should be made progressive so that greater burden can be imposed on the rich and the poor can be exempted from taxation. Direct taxes should be made progressive, in this way the tax structure would be justified.

·        Indirect taxes should also be made progressive i.e. greater taxes should be imposed on luxuries and the necessities should be exempted from taxation totally.

·        Taxes should be imposed heavily on big business houses and those in big cities and town and the money thus collected can be utilized in giving subsidies to the industries in backward areas. In this way regional disparities can be ended.

·        Public expenditure of the govt. should spend the money particularly on these programmers and projects which can benefit the lower income groups, this includes expenditure on social services like education, sanitation, and medical, public health etc. and these services should be provided free cost in order to provide greater benefits to the lower groups. The govt. should also spend on provision of social security by giving pensions, unemployment benefits, and scholarship stipends to upgrade the standard of the lower income groups and reduce the inequalities in a society.

·        The govt. should also provide incentives by giving subsidies to the entrepreneurs to set up industries in backward and remote areas of the country. This would reduce the inequalities and regional disparities to a great extent. 

FISCAL POLICY &ECONOMIC GROWTH

Fiscal policy can be used efficiently in accelerate the rate of economic growth so as to increase the real N.Y. in the country. Fiscal policy is implemented In the following manner.

·        Taxation and public borrowing policy should be implemented simultaneously in an integrated manner to induce saving and investment to a society.

·        Tax relief and subsidies should be granted by the govt. to the entrepreneurs to stimulate investment and capital formation, this will have a positive effect on the economic growth of the country.

·        Special tax holidays and subsidies of other kinds should b given to the entrepreneurs to set up industries in backward region so that regional disparities can be reduced to minimum. With the growth of industries the country’s prosperity is assured.

·        The govt. should spend more money on agriculture and industries development and to strengthening of the infrastructure like provision of power, transport and communication facilities, irrigation etc.

·        The govt. should spend more money in developing basic and key industries so that the infrastructure base in strengthened and the scope for industrialization on a massive scale can be increased.

1.)    What is deficit financing?

Ans.) Deficit financing in its literal sense means financing the deficit in the budget which is caused due to excess of expenditure over income. The word deficit financing has been interpreted differently in U.S.A, the deficit in the budget can be financed even with the help of public debt whereas public debt. Is totally outside the preview of deficit financing in india.

In India the deficit in the budget can be financed by the govt. in the following ways:

a.)    Running down the cash balance in the R.B.I.

b.)    Running down the cash balance from the state treasuries.]

Resorting to the printing press i.e., asking R.B.I to print new paper money of bigger denominations.