Cbse- ECONOMICS BUDGET CHAPTER NOTES AND Q&A

Government Budget and the Economy
Introduction
This is a descriptive chapter on government budget of Indian economy, wherein its objectives,
importance, types, components, budget deficits and its types (Revenue, Fiscal, Primary Deficit) and their
implications are studied.
Chapter at a Glance
Government Budget and Its Related Concepts
1. A government budget is an annual financial statement showing item wise estimates of
expected revenue and anticipated expenditure during a fiscal year.
2. Budget has two parts:
(a) Receipts; and (b) Expenditure.
3. Objectives of budget:
(a) Activities to secure a reallocation of resources:
(i) Private enterprises always desire to allocate resources to those areas of production where profits are
high.
(ii) However, it is possible that such areas of production (like production of alcohol) may not promote
social welfare.
(iii) Through its budgetary policy the government of a country directs the allocation of resources in a
manner such that there is a balance between the goals of profit maximisation and social welfare.
(iv) Production of goods which are injurious to health (like cigarettes and whisky) is discouraged through
heavy taxation.
(v) On the other hand, production of “socially useful goods” (like electricity, ‘Khadi’) is encouraged
through subsidies.
(vi) So, finally government has to reallocate resources in accordance to social and economic
considerations in case the free market fails to do or does so inefficiently.
(b) Redistributive activities:
(i) Budget of a government shows its comprehensive exercise on the taxation and subsidies.
(ii) A government uses fiscal instruments of taxation and subsidies with a view of improving the
distribution of income and wealth in the economy.
(iii) 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.
(iv) It reduces income of the rich and raises the living standard of the poor, thus, leads to equitable
distribution of income.
(v) Expenditure on special anti poverty and employment schemes will be increased to bring more people
above poverty line.
(vi) Public distribution system should be inferred so that only the poor could get foodgrains and other
essential items at subsidised prices.
(vii) So finally, Equitable distribution of income and wealth is a sign of social justice which is the principal
objective of any welfare state in India.
(c) Stabilising activities:
(i) Free play of market forces (or the forces of supply and demand) are bound to generate trade cycles,
also called business cycles.
(ii) These refer to the phases of recession, depression, recovery and boom in the economy. (Hi) The
government of a country is always committed to save the economy from
business cycles. Budget is used as an important policy instrument to combat(solve) the situations of

deflation and inflation.
(iv) By doing it the government tries to achieve the state of economic stability.
(v) Economic stability leads to more investment and increases the rate of growth and development.
(d) Management of public enterprises:
(i) A government undertakes commercial activities that are of the nature of natural monopolies; and
which are established and managed for social welfare of the public.
(ii) A natural monopoly is a situation where there are economies of scale over a large range of output.
(iii) Industries which are potential natural monopolies are railways etc.
4. Importance of a budget:
(a) Today every country aims at its economic growth to improve living standard of its people. Besides,
there are many other problems such as poverty, unemployment, inequalities in incomes and wealth etc.
Government strives hard to solve these problems through budgetary measures.
(b) The budget shows the fiscal policy. Itemwise estimates of expenditure discloses how much and on
what items, the government is going to spend. Similarly, itemwise details of government receipts indicate
the sources from where the government intends to get money to finance the expenditure.
In this way budget is the most important instrument in hands of governments to achieve their objectives
and there lies the importance of the government budget. Note: Fiscal year is the year in which country’s
budgets are prepared. Its duration is from 1st April to 31st March.
5. Types of budget: It may be of two types:
(a) Balanced Budget (b) Unbalanced Budget
Let us discuss them in detail:
(a) Balanced Budget: If the government revenue is just equal to the government expenditure made by the
general government, then it is known as balanced budget.
(b) Unbalanced Budget: If the government expenditure is either more or less than a government receipts,
the budget is known as Unbalanced budget.
It may be of two types:
(i) Surplus budget (ii) Deficit budget
Let us discuss them in detail:
(i) Surplus Budget: If the revenue received by the general government is more in comparison to
expenditure, it is known as surplus budget.
In other words, surplus budget implies a situation where government income is in excess of government
expenditure.
(ii) Deficit Budget: If the expenditure made by the general government is more than the revenue received,
then it is known as deficit budget.
In other words, in deficit budget, government expenditure is in excess of government income.
Components Of Government Budget, Budget Receipts Its Types
1. Components of a government budget: Government budget, comprises of two parts—
(a) Revenue Budget and (b) Capital Budget.
(a) Revenue Budget: Revenue Budget contains both types of the revenue receipts of the government, i.e.,
Tax revenue and Non tax revenue ; and the Revenue expenditure.
(i) Revenue Receipts: These are the receipts that neither create any liability nor reduction in assets of the

government. It includes tax revenues like income tax, corporation tax and non-tax revenue like fines and
penalties, special assessment, escheat etc.
(ii) Revenue Expenditure: An expenditure that neither creates any assets nor cause reduction of liability
is called revenue expenditure.
(b) Capital Budget: Capital budget contains capital receipts and capital expenditure of the government.
(i) Capital Receipts: Government receipts that either creates liabilities (of payment of loan) or reduce
assets (on disinvestment) are called capital receipts. Capital receipts include items, which are non-
repetitive and non-routine in nature.
(ii) Capital Expenditure: This expenditure of the government either creates physical or financial assets or
reduction of its liability. Acquisition of assets like land, machinery, equipment, its loans and advances to
state governments etc. are its examples.
2. Budget receipts (government receipt): Budget receipt refers to the estimated receipts of the
government from various sources during a fiscal year. It shows the sources from where the government
intends to get money to finance the expenditure. Budget receipts are of two types:
(a) Revenue receipts
(i) Meaning:
• Government receipts, which
-> Neither create any liabilities for the government; and
-> Nor cause any reduction in assets of the government, are called revenue receipts.
In revenue receipts both the conditions should be satisfied.
• Revenue receipts include items which are Repetitive and routine in nature.
(ii) Revenue receipts are further classified into:
• Tax Revenue:
-> Tax revenue refers to receipts from all kinds of taxes such as income tax, corporate tax, excise duty etc.
-> A tax is a legally compulsory payment imposed by the government on income and profit of persons and
companies without reference to any benefit. Taxes are of two types: Direct taxes and Indirect taxes.
• Non-Tax Revenue:

-> Non-tax revenue refers to government revenue from all sources other than taxes.
-> These are incomes, which the government gets by way of sale of goods and services rendered by
different government departments.
-> Components of Non-Tax Revenue:
♦ Commercial Revenue (Profit and interest):
♦ It is the revenue received by the government by selling the goods and services produced by the
government agencies.
♦ For example, profit of public sector undertakings like Railways, BHEL, LIC etc.
♦ Government gives loan to State Government, union territories, private enterprises and to general
public and earns interest receipts from these loans.
♦ It also includes interest and dividends on investments made by the government.
♦ Administrative Revenue: The revenue that arises on account of the administrative function of the
government. This includes:
♦ Fee: Fee refers to a payment made to the government for the services that it renders to the citizens.
Such services are generally in public interest and fees are paid by those, who receive such services. For
example, passport fees, court fees, school fees in government schools.
♦ License Fee: License fee is a payment to grant a permission by a government authority. For example,
registration fee for an automobile.
♦ Fines and penalties for an infringement of a law, i.e., they are imposed on law breakers.
♦ Special Assessment: Sometimes government undertakes developmental activities by which value of
nearby property appreciates, which leads to increase in wealth. So, it is the payment made by owners of
those properties whose value has appreciated. For example, if value of a property near a metro station
has increased, then a part of developmental expenditure made by government is recovered from owners
of such property. This is the value of special assessment.
♦ Forfeitures are in the form of penalties imposed by courts that a person needs to pay in the court of law
for failing to comply with court orders.
♦ Escheat refers to the claim of the government on the property of a person who dies without having any
legal heir or without leaving a will.
♦ External grants: Government receives financial help in the form of grants, gifts from foreign
governments and international organisations (IMF, World Bank). Such grants and gifts are received
during national crisis such as earthquakes, flood, war etc.
(b) Capital receipts:
(i) Meaning:
• Government receipts, that either creates liabilities (of payment of loan) or reduce assets (on
disinvestment) are called capital receipts.
In capital receipts any one of the conditions must be satisfied.
• Capital receipts include items which are non-repetitive and non-routine in nature,
(ii) Components:
• Borrowing (Domestic and External): Borrowings are made to meet the financial requirement of the
country. A government may borrow money:
-> Domestically: General Public (By issuing government bonds in the open market). Reserve Bank of
India.
-> Externally: Rest of the world (foreign government and international institutions)
• Recovery of Loans and Advances: Loans offered to others are assets of the government. It includes
recovery of loans granted by the central government to state and union territory governments. It is a
capital receipt because it reduces financial assets of the government. For example, The Government of

India may give Rs. 1000 crore as a loan to The Government of Delhi. Here the value of asset is Rs. 1000
crore. When The Government of Delhi repaid Rs. 100 crore, the value of The Government of India assets
reduces to Rs. 900 crore. Since, recovery of loan reduces the value of assets, it is termed as a capital
receipts.
• Disinvestment: A government raises funds from disinvestment also. Disinvestment means selling
whole or a part of the shares (i.e., equity) of selected public sector enterprises held by government. As a
result, government assets are reduced.
Types Of Taxes:
1. Direct Taxes: When (a) liability to pay a tax (Impact of Tax), and (b) the burden of that tax (Incidence
of tax), falls on the same person, it is termed as direct tax. A direct tax is paid directly by the same person
on whom it has been levied. It means a tax in which impact and incidence of tax falls on the same persons,
then it is termed as direct tax. In other words, burden of a direct tax is borne by the person on whom it is
imposed which means the burden cannot be shifted to others. Alternatively, the person from whom the
tax is collected is also the person who bears the ultimate burden of the tax. Income tax and corporate
(profit) tax are most appropriate examples of direct tax.
2. Indirect Tax: When (a) liability to pay a tax (Impact of tax) is on one person; and
(b) the burden of that tax (Incidence of tax), falls on the other person, it is termed as indirect tax. It means
a tax in which impact and incidence of tax lie on two different persons, then it is termed as indirect tax. In
other words, indirect taxes are the taxes of whose burden can be shifted to others. In case of an indirect
tax, person first pays the tax but he is able to transfer the burden of the tax to others. For instance, sales
tax is an indirect tax because indirect tax is collected by government from the seller of the commodity
who in turn realizes the tax amount from the buyer by including it in the price of the commodity. Other
examples of indirect taxes are excise duty, custom duty, entertainment tax, service tax etc.
3. Progressive Tax: A tax the rate of which increases with the increase in income and decreases with the
fall in income is called a progressive tax. The higher is the income of a taxpayer, the higher is
proportionate tax he pays. For example, in India income tax is considered a progressive tax because its
rate goes on increasing with the increase in annual income. For example, presently (2012-2013) there is
no tax up to annual income of Rs. 2,00,000 but the.rate of income tax increases with the increase in
incomes. It is 10% on incomes between Rs. 2,00,000 and Rs. 5,00,000; 20% on incomes between Rs.
5,00,000 and Rs.10,00,000 and 30% on incomes above Rs. 10,00,000.
4. Proportional Taxation: A tax is called proportional when the rate of taxation remains constant as the
income of the taxpayer increases.
Example: If tax rate is 10% and the annual income of a person is Rs. 2,00,000, then he will have to pay Rs.
20,000 per year as tax. If income rises to Rs. 3,00,000 per annum, then the tax liability will rise to Rs.
30,000 per year. In this case, burden of tax is more on the poor section as compared to rich section.
5. Regressive Tax: In a regressive tax system, the rate of tax falls as the tax base increases.
In this case, we find that (a) the amount of tax to be paid increases, and (b) the rate at which tax is to be
paid falls.
Budget Expenditure & Its Related Concepts
1. Meaning: Budget expenditure refers to the estimated expenditure of the government on its
“development and non-development programmes or “plan and non-plan programmes during the fiscal

year.
2. Types:
(a) Plan and non-plan expenditure
(b) Revenue and capital expenditure
(c) Developmental and non-developmental Expenditure
(a) Plan and non-plan expenditure:
(i) Plan Expenditure: Plan expenditure refers to that expenditure which is incurred by the government to
fulfill its planned development programmes. This includes both consumption and investment
expenditure by the government or Planning Commission of a country. Expenditure on agriculture,
industry, public utilities, health and education etc. are examples of plan expenditure.
(ii) Non-Plan Expenditure: This refers to all such government expenditures which are beyond the scope
of its planned development programmes. For instance, no government can escape from its basic function
of protecting the lives and properties of the people. For this government has to spend on police, judiciary,
military etc. In short, expenditure other than expenditure related to current Five-year plan is treated as
non-plan expenditure.
(b) Revenue and capital expenditure:
(i) Revenue Expenditure: An expenditure that (a) Neither creates any assets (b) nor causes any reduction
of liability.
In revenue expenditure both the conditions should be satisfied.
Examples of revenue expenditure are: salaries of government employees, interest : payment on loans
taken by the government, pensions etc.
(ii) Capital Expenditure: An expenditure that either create assets for the government [equity or shares) of
the domestic, or multinational corporations purchased by the government), or cause reduction in
liabilities of the government, [repayment of loans reduces liability of the government).
In capital expenditure any one of the above conditions must be satisfied.
Thus, it refers to expenditure that leads to creation of assets and reduction in liabilities. Such expenditure
is incurred on long period development.
Conclusion: A basic difference between capital expenditure and revenue expenditure is that the capital
expenditure is incurred on creation or acquisition of assets, whereas, the revenue expenditure is incurred
on rendering services.
For example: Expenditure on construction of a hospital building is capital expenditure, but expenditure
on medicines, salaries of doctors etc. for rendering services by the hospital is revenue expenditure.
(c) Developmental and non-developmental Expenditure:
(i) Developmental Expenditure: Developmental expenditure is the expenditure on activities which are

directly related to economic and social development of the country. This includes expenditure on
education, health, agriculture, transport, roads, rural development etc. This also includes loans given by
the government to enterprises like Sahara for the purpose of development.
(ii) Non-developmental Expenditure: Non-developmental expenditure of the
government is the expenditure on the essential general services of the government. This includes
expenditure on defence, payment of old age pension, collection of taxes, interest on loans, subsidies etc.
Deficits And Implications Of These Deficits
1. Budget deficit:
(a) Meaning:
(i) Budgetary deficit refers to the excess of total budgeted expenditure (both revenue expenditure and
capital expenditure) over total budgetary receipts (both revenue receipt and capital receipt).
(ii) In other words, when sum of revenue receipts and capital receipts fall short of the sum of revenue
expenditure and capital expenditure, budgetary deficit is said to occur. Symbolically,
Budgetary Deficit = Total Expenditure – Total Receipts
(b) Types:
(i) Revenue deficit, (ii) Fiscal deficit and (iii) Primary deficit
2. Revenue deficit:
(a) Meaning:
(i) Revenue deficit refers to the excess of revenue expenditure of the government over its revenue
receipts. Symbolically,
Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts
(ii) The government of India budget for the year 2012-2013, total expenditure is Rs. 12,42,263 crore
against total revenue receipts of Rs. 8,78,804 crore. As a result there is revenue deficit of Rs. 3,63,459
(12,42,263-8,78,804) crore, which is 3.6% of GDP.
(b) Implications of revenue deficit:
(i) Revenue deficit indicates dis-savings on government account because the government has to make up
uncovered gap.
(ii) Revenue deficit implies that the government has to cover this uncovered gap by drawing upon capital
receipts either through borrowing or through sale of its assets.
(iii) Since government is using capital receipts to generally meet consumption expenditure of the
government, it leads to an inflationary situation in the economy.
(c) Measures to reduce revenue deficit are:
(i) Government should reduce its unproductive or unnecessary expenditure.
(ii) Government should increase its receipts from various sources of tax and non-tax revenue.
3. Fiscal deficit:
(a) Meaning:
(i) Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts)
excluding borrowing. In the form of an equation:

(ii) Fiscal deficit is a measure of total borrowings required by the government.
(iii) Fiscal deficit indicates capacity of a country to borrow in relation to what it produces. In other words,
it shows the extent of government dependence on borrowing to meet its budget expenditure.
(iv) Another point to be noted here is that as the government borrowing increases, its liability in future to
repay loan with interest also increases leading to a higher revenue deficit. Therefore, fiscal deficit should
be as low as possible.
(v) Fiscal deficit for the year 2012-2013 is 4,89,890 crore which is 4.9% of GDP.
(b) Implications of fiscal deficit:
(i) Causes Inflation: An important component of government borrowing includes borrowing from the
Reserve Bank of India. This invariably implies deficit financing or meeting deficit requirements of the
government by way of printing more currency. This is a dangerous practice, though very convenient for
the government. It increases circulation of money and causes inflation.
(ii) Increase in Foreign Dependence: Government also borrows from rest of the world. It increases our
dependence on other countries. Foreign borrowing is often associated with economic and political
interference by the lender countries. It increases our economic slavery.
(iii) Financial Burden for Future Generation: Borrowing implies accumulation of financial burdens for the
future generations. It is for future generations to repay loans as well as the mounting interest thereon.
(iv) Deficits Multiply Borrowings: Payment of interest increases revenue expenditure of the government,
causing an increase in its revenue deficit. Thus, a vicious circle is set wherein the government takes more
loans to repay earlier loans, which is called Debt Trap.
4. Primary deficit:
(a) Meaning:
(i) Primary deficit is defined as fiscal deficit minus interest payments.
Primary Deficit = Fiscal Deficit – Interest Payments
(ii) The government of India budget for the year 2012-2013, fiscal deficit is 4,89,890 crore and Interest
Payment is 3,11,996 crore. As a result, primary deficit is 1,77,894 crore, which is 1.8% of GDP.
(b) Implications of primary deficit: While fiscal deficit shows borrowing requirement of the government
for financing the expenditure inclusive of interest payments, primary deficit reflects the borrowing
requirements of the government for meeting expenditures other than interest payments on earlier loans.
Words that Matter
1. Government Budget: A government budget is an annual financial statement showing itemwise
estimates of expected revenue and anticipated expenditure during a fiscal year.
2. Balanced Budget: If the government revenue is just equal to the government expenditure made by the
general government, then it is known as balanced budget.
3. Unbalanced budget: If the government expenditure is either more or less than a government receipts,
the budget is known as Unbalanced budget.
4. Surplus Budget: If the revenue received by the general government is more in comparison to
expenditure, it is known as surplus budget.
5. Deficit Budget: If the expenditure made by the general government is more than the revenue received,
then it is known as deficit budget.
6. Budget receipt: It refers to the estimated receipts of the government from various sources during a
fiscal year.
7. Budget expenditure: It refers to the estimated expenditure of the government on its “development
and non-development programmes or “plan and non-plan programmes during the fiscal year.
8. Revenue Budget: Revenue Budget contains both types of the revenue receipts of the government, i.e.,
Tax revenue and Non tax revenue ; and the Revenue expenditure.
9. Revenue Receipts: Government receipts, which
(a) Neither create any liabilities for the government; and

(b) Nor cause any reduction in assets of the government, are called revenue receipts.
10. Tax Revenue: Tax revenue refers to receipts from all kinds of taxes such as income tax, corporate
tax, excise duty etc.
11. Tax: A tax is a legally compulsory payment imposed by the government on income and
profit of persons and companies without reference to any benefit.
12. Non-tax revenue: It refers to government revenue from all sources other than taxes called non-tax
revenue.
13. Revenue Expenditure: An expenditure that (a) Neither creates any assets (b) nor causes any
reduction of liability.
14. Capital Budget: Capital budget contains capital receipts and capital expenditure of the government.
15. Capital Receipts: Government receipts that either creates liabilities (of payment of loan) or reduce
assets (on disinvestment) are called capital receipts.
16. Capital Expenditure: Government expenditure of the government which either creates physical or
financial assets or reduction of its liability.
17. Direct Tax: When (a) liability to pay a tax (Impact of Tax), and (b) the burden of that tax (Incidence
of tax), falls on the same person, it is termed as direct tax.
18. Indirect Tax: When (a) liability to pay a tax (Impact of tax) is on one person; and (b) the burden of
that tax (Incidence of tax), falls on the other person, it is termed as indirect tax.
19. Progressive Tax: A tax the rate of which increases with the increase in income and decreases with
the fall in income is called a progressive tax.
20. Proportional Taxation: A tax is called proportional when the rate of taxation remains constant as
the income of the taxpayer increases.
21. Regressive Tax: In a regressive tax system, the rate of tax falls as the tax base increases.
22. Plan expenditure: It refers to that expenditure which is incurred by the government to fulfill its
planned development programmes.
23. Non-Plan Expenditure: This refers to all such government expenditures which are beyond the scope
of its planned development programmes.
24. Developmental Expenditure: Developmental expenditure is the expenditure on activities which are
directly related to economic and social development of the country.
25. Non-developmental expenditure: Non-developmental expenditure of the government is the
expenditure on the essential general services of the government.
26. Budgetary deficit: It refers to the excess of total budgeted expenditure (both revenue
expenditure and capital expenditure) over total budgetary receipts (both revenue receipt and capital
receipt).
27. Revenue Deficit: Revenue deficit refers to the excess of revenue expenditure of the government over
its revenue receipts.
28. Fiscal deficit: It is defined as excess of total expenditure over total receipts (revenue and capital
receipts) excluding borrowing. Fiscal deficit indicates capacity of a country to borrow in relation to what
it produces. In other words, it shows the extent of government dependence on borrowing to meet its
budget expenditure.
29. Debt Trap: A vicious circle set wherein the government takes more loans to repay earlier loans,
which is called Debt Trap.
30. Primary deficit: It is defined as fiscal deficit minus interest payments.

NCERT TEXTBOOK QUESTIONS SOLVED
Question 1. Explain why public goods must be provided by the government?
Answer:
1. Public goods are those goods and services for which consumption by some individuals does not reduce
the amount available to others.
2. For example parks, roads, water, bridges, national defense etc..
3. these goods are non-rival and non-excludable ones.
4. people receives benefits from public goods but do not pay for them. Such a goods can only prepared by
government.
Question 2. Distinguish between revenue expenditure and capital expenditure . State the basis of
classifying government expenditure into revenue and capital expenditure. Give an example of each.
Answer:
Question 3. The fiscal deficit gives the borrowing requirement of the government Elucidate.
Answer:
1. Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts)
excluding borrowing. In the form of an equation:
Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (Net of borrowing)
= Total Expenditure (Revenue
Expenditure + Capital Expenditure) – Revenue Receipts (Tax Revenue + Non-Tax Revenue) – Non-Debt
Capital Receipts (Recovery of Loans + Dis-investment Proceeds)
= Revenue Deficit + Capital Deficit (excluding Borrowing)- Borrowing
= Net borrowing at home + Borrowing from RBI + Borrowing from abroad
2. Fiscal deficit shows total borrowing requirements of the government from all sources.
3. As the government borrowing increases, its liability in future to repay loan with interest also increases
leading to a higher revenue deficit. Therefore, fiscal deficit should be as low as possible.
Question 4. Give the relationship between revenue deficit and fiscal deficit.
Answer:
1. Fiscal deficit is always a wider concept than revenue deficit.

2. Revenue deficit is defined as the excess of government’s revenue expenditure over revenue receipts. In
terms of formula:
Revenue Deficit = Revenue Expenditures (RE) – Revenue Receipts (RR)
3. In short, there will be revenue deficit in a government budget when revenue expenditure exceeds revenue
receipts.
4. Fiscal deficit is defined as the excess for all expenditure over total receipts net of borrowings.
5. Initially, Fiscal deficit does not take into account all types of receipts. It does not take into account
borrowings. But finally they have to depend on borrowing to met fiscal deficit.
Fiscal Deficit = Revenue Deficit + Capital Deficit (Excluding Borrowing)- Borrowing
= Net borrowing at home + Borrowing from RBI + Borrowing from abroad
Question 5. Does public (government) debt impose a burden? Explain.
Answer: Public debt is not always a blessing. Excessive use of it creates a lot of crisis in an economy; such as,
1. Hampers Economic Development of a Country: Loans are easily borrowed but it is very difficult to repay
them. Generally, government imposes more taxes. It brings instability and is an obstacle in the economic
development of a country.
2. Poses Threat to Political Freedom: Foreign loans and assistance lead to deep conflict among countries.
The friction among countries challenges the political freedom.
3. Proves a Burden on Common Man: Loans taken for unproductive purposes, like war and armaments, are
a burden on common man in the form of higher taxes.
4. Leads to Extravagant Spending: Public debt leads to unplanned spending. This provides incentive to the
government to implement the schemes that require excessive expenditure.
5. Results in Drain of National Wealth: Repayment of foreign loans results in drain of wealth out of the
country.
Question 6. Are fiscal deficits necessarily inflationary?
Or
“Governments across nations are too much worried about the term fiscal deficit”. Do you think that
fiscal deficit is necessarily inflationary in nature? Support your answer with valid reasons.
Answer:
1. Fiscal deficits are not necessarily inflationary.
2. As we know fiscal deficit shows borrowing requirement of the government.
3. If we borrow when there is a situation of underemployment in an economy i.e., in a situation of deficient
demand, then it is not inflationary because in a situation of deficient demand output is held back because
of lack of demand.
4. A high fiscal deficit (borrowing) is accompanied by higher demand and greater output which is not
inflationary.
5. On the other hand, if we borrow at the full employment level, then it is inflationary in nature.
6. A high fiscal deficit (borrowing) is accompanied by higher prices because aggregate demand is greater
than aggregate supply at the full employment level which is always inflationary.
Question 7. Discuss the issue of deficit reduction.
Answer: The deficit in a government budget can be reduced by the following steps:
1. Taxes should be increased. Government can make a plan for rising direct taxes to increase its receipts can
also be raised by increasing rates of taxes or by imposing new taxes.
2. Reduction in Government Expenditures: It can be done through making government activities more
efficient through better planning of programmes and better administration.

3. The government can raise Receipts through the sale of shares in PSUs (Public Sector Undertaking).
4. Changing the scope and role of government by withdrawing from same areas where it operated before.
MORE QUESTIONS SOLVED
I. Very Short Answer Type Questions
Question 1. Define government budget.
Answer: A government budget is an annual financial statement showing itemwise estimates of expected
revenue and anticipated expenditure during a fiscal year.
Question 2. State any one obj ective of a government budget.
Answer: Activities to secure a reallocation of resources
Question 3. Define a tax.
Answer: A tax is a legally compulsory payment imposed by the government on income and profit of persons
and companies without reference to any benefit. Tax is of two types: Direct tax and Indirect tax.
Question 4. Why is service tax an indirect tax?
Answer: Its impact and incidence lie on different persons.
Question 5. State any two sources of non-tax revenue receipts.
Answer:
1. Commercial revenue (profit and interest)
2. Administrative revenue fees, fines and penalties etc)
Question 6. Is borrowing by the government a revenue receipt?
Answer: No, it is not so because it creates a liability (for the government) of repayment.
Question 7. Why is tax not a capital receipt?
Answer: Tax is not a capital receipt because it leads neither to creation of liability nor to reduction in assets.
Question 8. Why is interest termed as a revenue receipt?
Answer: Interest is a revenue receipt because it creates neither any liability nor causes a reduction in the assets
of the government.
Question 9. Why are borrowings a capital receipt?
Answer: They create a liability (in terms of repayment).
Question 10. Why are subsidies treated as revenue expenditure?
Answer: Subsidies are treated as revenue expenditure because they create neither any asset nor cause a
reduction in any liability of the government.
Question 11. Why is repayment of loan a capital expenditure?
Answer: It reduces the liabilities of the government.

Question 12. Why is recovery of loans treated as a capital receipt?
Answer: Recovery of loans is treated as a capital receipt because it reduces assets of the government.
Question 13. Why are receipts from taxes categorised as revenue receipts?
Answer: Receipts from taxes are categorised as revenue receipts because they create neither any liability nor
cause a reduction in the assets of the government.
Question 14. What is meant by revenue deficit?
Answer: Revenue deficit refers to the excess of revenue expenditure of the government over its revenue
receipts. Revenue Deficit = Revenue Expenditure- Revenue Receipts
Question 15. If the revenue receipts are Rs. 1,000 crore and revenue expenditure is Rs. 1,200 crore, how
much will be the revenue deficit?
Answer: Revenue Deficit = Revenue Expenditure – Revenue Receipts = 1,200 – 1,000 = Rs. 200 crore.
Question 16. Define fiscal deficit.
Answer: Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts)
excluding borrowing.
Question 17. What is the meaning of primary deficit?
Answer: Primary deficit refers to the difference between fiscal deficit of the current year and interest payments
on the previous borrowings.
Question 18. How is primary deficit calculated?
Answer: Primary Deficit = Fiscal Deficit – Interest Payments
Question 19. What does zero primary deficit mean?
Answer: If primary deficit is zero, fiscal deficit= interest payments. It means the government has to borrow
only for its interest commitments on earlier loans.
II. Multiple Choice Questions
Question 1. Budget is placed before:
(a) Lok Sabha
(b) Rajya Sabha
(c) Both Lok Sabha and Rajya Sabha
(d) Parliament
Answer: (c)
Question 2. Budget is a:
(a) Financial statement
(b) Monetary statement
(c) Political statement
(d) All of them
Answer: (a)
Question 3. Which article of the Constitution takes about the budget?
(a) Article 110 (b) Article 111

(c) Article 112 (d) Article 113
Answer: (c)
Question 4. One year period from 1 April to 31 March of next year is called a:
(a) Monetary year (b) Fiscal year
(c) Plan year (d) Tax year
Answer: (b)
Question 5. Capital receipts may come from:
(a) Market borrowings
(b) Provident funds
(c) Recoveries of loans
(d) All of them
Answer: (d)
Question 6. Find direct tax among the following taxes:
(a) Personal income tax
(b) Excise duty
(c) Sales tax
(d) Service tax
Answer: (a)
Question 7. Among the following types of taxes, find the indirect one.
(a) Gift tax
(b) Corporate income tax
(c) VAT
(d) Wealth tax
Answer: (c)
Question 8. If budgetary deficit is nil and borrowings and other liabilities are 70 crore, what is the
amount of fiscal deficit?
(a) Nil (b) 30 crore
(c) Can’t say (d) 70 crore
Answer: (d)
Question 9. When the government tries to,meet the gap of public expenditure and public revenue through
borrowing from the banking system, it is called
(a) deficit financing
(b) debt financing
(c) credit financing
(d) none of them
Answer: (a)
Question 10. ……….is the difference between
total receipts and total expenditure.
(a) Fiscal deficit
(b) Budget deficit
(c) Revenue deficit

(d) Capital deficit
Answer: (b)
Question 11. If borrowings and other liabilities are added to the budget deficit, we get
(a) revenue deficit
(b) capital deficit
(c) primary deficit
(d) fiscal deficit
Answer: (d)
Question 12. Payment of interest is _
(a) revenue expenditure.
(b) capital expenditure
(c) primary deficit.
(d) fiscal deficit
Answer: (a)
Question 13. If the total receipts are Rs.1000 crore and total expenditure is ?1500 crore, how much will
be the budgetary deficit?
(a) 500 crore (b) 1500 crore
(c) 1000 crore (d) -500 crore
Answer: (a)
Question 14. A government shows a primary deficit of ?4400 crore. The revenue expenditure on interest
payment is Rs.400
crore. How much is the fiscal deficit?
(a) 4000 crore (b) 4800 crore
(c) 4400 crore (d) -400 crore
Answer: (b)
Question 15. A government shows a primary deficit of Rs 10,000 crore. The revenue expenditure on
interest payment is Rs 8000 crore. How much is the fiscal deficit?
(a) 18000 crore (b) 10000 crore
(c) 8000 crore (d)-8000 crore
Answer: (a)
Question 16. In a government budget, revenue deficit is Rs,50,000 crore and borrowings are Rs.75,000
crore. How much is the fiscal deficit?
(a) 50000 crore (b) 75000 crore (c) 25000 crore (d) -25000 crore
Answer: (b)
Question 17. Borrowing in government budget is: (Choose the correct alternative)
(a) Revenue deficit
(b) Fiscal deficit
(c) Primary deficit
(d) Deficit in taxes
Answer: (b)

Question 18. The non – tax revenue in the following is: (Choose the correct alternative
(a) Export duty (b) Import duty (c) Dividends (d) Excise
Answer: (c)
Question 19. Primary deficit in a government budget is: (Choose the correct alternative)
(a) Revenue expenditure – Revenue receipts
(b) Total expenditure – Total receipts
(c) Revenue deficit – Interest payments
(d) Fiscal deficit – Interest payments
Answer: (d)
Question 20. Direct tax is called direct because it is collected directly from: (Choose the correct
alternative)
(a) The producers on goods produced
(b) The sellers on goods sold
(c) The buyers of goods
(d) The income earners
Answer: (d)
Question 21. The government budget has a revenue deficit. This gets financed by:
(A) Borrowing
(B) Disinvestment
(C) Tax revenue
(D) Indirect taxes
(a) A and D (b) C and D
(c) A and B (d) C and D
Answer: (c)
Question 22. Which of the following statement is not true for fiscal deficit?
A fiscal deficit:
(a) represents the borrowing of the government.
(b) is the difference between total expenditure and total receipts of the government.
(c) is the difference between total expenditure and total receipts other than borrowing.
(d) increases the future liability of the government
Answer: (b)
Question 23. The government budget of a hypothetical economy presents the following information,
which of the following value represents Budgetary Deficit, (all fig. in ? crores)
1. Revenue Expenditure = 25,000
2. Capital Receipts = 30,000
3. Capital Expenditure = 35,000
4. Revenue Receipts = 20,000
5. Interest Payments = 10,000
6. Borrowings = 20,000
(a) Rs. 12,000
(b) Rs. 10,000
(c) Rs. 20,000
(d) None of the above.
Answer: (b)

Question 24. Which of the following statement is true?
(a) Loans from IMF is a Revenue Receipt.
(b) Higher revenue deficit necessarily leads to higher fiscal deficit.
(c) Borrowing by a government represents a situation of fiscal deficit.
(d) Revenue deficit is the excess of capital receipts over the revenue receipts.
Answer: (c)
III. Short Answer Type Questions
Question 1. Explain objective of stability of prices of government budget. Or
Explain the ‘economic stability’ objective of a government budget. Or
Explain stabilising activities function of budget.
Answer:
1. Free play of market forces (or the forces of supply and demand) are bound to generate trade cycles, also
called business cycles.
2. These refer to the phases of recession, depression, recovery and boom in the economy.
3. The government of a country is always committed to save the economy from business cycles. Budget is
used as an important policy instrument to combat(solve) the situations of deflation and inflation.
4. By doing it the government tries to achieve the state of economic stability.
5. Economic stability leads to more investment and increases the rate of growth and development.
Question 2. Name two sources each of non-tax revenue receipts.
Answer: Non-tax revenue refers to government revenue from all sources other than taxes called non-tax
revenue. These are incomes, which the government gets by way of sale of goods and services rendered by
different government departments. Its two sources are:
1. Commercial Revenue (Profit and interest): It is the revenue received by the government by selling the
goods and services produced by the government agencies. For example, profit of public sector
undertakings like Railways, BHEL, LIC etc. Government gives loan to State Government, union
territories, private enterprises and to general public and earns interest receipts from these loans. It also
includes interest and dividends on investments made by the government.
2. Administrative Revenue: The revenue that arises on account of the administrative function of the
government. This includes:
(i) Fee: Fee refers to a payment made to the government for the services that it renders to the citizens.
Such services are generally in public interest and fees are paid by those, who receive such services. For
example, passport fees, court fees, school fees in government schools,
(ii) License Fee: License fee is a payment to grant a permission by a government authority. For example,
registration fee for an automobile.
Question 3. Distinguish between: Revenue receipts and capital receipts.
Or
Distinguish between ‘revenue receipt’ and ‘capital receipt’ and give two examples of each.
Answer:

Question 4. Distinguish between Direct tax and indirect tax.
Answer:

Question 5. Differentiate between Revenue Budget and Capital Budget.
Answer:
Question 6. Differentiate between Developmental and Non-Developmental Expenditure.
Answer:

Question 7. What are the implications of a large revenue deficit? Give two measures to reduce this deficit.
Answer:
1. Revenue deficit indicates dis¬savings on government account because the government has to make up
uncovered gap.
2. Revenue deficit implies that the government has to cover’this uncovered gap by drawing upon capital
receipts either through borrowing or through sale of its assets.
3. Since government is using capital receipts to meet generally consumption expenditure of the government
which leads to an inflationary situation in the economy.
Two measures to reduced revenue deficit are :
1. Government should reduce its unproductive or unnecessary expenditure.
2. Government should increase its receipts from various sources of tax and non-tax revenue.
Question 8. What are implications of fiscal deficit?
Answer:
1. Causes Inflation: An important component of government borrowing includes borrowing from the
Reserve Bank of India. This invariably implies deficit financing or meeting deficit requirements of the
government by way of printing more notes. This is a dangerous practice, though very convenient for the
government. It increases circulation of money and causes inflation.
2. Increase in Foreign Dependence:Government also borrows from rest of the world. It increases our
dependence on other countries. Foreign borrowing is often associated with economic and political
interference by the lender countries. It increases our economic slavery.
3. Financial Burden for Future Generation: Borrowing implies accumulation of financial burdens for the
future generations. It is for future generations to repay loans as well as the mounting interest thereon.
4. Deficits Multiply Borrowings:Payments of interest increases revenue expenditure of the government,
causing an increase in its revenue deficit. Thus, a vicious circle set wherein deficits multiply borrowings.
IV. True Or False
Are the following statements true or false? Give reasons.
Question 1. Government budget is a statement of actual receipts and payments of the government.
Answer: False.
Reason: It is a statement of “Estimated’ (and not actual) receipts and payments of the government.
Question 2. Rise in revenue deficit will always lead to higher fiscal deficit.
Answer: False.
Reason: Fiscal deficit leads to rise in revenue deficit.
Question 3. Service tax is a indirect tax as its impact and incidence is on the same individual.
Answer: False.
Reason: Its burden can be shifted to others.
Question 4. Direct tax are generally ‘Proportional’ in nature.
Answer: False.
Reason: Direct taxes are generally ‘progressive’ in nature.

Question 5. Primary deficit is the difference between capital deficit and interest payments.
Answer: False.
Reason: Primary deficit is the difference between fiscal deficit and interest payments.
Question 6. Non-debt capital receipts only includes disinvestment.
Answer: False.
Reason: It also includes the recovery of loan.
Question 7. Fiscal deficit is non-inflationary.
Answer: False.
Reason: Fiscal deficit can be inflationaiy when we are at full employment level.
It is so because large fiscal deficits creates excess money supply that creates inflation.
Question 8. Expenditure made on the development of a railway line is a capital expenditure.
Answer: True.
Reason: This expenditure creates an asset for the railway and government.
Note: As per CBSE guidelines, no marks will be given if reason to the answer is not explained.
Note: As per CBSE guidelines, no marks will be given if reason to the answer is not explained.
V. Long Answer Type Questions
Question 1 . Explain the role the government can play through the budget in influencing allocation of
resources. OR .
Explain the ‘allocation of resources’ objective of government budget. OR
Explain the allocation function of a government budget. OR
Explain how government can influence allocation of resources through government budget.
Answer:
1. Private enterprises always desire to allocate resources to those areas of production where profits are high.
2. However, it is possible that such areas of production (like production of alcohol) may not promote social
welfare.
3. Through its budgetary policy the government of a country directs ‘ the allocation of resources in a manner
such that there is a balance between the goals of profit maximisation and social welfare.
4. Production of goods which are injurious to health (like cigarettes and whisky) is discouraged through
heavy taxation.
5. On the other hand, production of “socially useful goods” (like electricity, ‘Khadij is encouraged through
subsidies.
6. So, finally government has to reallocate resources in accordance to social and economic considerations in
case the free market fails to do or does so inefficiently.
Question 2. Explain how the government can use the budgetary policy in reducing inequalities of
incomes. OR
How can a government budget help in reducing inequalities of income? Explain. OR
How can a government budget be helpful in altering distribution of income in an economy? Explain.
OR
Explain ‘redistribution of income’ objective of government budget. OR
Reduction in income inequalities raises welfare of the people. How can government help, through

government budget, in this regard? Explain?
Answer:
1. Budget of a government shows its comprehensive exercise on the taxation and subsidies.
2. A government uses fiscal instruments of taxation and subsidies with a view of improving the distribution
of income and wealth in the economy.
3. 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.
4. It will reduce income of the rich and raises the living standard of the poor, thus, leads to equitable
distribution of income.
5. Expenditure on special anti poverty and employment schemes will be increased to bring more people
above poverty line.
6. Public distribution system should be inferred so that only the poor could get food grains and other
essential items at subsidized prices.
7. Equitable distribution of income and wealth is a sign of social justice which is as the principal objective
of any welfare state in India.
Categorize the following items into Revenue and Capital Receipts
Question 1. Statement—Loan from the Australian government.
Answer: Capital receipt.
Reason: It creates liability for the government.
Question 2. Statement—Corporation tax. OR
Statement—Income tax received by government.
Answer: Revenue receipt.
Reason: It creates neither any liability nor reduces any asset of the government.
Question 3. Statement—Grants received from International Monetary Fund
Question 4. Statement—Profits of public sector undertakings.
Question 5. Statement—Sale of a public sector undertaking. OR
Statement—Receipts from sale of shares of a public sector undertaking.
Reason: It reduces assets of the government.
Question 6. Statement—Foreign aid against earthquake victims.
Question 7. Statement—Dividends on investments made by government.

Question 8. Statement—Borrowings from public.
Question 9. Statement—Fees of a Government College.
Question 10. Statement—Recovery of loans.
Question 11. Statement—Loans recovered from public sector enterprises.
Question 12. Statement—License and court fees received by the government in the year 2012-13
Question 13. Statement—Loan taken from the USA for the infrastructural developments.
Question 14. Statement—Sale of shares held by Government in a PSU.
Question 15. Statement—Financial help from microsoft for the victims of flood affected areas.
Reason: It creates neither any liability nor reduces any asset of the government
Question 16. Statement—Amount borrowed from Japan for construction of Metro.
Question 17. Statement—Dividend received by government from a company.
Reason: It creates neither any liability nor reduces any asset of the
government.
Question 18. Statement—Funds raised from public in the form of National Saving Certificates and Kisan
Vikas Patras.

Question 19. Statement—Sale of 40% shares of a public sector undertaking to a private enterprise.
Reason: It reduces assets of the L government.
Question 20. Statement—Profits of LIC, a public enterprise.
Reason: It creates neither any s liability nor reduces any asset of the government.
Categorize the following items into Direct and Indirect Taxes
Question 1. Statement—Corporation tax.
Answer: Direct tax.
Reason: Its impact and incidence lie on the same person.
Question 2. Statement—Value Added tax.
Answer: Indirect tax.
Reason: Its impact and incidence lie on different persons.
Question 3. Statement—Service tax.
Question 4. Statement—Wealth tax.
Answer: Direct tax.
Question 5. Statement—Indirect tax.
Question 6. Statement—Income tax.
Answer: Direct tax.
Question 7. Statement—Entertainment tax.
Question 8. Statement—Corporate tax.
Answer: Direct tax.
Question 9. Statement—Excise duty.

Question 10. Statement—Custom duty.
Question 11. Statement—Capital Gains Tax.
Answer: Direct tax.
Categorize the following items into Revenue and Capital Expenditure
Question 1. Statement—Subsidies.
Answer: Revenue expenditure.
Reason: It creates neither any asset nor reduces any liability of the government.
Question 2. Statement—Defence capital equipments purchased from Germany.
Answer: Capital expenditure.
Reason: It increases asset of the government.
Question 3. Statement—Grants given to State Governments.
Question 4. Statement—Construction of school building.
Question 5. Statement—Expenditure incurred on administrative and defence services.
Question 6. Statement—Repayment of loan.
Reason: It reduces the liability of the government.
Question 7. Statement—Amount spent on construction of Bridges
Question 8. Statement—Payment of salaries to staff of government hospitals.
Question 9. Statement—Purchase of 20 cranes for the construction of flyovers

Question 10. Statement—Amount borrowed from USA repaid.
Question 11. Statement—Salary paid to Army officers.
Question 12. Statement—Purchase of Metro coaches from Japan.
Question 13. Statement—Repayment of Loan taken from the World Bank.
Question 14. Statement—Grants given by central government to state government.
Answer: Revenue Expenditure.
Question 15. Statement—Loan given to Union Territories
Question 16. Statement—Interest paid on National Debt.
Question 17. Statement — Expenditure on construction of Metro.
Question 18. Statement—Pension paid to retired government employees.
Question 19. 10% shares purchased by the government in a private company.
VI. Higher Order Thinking Skills
Question 1. Define debt trap.
Answer: It is a vicious circle set wherein the government takes more loans to repay earlier loans.

Question 2. Distinguish between revenue deficit and fiscal deficit. [CBSE 2009, 13] [3 Marks]
Answer:
Question 3. Difference between primary deficit and fiscal deficit. [Delhi 2013] [3 Marks]
Answer:
Question 4. How can a deficit be financed?
Answer: A deficit can be financed in two ways:
1. Monetary Expansion: It means printing new notes to the extent of deficit. It involves government
borrowings from the Central bank (Reserve Bank of India) through the issue of the treasury bills to the
Central Bank. The Central Bank purchases the treasury bills in return for cash (procured by printing new
notes). The government use this cash to finance the deficit.
2. The second method of financing the deficit is borrowing by the government from the public through
market loans etc.
3. By borrowing from abroad (rest of the world).
Question 5. Can there be a fiscal deficit in a government budget without a revenue deficit? Explain.
Answer:
1. Yes, there can be a fiscal deficit in government budget without any revenue deficit.
2. Revenue deficit is a position where total revenue expenditure of the government exceeds its total revenue
receipts.
3. Fiscal deficit is a position where total expenditure of the government exceeds sum total of its revenue
receipts and non-debt capital receipts.

4. Hence, there can be a fiscal deficit without revenue deficit in following situations:
(i) When capital budget shows a deficit and revenue budget is balanced.
(ii) When deficit in capital budget is greater than surplus in revenue budget.
Question 6. Revenue deficit is the real deficit and not the fiscal deficit. How?
Answer:
1. Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts)
excluding borrowing.
2. In other words, it is equal to borrowings and borrowings are just an act of the government which may be
finance interest payments of the government also.
3. While revenue deficit exclusively takes into account current interest payment obligations of the
government not connected with the actual activities.
4. Thus, revenue deficit is more important than fiscal deficit.
Question 7. From the following data about a government budget find: (a) revenue deficit, (b) fiscal deficit
and (c) primary deficit
Answer: (a) Revenue deficit = Revenue expenditure – Revenue receipts (Tax revenue + Non-tax Revenue)
= 80 – (47+10) = Rs. 23 Arab
(b) Fiscal deficit = Total expenditure (Revenue expenditure + Capital expenditure) – Revenue receipts(Tax
revenue + Non-tax revenue) – Non-debt Capital ReceiptfCapital receipts – borrowings)
= (80 + 0) – (47 + 10) – (34 – 32)
= 80 – 57 – 2 = Rs. 21 Arab
(c) Primary deficit = Fiscal deficit – Interest payments
= 21 – 20 = Rs. 1 Arab
8. Find (a) fiscal deficit and (b) primary deficit from the following items:
Answer: (a) Fiscal deficit = Borrowings = Rs. 15000 crore.
(b) Primary deficit = Fiscal deficit – Interest payments = 15000 – 25% of (70000 – 50000) = 15000 – 25% of
20000 = 15000 – 5000 = Rs. 10000 crore.

VII. Value Based Questions
Question 1. There has been consistent rise in prices of fruits and vegetables in Delhi for sometimes.
Which measures of budget will you support to reduce the prices of these commodities?
Answer: Prices of fruits and vegetables can be reduced by providing subsidies to the producer of fruits &
Vegetables and the government should also provide fruits and vegetables at subsidised rates to the consumers
through public distribution system.
Value : Problem solving
Question 2. Budget deficit creates disequilibrium in every economy, but in developing countries like
India, why does government depend on it?
Answer: Per capital income in developing countries like India is comparatively low so the tax receipts of the
government are not sufficient, but on the other hand government has to incur heavy public expenditure for the
development of economy so a government is compelled on budget deficit.
Value : Economic awareness
Question 3. In India a majority of population is lying below poverty line due to inequality of ‘Income and
Wealth’. How can budget be helpful in solving this problem?
Answer: In Indian budget progressive tax system can be a good measure to remove the inequality of ‘income
and wealth’ and government should provide social facilities like education, health and food grain to the poor at
subsidized rates.
Value : Problem solving.
Question 4. Classify the following items into revenue expenditure and capital expenditure. Give reason
for your answer.
(a) Free supply of stationary to the students by the government.
(b) Economic assistance given according to Ladli scheme.
(c) Expenditure on the construction of computer lab in school by the government.
(d) Expenditure on Mid Day Meal given to students by the government.
Answer: (a), (b) and (d) are revenue expenditures because they neither create assets nor cause reduction in
assets.
(c) is capital expenditure because it increases assets of the government. Value : Analytic
Question 5. In India, for the last several years, there has been deficit in the revenue account. How is it
met or financed?
Answer: Two measures to reduce revenue : deficit:
1. Government should reduce revenue expenditure.
2. To increase taxes, both direct and ; indirect.
Value : Analytic
Question 6. If you were to be appointed as the Finance Minister of India, which taxes would you prefer:
direct taxes or indirect taxes and why?
Answer: As we know, direct tax and indirect tax are complimentary to each other i.e., they are not substitutes to
each other. There is really nothing to choose between direct taxes and indirect taxes as such. Both of them have
their relative merits and demerits.
They differ from each other as:

1. Indirect taxes reach all the sections of the society; whereas direct taxes cannot reach all the sections.
2. Direct taxes can be highly progressive; whereas Indirect taxes are generally proportional.
3. Indirect taxes can be easily used to influence the consumption of specific commodities; whereas direct
taxes cannot be used thus. In short, it is necessary to strike a balance between direct taxes and indirect
taxes as a source of tax revenue.
Question 7. Should we rely exclusively on direct taxes for mobilizing tax revenue because indirect taxes
are inequitable? Comment.
Answer:
1. We cannot depend solely on direct taxes because they are progressive in nature and there is possibility of
tax evasion.
2. But as against it indirect taxes are proportional in nature and are generally imposed on commodities
(necessity goods etc.) which each and every individual purchase.
3. So, direct and indirect tax are important for providing funds for investment and for other social welfare
considerations.
Question 8. Levy of taxes on all commodities without caring for their impact on the common man is not
desirable. Comment.
Answer:
1. Indirect taxes such as sales tax and excise duty fall heavily on the shoulders of a common man.
2. This means they are inequitable.
3. Therefore, in such a situation, tax basket should be a mixture of direct and indirect taxes both.
Question 9. It is not only difficult but impossible to tax all those who should be taxed, in India. Why?
Answer: Due to lack of necessary information and disclosures required, tendency of the people to avoid taxes
and lack of efficient implementation machinery, it is not possible to tax all those who should be taxed.
Question 10. In the government of India budget for the year 2013-14 the Finance Minister proposed to
raise the excise duty on cigarettes. He also proposed to increase income tax on individuals earning more
than ? One crore per annum.
Identify and explain the types of taxes proposed by the finance minister. Was the government’s objective
only to earn revenue themselves? What possible welfare objective could the government be considering?
Explain.
Answer: (a) Excise Duty: Indirect Tax When (a) liability to pay a tax (Impact of tax) is on one person; and(b)
the burden of that tax (Incidence of tax), falls on the other person, it is termed as indirect tax.(b) Income Tax:
Direct Tax When (a) liability to pay a tax (Impact of Tax), and (b) the burden of that tax (Incidence of tax), falls
on the same person, it is termed as direct tax.(c) Besides the objective of raising more revenue, the proposals
also serve some welfare objectives.
1. First, raising excise duty on cigarettes makes cigarettes costlier and discourages smoking. Less smoking
have positive influence on health and raises welfare of the people,
2. Secondly, raising income tax on incomes above ? one crore will help in reducing inequalities in income.
3. Thirdly, the extra revenue is raised from these proposals, and if spent on health and education of the poor
it will do the welfare of the poor.

Question 11. Regulation of prices in the case of agricultural products is not only desirable but necessary.
Explain.
Answer:
1. As we know that agricultural production depends upon natural factors like rainfall, climate etc. these
natural factors creates a situation of drought or surplus production.
2. Therefore, in such a situation for helping farmers in case of drought the government should fix a price
lower than the market price (which is also known as price ceiling) and in case of the surplus production
the government should fix a price higher than the market price (which is also known as price floor).
3. Surplus or shortages should be met by the government from its buffer stock operations through Public
Distribution System (PDS) such as ration shops or fair price shops.
Question 12. We should try to regulate interest rates prevailing among farmers, weaker sections of
society and poor villagers. How can we control it?
Answer:
1. A government and monetary authorities fix the rate of interest which is based on bank rate fixed by the
RBI and consequent interest rates are charged by the commercial banks.
2. In this regard we have regional rural banks being set up in rural areas to benefit the rural artisans, small
and marginal labourers and weaker sections of the society.
3. They provide credit assistance at concessional lending rates.
4. However, weaker sections of society including poor farmers and villagers pay very high rate of interest
which they pay to the moneylenders or zamindars.
5. Therefore, for reducing rate of interest for such people, some necessary steps should be taken such as
promoting cooperative societies etc.

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