What Are The 5 Important Points Of Government Budget [Explained]

The Government Budget

The government budget is an annual statement, showing item-wise estimated receipt and expenditure of the government during a fiscal year. It is also known as the “Annual Financial Statement” in Article 112 of the Indian Constitution. It has two aspects: (i) Revenue aspect and Expenditure aspect. 

Important Points Of Government Budget :

1. In India, the Union Budget is prepared by the Department of Economic Affairs, NITI (National Institution for Transforming India) Aayog, MoF (Ministry of Finance), and other spending ministries prepare budgetary documents after a consultative process.

2. Under Article 112 of the Indian constitution, the president is held responsible for presenting the Budget before Lok Sabha, and According to Article 77(3), the president has given the responsibility to the ‘Union Finance Minister’ to prepare the budget.

3. The Indian government presents it on the first day of February so that it could be materialized before the beginning of the new financial year by the Finance Minister before Parliament (Lok Sabha). The first Union budget of independent India was presented by R.K. Shanmukham Chetty on 26th November 1947.

4. The budget is prepared by the Government at all levels (union (central), state, district) prepares its annual budget. The programs and policies introduced in the Government budget are known as ‘Budgetary Policy’ or Fiscal Policy’ of the government.

5. The Railway budget was separately presented from the annual budget till 2016. The Modi government on 21st September 2016 approved the merger of the Rail and General budgets from next year, ending a 92-year-old practice of a separate budget.

(“Check Out the link – https://youtu.be/iQZsHZUPrxw for detailed explanation  “) 

Objectives of Government Budget

1) REALLOCATION OF RESOURCES: 

The budgetary policy of the government aims to reallocate resources in line with the social and economic priorities of the nation. Government can influence the allocation of resources through the following ways:

a. TAX CONCESSION OR SUBSIDES 

To encourage investment in productive projects, the government provides tax concession and subsidies to producers.

To discourage the production of harmful products (like cigarettes and liquor shops) the government imposes heavy taxes.

b. DIRECTLY PRODUCING GOODS AND SERVICES

Through its budgetary policy, the government makes sufficient provision for the supply of public goods (like law and order, defense, public administration, water supply). It also addresses environmental issues by offering subsidies on the use of cleaner energy (CNG, LPG, solar, and wind energy). These activities are undertaken by the government in a manner such that there is a balance between the goals of profit maximization and social welfare.

Public good:- It refers to those goods which are both non-excludable ( i.e., individuals cannot be excluded from use or could benefit from without paying for it e.g. construction of a dam to stop flooding it protects everyone in the area (whether they contributed to constructing a dam or not) and non-rivalry i.e., consumption by one does not reduce the availability to others e.g. benefiting from a street light does not reduce the light available for others.

For example:- MEDICAL TREATMENT FOR COVID19 PATIENT IS A PUBLIC SERVICE.

(“Check out link https://youtu.be/nmAmZIDxWfk for a detailed video on Objectives of Government Budget “)

2) REDISTRIBUTION OF INCOME AND WEALTH: Economic inequalities is an inherent part of every economy. The government aims to reduce such inequalities through its fiscal policy. Governments adopt liberal expenditure policies in favor of people whose income level is low.

For example–  GOVERNMENT PROVIDED FINANCIAL HELP TO CASUAL 

WORKER WHOSE INCOME IS AFFECTED DUE TO COVID19 LOCK-DOWN. 

• Expenditure incurred by the government on unemployment allowance, old age pension, adult education, health facilities etc.

• The government may increase its expenditure of public works (like construction of roads, bridges, building railways etc.). This will help in increasing income of the poor.

• On the other-hand government may impose higher income tax on the richer section of society and on low rates on poor people. This can be done by adopting Progressive Taxation System. 

Progressive taxation system refers to a situation where the tax rate increases with an increase in income such as a 5% tax rate on individuals earning up to 5 lakh p.a, a 10% rate are charged from the individuals earning between 5-10 lakh and so on.

Progressive taxation in India focuses on the equitable distribution of disposable income. A higher taxation rate for rich people and a lower tax rate for the poor section diminishes the wedge between the disposable income of the rich and the poor. By giving subsidies to Below Poverty Line (BPL), the government enhances their purchasing power and thereby improves the standard of living.

3) ECONOMIC STABILITY: One of the main issues addressed by the government budget is preventing the fluctuations in businesses i.e., inflation and deflation to ensure economic stability.

Inflationary tendency emerges when aggregate demand is more than aggregate supply. The government then adopts a ‘Surplus Budget’ i.e., increases tax rate and reduces its own expenditure to reduce the level of AD and thereby eliminating the inflationary gap.

Deflationary tendency emerges when aggregate demand is less than aggregate supply. In this situation, the government adopts a ‘Deficit budget‘ i.e., reduces tax rate and increases its own expenditure to raise the level of AD and thereby accelerating the level of AD.

In short, the policy of surplus budget and policy of deficit budget (Fiscal Policy/Budgetary Policy) during inflation and deflation respectively helps to maintain price stability.

4) ECONOMIC GROWTH:  It refers to a sustainable increase in per capita real GDP(Gross Domestic Product). GDP refers to the gross money value of all final goods and services produced within the domestic territory of a nation during the fiscal year. Through its Budgetary Policy government aims to initiate such expenditure that increases the production capacity of the nation and thus leads to an increase in GDP.

Example: India purchases metro coaches from Japan, Signature Bridge build In New Delhi.

Also, the government can undertake this by following methods.

– By providing tax rebates and other incentives for productive ventures and projects, the government stimulates savings and investments in an economy.

 – By spending on infrastructure, the government can enhance the productive activity in different sectors of the economy.

INVESTMENT IN HUMAN CAPITAL FORMATION CONTRIBUTES TO THE GROSS DOMESTIC PRODUCT OF THE COUNTRY.

5) MANAGEMENT OF PUBLIC ENTERPRISES: The government established a large number of public sectors for the sake of social welfare. 

The government budget is prepared with the aim to cater to such enterprises and provide financial help to these enterprises.

GOVERNMENT PROVIDES A SOURCE OF FINANCE TO GOVERNMENT HOSPITALS, PUBLIC COMPANIES (LIKE BHAIL, SAIL ETC).

6) REDUCING REGIONAL DISPARITIES:  Government uses taxation and expenditure policy to encourage productive units in backward regions to reduce regional disparities.

Tax concession, Tax holiday, Subsidies, etc. are the incentives provided by the government to industrial units for setting up plants in backward regions.

Conclusion

This article was about How the Government of India prepares its annual budget and what are the main objectives laid down by the government to fulfill its long-term objective of growth and development with equality.

QUESTIONS FOR PRACTICE

1. In the government budget of India, the finance minister proposed to raise the GST (goods and services tax) on cigarettes. She also proposed to increase income tax on individual earnings more than rupee one crore p.a. (3-4marks)
2. The government has started spending more on providing free services like education and health to the poor. Explain the economic value it reflects. (3-4marks)
3.  Government raises its expenditure on providing public goods. Which economic value does it reflect? (1mark)
4. Explain the need for a reduction in inequalities of income and wealth. Explain any two budgetary measures by which it can be done. (4 marks )
5. Explain the budgetary measure for achieving the objective of setting up production units in backward regions. (3 marks)
6. “The government budget’s main objective is economic growth”.  Explain. (4marks)
7. Explain how the government budget can be helpful in bringing economic stabilization to the economy. (3-4marks)
8.  India is suffering from the problem of inequalities in the distribution of income and wealth. How can the budget be used as an instrument to solve this problem? (3-4marks)
9. The inflation rate is alarmingly high in the Indian economy. Explain the step that should be taken by the government in its budgetary policy to control the inflation rate. (3-4marks)
10. Why does inefficiency in the allocation of resources arises in the market? What steps should be taken by the government for removing these inefficiencies through its budgetary policy? (4marks)
11. The government budget is prepared only by the central government in India. True or false ( 1 marks )
12. Is a cut in subsidies always good for the economy? (4 marks)