Goverment Budget and the Economy

                                                           

                                    Goverment Budget and the Economy                                            

Basic Concepts:

Government Budget : 

“A government budget is an annual financial statement showing item-wise estimates of expected revenue and anticipated expenditure during a fiscal year.”

Budget Receipts:-

Budget receipts refer to estimated  receipts of the government from various sources during a fiscal year.

Revenue Receipts:-

Government receipts which neither (i) create liabilities nor (ii) reduce assets are called revenue receipts.

Capital Receipts:-

Government receipts which either (i) create liabilities or (ii) reduce assets are called capital  receipts.

Tax Revenue:-

Tax Revenue consists of proceeds of taxes and other duties levied by the Union government.

Tax:-

A tax is legally a compulsory payment imposed by the government on income and profit of persons and companies without reference to any benefit.

Non Tax Revenue:-

Income from sources other than taxes is called non-tax revenue.  It arises on account of administrative function of the govt.

Direct tax: When (i) liability to pay a tax and (ii) the burden of that tax falls on the same person, the tax is called a direct tax. e.g.: Income tax, Wealth tax, gift tax, expenditure tax, interest tax etc.

Indirect Tax : When (i) liability to pay a tax is on one person and (ii) the burden of that tax falls on same other person, the tax is called an indirect tax. e.g.: sale tax, excise duty, customs duty, entertainment tax, service tax, octroi etc.

Budget Expenditure:

Bdget or Govt. Expenditure refers to the estimated expenditure to be incurred by the government under different heads in a year.

Revenue Expenditure: An expenditure which neither creates assets nor reduces liability is called Revenue Expenditure.

Capital Expenditure: An expenditure which either creates an asset (e.g.school building) or reduces liability (e.g. repayment of loan) is called capital expenditure.

Balanced Budget: A government budget is said to be  a balanced budget in which government estimated receipts (revenue and capital) are equal to government estimated expenditure.

Surplus Budget: When government receipts are more than government expenditure in the budget, the budget is called a surplus budget.

Deficit Budget : When government expenditure exceeds government receipts in the budget, the budget is said to be a deficit budget.

Revenue Deficit:

Revenue deficit refers to the excess of total revenue expenditure of the government over its total revenue receipts.

                        Revenue  deficit = Total Revenue expenditure - Total Revenue receipts.

Fiscal Deficit: Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowing during a fiscal year.

            Fiscal deficit = Total budget expenditure - Total budget receipts excluding borrowings

Primary Deficit : Primary deficit is defined as fiscal deficit minus interest payments on previous borrowings.

                                    Primary deficit = Fiscal deficit - Interest payments

Summary :

            Objectives of a Government Budget.

(i)  Economic growth : To promote rapid and balanced economic growth so as to improve living standard of the people.

(ii) Reduction of poverty and unemployment : To eradicate mass poverty and unemployment by creating employment opportunities and providing maximum social benefits to the poor.

(iii) Reduction of  inequalities : To reduce inequalities of income and wealth through living taxes and granting subsidies.

(iv) Reallocation of resources : To reallocate resources so as to achieve social and economic objectives.

(v)  Price stability : To maintain price stability and correct business cycles.

(vi)  Management of public enterprises.    

                                                   Structure of Govt. Budget

                        Budget Receipts                                            Budget Expenditure

                                                            Budget (Govt.) Receipts

            Revenue Receipts                                                                Capital Receipts (components)

Tax Revenue                          Nontax Revenue                               

(components)                        (components)

(i) Income tax                         (i) Interest receipts                   (i) Borrowings

(ii) Corporate tax                   (ii) Profits and Dividends        (ii) Recovery of  loans

(iii) Customs duty                  (iii) Fees and fines                  (iii) Disinvestment

(iv) Exice duty                        (iv) Special assessment         (iv) Small savings and provident funds

(v) Expenditure tax    (v)  External grants-in-aid 

(vi) Wealth tax 

(vii) Interest tax

(viii) Estate duty

Budget (Govt.) Expenditure

                        Plan Expenditure                                 Non-Plan Expenditure

Plan Expenditure

                        Revenue Expenditure                                            Capital Expenditure

                               (components)                                                     (components)

            (i) Central plans                                                                     (i) Central plans capital projects

            (ii) Assistance to finance                                          (ii) Loans to state and union terriories 

                 state and UT plans                                               for their capital projects.

Non-Plan Expenditure

                        Revenue Exp.                                                         Capital  Exp.

                        (components)                                                       (components)

            (i) Interest payment                                                   (i) Defence capital

            (on loans taken by Govt.)  

            (ii) Payments of salaries                                          (ii) Other than defence capital

            (iii) Defence service exp.                                         (iii) Loans to states and UT

            (iv) Subsidies                                                            (iv) Loans to public

            (v)  Grants to States                                     (v)  Loans to Foreign government

                  and UT

            (vi) Economic services

            (vii) Education and health services

            (viii) Family welfare

            (ix)  Flood control

            (x)   Rural development

Types of Budget Deficit

The budget deficit is the difference between total expenditure on the one hand and current revenue and net internal and external capital receipts of the govt. on the other.

Measures of Govt. Deficit

            Revenue                                 Fiscal Deficit                                     Primary

            Deficit                                     (Govt. borrowing)                             Deficit

Revenue Deficit = Total revenue exp. - Total revenue receipts.

Remedial measures for reducing revenue deficit are : (i) Govt. should raise rate of taxes especially on rich people and any new taxes where possible. 

(ii) Government should try to  reduce its expenditure  and avoid unnecessary expenditure.

Implications : It gives information on what the govt. is borrowing for i.e. for financing its current expenditure or for capital formation.

Fiscal Deficit : Total expenditure - Total  receipts excluding borrowings.

Importance : Fiscal deficit shows the borrowings requirements of the govt. during the budget year.

Implications : (i) Death trap : Fiscal deficit i.e. borrowings creats problem of not only (a) payment of interest but also of (b) repayment of loans.

(ii) Wasteful expenditure

(iii) Inflationary pressure

(iv) Partial use

How is fiscal deficit met ?

(i)  Borrowing from domestic sources.

(ii)  Borrowing from external sources.

(iii) Deficit financing (printing of extra currency notes):

Primary Deficit = Fiscal deficit - Interest payment

Importance : Fiscal deficit reflects the borrowing requirements of the govt. for financing the exp. inclusive of interest payments.

       As against it, primary deficit shows the borrowing requirements of  the govt. for meeting exp. exclusive of interest payment.

types of research

Types of Research

Topic 1- Basic and Applied
Research can be classified by purpose or by method. If we categorize it by purpose, it would fall into two major categories: Basic Research and Applied Research, while in case of method, it would be deductive research and inductive research.
Basic Research

Also called Pure or fundamental Research, it is undertaken for increase in knowledge. There is no direct benefit as it is a research for the sake of research. It is conducted to satisfy any curiosity such as: (a) what makes things happen, (b) why society changes and (c) why social relations are in a certain way. In fact, it is the source of most new theories, principles and ideas. Basic research rarely helps anyone directly. It only stimulates new ways of thinking. The main motivation is to expand man's knowledge. There is absolutely no commercial value to the discoveries resulting from such research.

However, in the long run, it forms the basis of applied research or development commercial products. If basic work is done first, then applied spin-offs often eventually result from this research. As Dr. George Smoot of says, "People cannot foresee the future well enough to predict what's going to develop from basic research. If we only did "applied research", we would still be making better spears."
To sum up, basic research is purely theoretical to increase our understanding of certain phenomena or behavior but does not seek to solve any existing problem.
Applied research
It is use of basic research or past theories, knowledge and methods for solving an existing problem. It deals with practical problems. It is opposed to pure research which is not problem-oriented but for the increase in knowledge which may or may not be used in future.
In the present world situation, more emphasis is being given to applied research to solve problems arising out of overpopulation and scarcity of natural resources.
Applied research should not be treated the same as Research & Development (R&D) which is involved in developing products demanded by the existing clients. Applied Research, on the other hand, focuses on uncovering what needs are not being met and use that information in designing products or services that would create their own demand. Thus, applied research brings in new customers and also provides better products and services to the existing customers. In old days, the mobile phone was expensive, bulky and had a short range. Applied Research foresaw that this product would have a limited market and stressed on cost-cutting, reduced weight and long-distance communication. Such measures caused a heavy demand

Topic 2- Historical Research

Historical research is the process of systematically examining past events to give an account of what has happened in the past.
� It is not a mere accumulation of facts and dates or even a description of past events.
� It is a flowing, dynamic account of past events which involves an interpretation of these events in an attempt to recapture the nuances, personalities, and ideas that influenced these events.
� One of the goals of historical research is to communicate an understanding of past events.

Significance of Historical Research

The following gives five important reasons for conducting historical research (based on Berg, 1998):
1. To uncover the unknown (i.e., some historical events are not recorded).
2. To answer questions (i.e., there are many questions about our past that we not only want to know but can profit from knowing).
3. To identify the relationship that the past has to the present (i.e., knowing about the past can frequently give a better perspective of current events).
4. To record and evaluate the accomplishments of individuals, agencies, or institutions.
5. To assist in understanding the culture in which we live (e.g., education is a part of our history and our culture).

Historical Research Methodology

There is no one approach that is used in conducting historical research although there is a general set of steps that are typically followed. These include the following steps although there is some overlap and movement back and forth between the steps:

1. Identification of the research topic and formulation of the research problem or question.
2. Data collection or literature review.
3. Evaluation of materials.
4. Data synthesis.
5. Report preparation or preparation of the narrative exposition.

Topic 3- Empirical research
Empirical research is research that derives its data by means of direct observation or experiment, such research is used to answer a question or test a hypothesis (e.g. "Does something such as a type of medical treatment work?"). The results are based upon actual evidence as opposed to theory or conjecture; as such they can be replicated in follow-up studies.
Objectives of the Research Process:
� Capture contextual data and complexity
� Learn from the collective experience of the field
� Identify, explore, confirm & advance theoretical concepts
� Enhance educational design

Aims of the Empirical Research Process:

� Move research beyond simple �reporting of observations�
� Foster environments for enhanced understanding
� Combine rigorous research with thorough case study
� Relevance of theory is proved by ability to work in a real world environment (context)

Why use Empirical Research Methods:

� Tradition and assumed knowledge (i.e. superstition) have been relied upon for too long
� Integrate research and practice
� Instructional science (i.e. the education process) needs to progress.


How you benefit from Empirical Research Methodology:

1. Integrate professional knowledge with empirical data to inform instructional developmental decisions
2. Teaching methods and student learning are backed by quality data and educational theory
3. Results reflect/support theory and demonstrate relevance to context
4. Established relationship between intervention & behavioral response


Benefits of Empirical Research:

1. Understand and respond to dynamics of situations (context)
2. Respect contextual differences
3. Build upon what is already known to work
4. Meet accepted professional standards of research

Topic 4- Descriptive, Exploratory and Explanatory
Descriptive Research
Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomenon being studied. Descriptive research answers the questions who, what, where, when and how...
Although the data description is factual, accurate and systematic, the research cannot describe what caused a situation. Thus, Descriptive research cannot be used to create a causal relationship, where one variable affects another. In other words, descriptive research can be said to have a low requirement for internal validity.
The description is used for frequencies, averages and other statistical calculations. Often the best approach, prior to writing descriptive research, is to conduct a survey investigation. Qualitative research often has the aim of description and researchers may follow-up with examinations of why the observations exist and what the implications of the findings are.
In short descriptive research deals with everything that can be counted and studied. But there are always restrictions to that. Your research must have an impact to the lives of the people around you. For example, finding the most frequent disease that affects the children of a town. The reader of the research will know what to do to prevent that disease, thus, more people will live a healthy life.
This research is the most commonly used and the basic reason for carrying out descriptive research is to identify the cause of something that is happening. For instance, this research could be used in order to find out what age group is buying a particular brand of cola, whether a company�s market share differs between geographical regions.
Exploratory Research
An exploratory study is undertaken when not much is known about the situation at hand or no information is available on how similar problem or research issues have been solved in the past.

Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Microcredit is a financial innovation that is generally considered to have originated with the Grameen Bank in Bangladesh. In that country, it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry, and many traditional large finance organizations are contemplating microcredit projects as a source of future growth, even though almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun. The United Nations declared 2005 the International Year of Microcredit.

MONEY AND BANKING

Chapter 3
money & banking

Barter system

•Exchange of goods for goods & Services for services.

Defects of Barter system

1.Double coincidence of wants –need to have mutually exchangeable goods.

2.Indivisibility of commodities

3.Lack of common measure of value

4.Lack of proper store of value.

Money:  definition

Money is the stock  of assets that can be readily used to make transactions.

                        Primary functions

•1.Medium of exchange -we use it to buy stuff

•2.Measure of value – goods & services

                        Secondary functions

•1.Standard of deferred payment – future payment

•2.Store of value 

•3.Transfer of value- transfers purchasing power from the present to the future

CONTINGENT FUNCTION

•1.Basis of credit

•2.Distribution of National Income

•3.Medium of compensation

•4.Liquidity– money is the most liquid of all assets

Classification of money
1.Legal tender money – money which has legal sanction

•2.Full bodied money (standard money) – face value is equal to its intrinsic value (value of metal)

•3.Fiat money – legal tender money having no intrinsic value. e.g.,currency notes and coins

Indian Monetary System

•Meaning – the monetary standard and monetary set up of a country.

•The type of standard money used in the country is its monetary standard .

•The apex monetary authority in our country is RBI.

The system of currency issue

•The Minimum Reserve System

•The system of note issue in India is MRS

•Under this system, a reserve worth Rs.200 crores to be held by the RBI.

•Of this, gold reserves of Rs.115 crores and the rest in the form of foreign exchange securities

•RBI issues currency notes above Rupee 1.

RESERVE BANK OF INDIA ( RBI )

       RBI is the Central Bank of our country

FUNCTIONS OF RBI

1. Note issue – RBI issues currency notes & coins

2. Banker, Agent & Adviser to the Govt.

3. Custodian of foreign exchange reserves

4. Bankers’ Bank – RBI controls & regulates the commercial banks through its Monetary Policy

5.Lender of the last resort – RBI helps the commercial banks in times of crisis.

6. Controller of credit & money supply – through its Monetary Policy RBI controls the volume of credit.

7. Publisher of reports – periodical reports on banking & other monetary matters.

Commercial Banks

•Accept deposits from the public

•Lending money

•Borrowing rate – the rate of interest     offered by the bank to deposit holders

•Lending rate – the rate of interest levied           for lending money

•The difference between lending & borrowing rate is called “spread”,  and is the profit appropriated by the banks.

Deposits

•1. savings deposits / demand deposits— chequeable deposits having low         interest rate.

•2. Time deposits / fixed deposits / term deposits—

Have a fixed period to maturity

Having high interest rate

Money Supply
 Legal definitions of Money

                        Money Supply is a stock variable.

•Money Supply is the total stock of money in circulation at a particular point of time.

•Measures of Money Supply by RBI

•1.  M1= CU + DD

            CU is currency held by the public.

            DD is demand deposits held by the commercial banks.       

•2.  M2= M1 + Savings deposits with Post Office savings         bank

•3.  M3= M1 + Net time deposits of Commercial Banks

•4.  M4= M3 + Total deposits with Post Office             savings organizations

Narrow & Broad Money

•M1 and M2 are known as Narrow Money

•M3 and M4 are known as Broad Money

•M1 is the most liquid asset

•M4 is the least liquid asset

AGGREGATE MONETARY RESOURCE

            M3 is the most commonly used measure of money supply and it is the AMR.

MONEY CREATION BY THE BANKING SYSTEM

•1. The Currency Deposit Ratio (cdr)

                          cdr =CU/DD

                         it reflects people’s preference for liquidity.

2. The Reserve Deposit Ratio (rdr)

                          rdr = R/DD

It is the proportion of the total deposits commercial banks keep as reserves.

Rdr has two instruments

•1. Cash Reserve Ratio (CRR) –

•The fraction of commercial banks deposits kept in RBI is CRR.

•2. Statutory Liquidity Ratio (SLR) –

•Commercial banks have to keep a given fraction of their total deposits n the form of specified liquid assets.

BANK RATE

•To control the value of rdr RBI uses another instrument called Bank Rate,

•It is the rate at which RBI lend money to the commercial banks.

•A high BR makes borrowing costly for commercial banks.

HIGH POWERED MONEY (H)

•The total liability of the Monetary authority of the country,RBI, is called the H or Monetary Base.

•H = CU + R                    R is the reserves

Demand for money

•Demand for money balance is liquidity preference.

•Whether to hold cash or put it in savings bank so as to earn interest.

•People desire to hold money balance from       two motives —

•1. The Transaction Motive

•2. The Speculative Motive

Transaction motive

•Holding money for transactions

•Transaction demand for money in an economy,

MT  can be written as

v.M  = T 

Where,  v is velocity of circulation of money

•                                   T is the total value of transaction in the economy.

Velocity

•basic concept:  the rate at which money circulates

•definition:  the number of times the average rupee changes hands in a given time period

•example:  In 2010,

•Rs.500 crores in transactions

•money supply = Rs.100 crores

•The average Rupee is used in five transactions in 2010

•So, velocity = 5.