Relevance : GS 3(Economy )
Components of the Budget:
- Expenditure: Divided into capital expenditure (creating long-term assets) and revenue expenditure (ongoing costs like wages, subsidies).
- Capital expenditure includes infrastructure projects (e.g., new schools or hospitals).
- Revenue expenditure involves costs that do not create assets, like interest payments or subsidies.
- Receipts: Categorized into revenue receipts, non-debt capital receipts, and debt-creating capital receipts.
- Revenue receipts include tax and non-tax revenue that do not increase liabilities.
- Non-debt capital receipts (e.g., loan recovery, disinvestment) do not create future liabilities.
- Debt-creating receipts involve loans and borrowings, increasing liabilities.
- Deficit Indicators:
- Fiscal Deficit: Difference between total expenditure and the sum of revenue receipts + non-debt receipts.
- Primary Deficit: Fiscal deficit minus interest payments.
- Revenue Deficit: Difference between fiscal deficit and capital expenditure.
Implications of the Budget on the Economy:
- Aggregate Demand: Government expenditure boosts aggregate demand, while taxes and non-tax revenue reduce private sector income, thus lowering private demand.
- Economic Trends: Expenditure and revenue typically rise with GDP, and are analyzed in relation to GDP or growth rates (after inflation adjustment).
- Fiscal Deficit Analysis: A reduction in fiscal deficit-GDP ratio signals a government policy to reduce aggregate demand.
- Income Distribution: Budget decisions, such as spending on welfare (e.g., food subsidies, employment schemes) or corporate tax cuts, can have varying impacts on income distribution. Welfare measures may benefit poorer sections, while tax cuts may favor corporations.
Fiscal Rules and Policy Impact:
- Fiscal Rules: India’s fiscal policy is guided by the N.K. Singh Committee Report, which sets targets for the debt-GDP ratio, fiscal deficit-GDP ratio, and revenue deficit-GDP ratio.
- Adjusting Expenditure: To meet these fiscal targets, expenditure may be adjusted, even if it contradicts the need for economic expansion (e.g., during recessions or high unemployment).
- Limitations of Current Rules: The existing fiscal framework may limit the government’s ability to address issues like unemployment or low output growth by capping expenditure.
- Re-examining Fiscal Policy: In light of contemporary economic challenges, there may be a need to re-evaluate India’s fiscal rules to allow more flexibility in responding to economic needs.
