CBSE Class 12 Economics HOTs Government Budget the Economy Set 03

Reason-based Questions (Comprehension of the Subject-matter)

Read the following statements carefully. Write True or False with a reason.

Question. Borrowing from the central bank by the government leads to inflation as it increases the supply of money in the economy.
Answer: True. Because increase in the supply of money has a direct bearing on the general price level particularly in less developed countries where production capacity is highly limited.

Question. Balanced budget is that budget in which revenue receipts = revenue expenditure.
Answer: False. Balanced budget is that budget in which total expenditure = total receipts.

Question. Revenue receipts tend to reduce liability of the government.
Answer: False. Revenue receipts do not affect asset/liability status of the government.

Question. Capital expenditure adds to assets of the government, or reduces its liability.
Answer: True. Capital expenditure of the government creates assets for the government (through expenditure on capital goods projects) or reduces its liability (through repayment of loans).

Question. Revenue receipts do not impact asset and liability status of the government.
Answer: True. Revenue receipts are those receipts which do not cause reduction in assets or increase in liability of the government.

Question. Revenue expenditure reduces assets of the government.
Answer: False. Revenue expenditure is that expenditure of the government which does not cause increase in assets or a reduction in liabilities.

Question. Capital receipts add to liabilities of the government.
Answer: True. Capital receipts are those receipts which cause a reduction in assets or increase in liability of the government.

Question. Capital expenditure reduces capital stock of the government.
Answer: False. If incurred on the creation of assets (like construction of government buildings), capital expenditure increases capital stock of the government.

Question. Tax is a capital receipt of the government.
Answer: False. Tax is a revenue receipt of the government. It does not impact asset/liability status of the government.

Question. Repayment of loan by the government is a capital expenditure.
Answer: True. Because repayment of loan causes reduction in liabilities of the government. Therefore, it is a capital expenditure.

Question. GST is a direct tax.
Answer: False. GST is an indirect tax because it is levied on goods and services, and its burden can be shifted from sellers to the buyers.

Question. A regressive tax causes a greater real burden on the rich.
Answer: False. A regressive tax, by definition, causes a greater real burden on the poor.

Question. Borrowing by the government is a measure of revenue deficit.
Answer: False. Borrowing by the government is not a measure of revenue deficit. It is a measure of fiscal deficit.

Question. Loans offered by the central government to the state government are to be treated as capital expenditure of the central government.
Answer: True. Because loans offered by the central government to the state government create assets for the central government.

Question. Grants by the government are treated as revenue expenditure.
Answer: True. All grants, as a matter of convention, are treated as revenue expenditure of the government.

Question. Construction of fly-over is a revenue expenditure of the government.
Answer: False. Construction of fly-over is a capital expenditure of the government because it adds to assets of the government.

Question. Expenditure on law and order is a component of plan expenditure.
Answer: False. Expenditure on law and order is a component of non-plan expenditure because it relates to expenditure on routine functioning of the government.

Question. Borrowing by the government is a component of revenue budget.
Answer: False. Borrowing by the government is a component of capital budget. Because, it increases liability of the government.

Question. Disinvestment is a component of capital budget.
Answer: True. Disinvestment causes reduction in assets of the government. Therefore, it is a capital receipt of the government.

Question. Fiscal deficit is only a part of primary deficit.
Answer: False. Primary deficit is only a part of fiscal deficit. Fiscal deficit = Primary deficit + Interest payment.

Question. Higher revenue deficit always leads to higher fiscal deficit.
Answer: False. Because fiscal deficit also depends on capital receipts and expenditures of the government.

Question. Fiscal deficit is zero in case there is no provision for borrowing in the government budget.
Answer: True. Because fiscal deficit is equal to total borrowing by the government.

Question. Revenue deficit is the excess of capital receipts over and above revenue receipts of the government.
Answer: False. Revenue deficit is the excess of revenue expenditure over revenue receipts.

Question. Primary deficit does not include interest payment, while fiscal deficit does.
Answer: True. Primary deficit is the difference between fiscal deficit and interest payment.

HOTS & Applications

Question. Revenue deficit can be managed through borrowing or disinvestment. But fiscal deficit can be managed only through borrowing. Do you agree? State reason in support of your answer.
Answer: The statement is true. Because disinvestment is already included as an item of capital receipt in the estimation of fiscal deficit. So that, borrowing is the only window available to manage fiscal deficit. On the other hand, estimation of revenue deficit does not account for borrowing as well as disinvestment. So that, both these windows are available to manage revenue deficit.

Question. A persistent recession leads to low revenue receipts of the government. Comment.
Answer: Economic recession is a situation when low AD leads to low investment and therefore, low growth rate of GDP. When growth rate of GDP falls, tax revenue of the government (through direct as well as indirect taxation) tends to suffer. Implying slowdown of revenue receipts of the government during recession.

Question. A rise in fiscal deficit when the government revises salary structure of its employees leads to a rise in primary deficit as well. Comment.
Answer: Revision of salary structure enhances revenue expenditure of the government. It would mean a rise in fiscal deficit of the government. If interest payments are constant, a rise in fiscal deficit would amount to a rise in primary deficit as well (Fiscal deficit – Interest payment = Primary deficit).

Question. Is it correct that if revenue budget balances, capital budget also balances.
Answer: No, the given statement is incorrect. Because revenue budget shows revenue receipts and revenue expenditure while capital budget shows capital receipts and capital expenditure.

Question. Is government budget a statement of government receipts and expenditure over the past one year?
Answer: No, government budget is a statement of estimated receipts and expenditure of the government for the fiscal year which is to begin.

Question. Budgetary deficit points to failure of the government to manage its budget. Defend or refute.
Answer: The above statement is incorrect. Budgetary deficit reflecting borrowing by the government may in fact be a part of designed strategy of the government to accelerate the pace of growth or to achieve macro stability in the economy.

Question. Do you agree that revenue deficit increases when the government fails to recover its loans?
Answer: No, it is incorrect. Revenue deficit is the excess of revenue expenditure over revenue receipts. While the recovery of loans by the government is a capital receipt.

Question. Is balanced budget always the best budget?
Answer: Not necessarily. A moderate fiscal deficit (around 3%) is found to be conducive to growth, when investment is low because of low AD.

Question. Is income tax in India regressive in nature?
Answer: No, income tax in India is progressive in nature. Because tax rate increases with increase in income.

Question. Does non-plan expenditure contribute to social welfare?
Answer: Yes, non-plan expenditure does contribute to social welfare. Most of the non-plan expenditure consists of expenditure on subsidies and the maintenance of law and order in the country. Both these categories of expenditure are welfare-oriented.

Question. Briefly describe how the government budget contributes to the process of growth and stability.
Answer: The government budget contributes to growth, because a significant percentage of budgetary expenditure is committed to the growth and expansion of public sector enterprises. The government also offers subsidies to the producers to maintain high level of production of the essential goods. Stability is promoted by combating inflation through fiscal discipline and combating deflation through liberal spending by the government. Fiscal discipline aims at lowering AD during inflation. Liberal spending promotes AD during deflation.

Question. Distinguish between revenue budget and capital budget.
Answer: That part of the government budget which shows revenue account (including revenue receipts and revenue expenditure) is known as revenue budget. That part of the government budget which shows capital account (including capital receipts and capital expenditure) is known as capital budget.

Question. Government has raised its expenditure on free services like education and health to the poor. Explain the economic value it reflects.
Answer: Two observations can be made in this respect:
(i) Higher expenditure on health is expected to make our workforce strong and efficient. Rise in efficiency implies a rise in productivity which leads to a rise in GDP. It is an index of economic growth.
(ii) Higher expenditure on education is expected to boost skill formation in the country. It facilitates the use of new technology. Application of new technology would shift PPC of the economy to the right. Implying a higher level of output with the same resources.

Question. Find Primary Deficit from the following data:
Items (Rs. in crore)
(i) Revenue deficit: 8,800
(ii) Fiscal deficit: 11,600
(iii) Interest payment by the government: 1,600
Answer: Primary Deficit = Fiscal deficit – Interest payment by the government
= Rs. 11,600 crore – Rs. 1,600 crore
= Rs. 10,000 crore
Primary deficit = Rs. 10,000 crore.

Question. Calculate Revenue Deficit, Fiscal Deficit and Primary Deficit from the following data:
Items (Rs. in crore)
(i) Revenue expenditure: 22,250
(ii) Capital expenditure: 28,000
(iii) Revenue receipts: 17,750
(iv) Capital receipts (net of borrowing): 20,000
(v) Interest payments: 5,000
(vi) Borrowings: 12,500
Answer: Revenue Deficit = Revenue expenditure – Revenue receipts
= Rs. 22,250 crore – Rs. 17,750 crore
= Rs. 4,500 crore
Fiscal Deficit = Revenue expenditure + Capital expenditure – Revenue receipts – Capital receipts (net of borrowing)
= Borrowings
= Rs. 12,500 crore
Primary Deficit = Fiscal deficit – Interest payments
= Rs. 12,500 crore – Rs. 5,000 crore
= Rs. 7,500 crore

Question. Find borrowing by the government if payment of interest is estimated to be of Rs. 15,000 crore which is 25% of primary deficit.
Answer: Here, interest payment = 25% of primary deficit. So that,
Primary deficit = \( \frac{100}{25} \times 15,000 = Rs. 60,000 \) crore
We know, Primary Deficit = Fiscal deficit – Interest payment
Or, Fiscal Deficit = Primary deficit + Interest payment
= Rs. 60,000 crore + Rs. 15,000 crore
= Rs. 75,000 crore
Borrowing = Fiscal Deficit = Rs. 75,000 crore

Question. Revenue deficit is estimated to be Rs. 20,000 crore, and borrowing is estimated to be Rs. 15,000 crore. If expenditure on interest payment is estimated to be 50% of the revenue deficit, find fiscal deficit and primary deficit.
Answer: Fiscal Deficit = Borrowing = Rs. 15,000 crore
Interest Payment = 50% of Revenue deficit
= 50% of Rs. 20,000 crore
= Rs. 10,000 crore
Primary Deficit = Fiscal deficit – Interest payment
= Rs. 15,000 crore – Rs. 10,000 crore
= Rs. 5,000 crore

Question. Comment on the following statements as true or false, with a reason.
(i) Construction of school-building is a revenue expenditure of the government.
(ii) Gift tax is a capital receipt.
(iii) Dividends on investment made by government is a revenue receipt.
Answer: (i) It is a false statement. Construction of school-building is a capital expenditure because it creates an asset for the government.
(ii) It is a false statement. Gift tax is a revenue receipt, because it neither creates liability nor leads to reduction in assets of the government.
(iii) It is a true statement. Dividends on investment made by government is a revenue receipt, as it does not add to liability or reduction in assets of the government.

Question. Categorise the following government receipts into revenue and capital receipts. Give reasons for your answer.
(i) Receipt from sale of shares of a public sector undertaking.
(ii) Borrowing from public.
(iii) Profit of public sector undertakings.
(iv) Income tax received by government.
Answer: (i) Receipt from sale of shares of a public sector undertaking is a capital receipt, as it causes reduction in assets of the government.
(ii) Borrowing from public is a capital receipt, as it creates liability for the government.
(iii) Profit of public sector undertakings is a revenue receipt, because it neither creates liability nor leads to reduction in assets of the government.
(iv) Income tax received by government is a revenue receipt, because it neither creates liability nor leads to reduction in assets of the government.

Question. Why should revenue deficit be curbed?
Answer: Revenue deficit often occurs when unproductive expenditure of the government (like expenditure on subsidies and purchases relating to law & order and defence of the country) is in excess of the tax and non-tax revenue receipts. Thus, it contributes to fiscal deficit without adding much to the flow of goods and services in the economy. Revenue deficit compels the government to resort to borrowing or disinvestment. Borrowing leads to a rise in national debt. Disinvestment leads to transfer of asset ownership from the public sector to private sector. It implies a shift in focus from social welfare to profit maximisation. Thus, we conclude that revenue deficit should be curbed.

Question. Finance Minister has announced that steps would be taken to rationalise subsidies which presently dominate the economy of the nation. What is the economic value of this statement?
Answer: The statement comes in the wake of consistently high fiscal deficit arising out of high expenditure of the government on subsidies. Expenditure on subsidies is mostly unproductive. Because, it just focuses on lowering the market price of certain goods (like oil and LPG). To the extent money is spent on subsidies, it is not available for investment in strategic sectors of economy like infrastructure. Rationalising the subsidies means provision of subsidies only for below poverty line population. The government has already initiated this process by withdrawing subsidy on petrol and diesel.

Question. How has the decline in the price of crude oil in the international market helped the government to reduce fiscal deficit?
Answer: India imports crude oil to meet the bulk of domestic demand for petrol and diesel. A substantial fall in crude oil prices in the international market has prompted the government to increase excise duty on petrol and diesel without passing the benefit of it to the consumers. It has raised tax revenue of the government. Accordingly, fiscal deficit has reduced.

Analysis & Evaluation

Question. How can the government impact allocation of resources through its budgetary policy?
Answer: Following observations highlight how the government can impact allocation of resources through its budgetary policy:
(i) The government can offer subsidies on such goods (like coarse cloth) the production of which is essential for poorer sections of the society. So that, the resources are shifted from the production of ‘goods for the rich’ to the production of ‘goods for the poor’.
(ii) The government can grant ‘tax holiday’ (exemption from tax payments) to induce investment in the production of essential goods like ‘life saving drugs’. So that the resources are shifted from the production of non-essential drugs to the life-saving drugs.
(iii) The government can impact allocation of resources by shifting its own investments from inefficient to efficient units of production. Also, allocation of resources would be impacted when the government increases investment on the production of public goods.
(iv) High taxation can be imposed on such goods (like cigarettes and liquor), the production of which is harmful to the society. Accordingly, the resources would shift to the production of socially useful production activities.
(v) The government can make larger budgetary allocations for its ‘Support Price Policy’ in favour of food crops. This would shift resources from non-food crops to food crops. This would make the country self-sufficient in food grain production.

Question. Do you approve of disinvestment as an appropriate policy of financing budgetary deficit?
Answer: Disinvestment occurs when the government chooses to sell its stake in public sector or joint sector enterprises. This leads to ‘privatisation’. Presently, this seems to be the only effective remedy available with the government to finance the deficit. However, the government should be careful about two points:
(i) It should unload shares of only inefficient enterprises. Otherwise, it would not only be lowering its asset holding, but also closing a regular source of income, and
(ii) Money received through disinvestment should not be used for purpose of political popularity (to garner votes). Instead, it should be used as productive investment.

Question. Subsidy on diesel oil is a wasteful expenditure by the government. Write one point in support of this observation and one against it.
Answer: It is a wasteful expenditure: Because the benefit of subsidy (on diesel oil) is unduly reaped by a richer section of the society who get cheaper oil to run their luxury cars.
It is not a wasteful expenditure: Because, farmers need to be given diesel at the low price. So that, the cost of farming does not rise and farming remains a profitable occupation.

Question. Do you agree with the view that demonetisation of 500 and 1,000 rupee notes would help the government in lowering its fiscal deficit?
Answer: It is true that demonetisation would help the government to lower its fiscal deficit. Because of demonetisation, shadow economy (black money economy) will shrink. Unaccounted output would now be accounted as a part of GDP. This would increase revenue receipts of the government by way of direct and indirect taxation. Accordingly, fiscal deficit must reduce.

CBSE Questions—

Question. Borrowing in government budget is: (choose the correct alternative) [CBSE Delhi 2015]
(a) revenue deficit
(b) fiscal deficit
(c) primary deficit
(d) deficit in taxes
Answer: (b) fiscal deficit