Maharashtra Board Class 12 Economics Chapter 8 Public Finance in India Solutions

1. Choose The Correct Option

Question 1. Optional functions of Government:
a) Protection from external attack
b) Provision of education and health services
c) Provision of social security measures
d) Collection of tax
Options:
1) b and c
2) a, b and c
3) b, c and d
4) All of the above
Answer: (1) b and c
In simple words: Optional government functions, such as providing education, health, and social security, aim to improve citizens' quality of life beyond basic governance, contributing to overall societal development.

🎯 Exam Tip: Distinguish clearly between obligatory (essential for state survival) and optional (welfare-oriented) government functions to answer such questions accurately.

Question 2. Obligatory functions of the Government:
a) Provision of employment
b) Maintaining internal law and order
c) Welfare measures
d) Exporting goods and services
Options:
1) c and d
2) a and b
3) only b
4) a, c and d
Answer: (3) only b
In simple words: Obligatory government functions are core responsibilities like maintaining law and order, essential for the state's very existence and smooth functioning.

🎯 Exam Tip: Remember that maintaining internal law and order is a fundamental, non-negotiable duty of any government, key to its stability and citizen protection.

Question 3. Public finance is one of those subjects which are on the borderline between economics and politics' ................. is the view of
a) Adam Smith
b) Alfred Marshall
e) Prof. Hugh Dalton
d) Prof. Findlay Shirras
Options:
1) only a
2) only b
3) only c
4) only d
Answer: (3) only c
In simple words: Professor Hugh Dalton viewed public finance as a field that inherently sits at the intersection of economic principles and political decision-making, acknowledging the influence of both.

🎯 Exam Tip: Knowing the key economists associated with specific definitions or views in public finance helps secure marks in objective questions.

Question 4. Non-tax sources of revenue:
a) Direct and Indirect Tax
b) Direct Tax and Fees
c) Fees
d) Special Levy
Options:
1) b and c
2) a and c
3) a, b, c andd
4) c and d
Answer: (4) c and d
In simple words: Non-tax revenue sources for the government include fees charged for specific services and special levies, which are distinct from direct or indirect taxes.

🎯 Exam Tip: Understanding the diverse non-tax revenue streams, such as fees and special levies, is crucial for comprehending a government's total financial intake.

Question 5. Trends shown by Public expenditure of any Government shows following trend.
a) Constant
b) Increasing
c) Decreasing
d) Fluctuating
Options:
1) only a
2) only b
3) only c
4) only d
Answer: (2) only b
In simple words: Historically, government public expenditure generally shows an increasing trend, driven by expanding roles in welfare, development, and administration.

🎯 Exam Tip: Recognize that public expenditure tends to grow over time due to increasing societal needs and government responsibilities, a fundamental principle in public finance.

Question 6. Identify the right group of pairs from the given options.
I) Direct tax - a) Non-tax revenue
ii) Indirect tax - b) Inflation
iii) Fees and Fines - c) GST
iv) Surplus budget - d) Personal income tax
Options:
a) i-d ii-c iii-b iv-a
b) i-c ii-d iii-a iv-b
c) i-d ii-c iii-a iv-b
d) i-a ii-b iii-c iv-d
Answer: (c) i-d ii-c iii-a iv-b
In simple words: This question asks to correctly match direct tax with personal income tax, indirect tax with GST, fees and fines with non-tax revenue, and surplus budget with inflation based on their definitions and impacts.

🎯 Exam Tip: A clear understanding of tax types, revenue sources, and budgetary concepts is essential for accurately identifying correct pairings in economic matching questions.

2. Distinguish Between Following Concepts:

Question 1. Public finance and Private finance.
Answer:

🎯 Exam Tip: Clearly differentiating between the objectives, scope, and operational flexibility of public and private finance is crucial for comparative analysis.

Question 2. Internal debt and External debt.
Answer:

🎯 Exam Tip: Focus on the source of borrowing (domestic vs. foreign) and the currency used as key distinctions between internal and external debt.

Question 3. Developmental expenditure and Non developmental expenditure.
Answer:

🎯 Exam Tip: To differentiate, remember that developmental expenditure focuses on growth and asset creation, whereas non-developmental expenditure covers routine government operations and maintenance.

Question 4. Special assessment and Special levy.
Answer:

🎯 Exam Tip: Understand that special assessment is for specific benefits to a group, while a special levy is a deterrent measure for harmful goods, highlighting their distinct purposes.

Question 5. Direct Tax and Indirect tax.
Answer:

🎯 Exam Tip: The key difference lies in the incidence of the tax-direct taxes cannot be shifted, while indirect taxes can.

3. State With Reasons Whether You Agree Or Disagree With The Following Statement:

Question 1. Obligatory function is the only function of the Govenment.
Answer: No, I do not agree with this statement. It is essential to perform obligatory functions for the government like protection from external attack, maintaining law and order, defence and civil administration, etc. But modern government also perform some optional functions also. They are necessary for social and economic development of the country such as provision of education and health services, provision of social security like pensions and other welfare measures. So, government has to perform obligatory as well as optional functions.
In simple words: Governments perform both essential obligatory functions, like defense and law enforcement, and optional welfare functions, like education and health, demonstrating a broader role than just obligatory duties.

🎯 Exam Tip: When answering agree/disagree questions, always provide a clear stance (agree/disagree) followed by well-reasoned arguments explaining why, covering both sides of the government's functions.

Question 2. Fines and penalties are a major source of revenue for the Government.
Answer: No, I do not agree with this statement. Public revenue is the aggregate income, with the government, comes through various sources. These sources are classified as tax-revenue and non-tax revenue. Tax revenue is a compulsory contribution from people to government without getting any special benefits to tax-payers. So, tax revenue is the major source of revenue for the government. However, fines and penalties are sources of non-tax revenue. The government imposes fines and penalties { only on those who violate the laws of a country. So, the income from this source is ) very small.
In simple words: Fines and penalties are indeed government revenue sources, but they are generally minor compared to tax revenue, which forms the primary income stream for the state.

🎯 Exam Tip: Distinguish between primary (tax revenue) and secondary (non-tax revenue like fines) sources of government income; fines are regulatory tools, not primary revenue generators.

Question 3. The goods and services tax (GST) has replaced almost all indirect taxes in India.
Answer: Yes, I agree with this statement. The Goods and Service Tax (GST) came into effect in India on 1st July, 2017. GST is an indirect tax used in India, on the supply of goods and services. GST simplified the tax system in a country. GST is different from an excise or sales tax imposed on the manufacture or sale of ; a product. GST is a tax levied on supply of goods and services. GST replaced almost all indirect taxes like central excise duty, service tax, entry tax, entertainment tax, etc. Because, GST is a comprehensive tax base with nationwide coverage of goods and ; services.
In simple words: GST has significantly simplified India's tax system by consolidating various central and state indirect taxes into a single comprehensive levy on goods and services.

🎯 Exam Tip: Highlight the unifying and simplifying nature of GST, replacing a multitude of older indirect taxes, as a key reason for agreeing with the statement.

Question 4. Democratic Governments do not lead to increase in public expenditure.
Answer: No, I do not agree with this statement. i Public expenditure is that expenditure which is incurred by the public authority (i.e., central, state and local government). Public expenditure is required for protection of the citizens, for satisfying their collective needs and for promoting economic and social welfare of the people. In a democratic state, government has to (perform the obligatory functions like, defence and civil administration, maintaining internal law and order, etc. Government also performs optional functions like provision of education and health services, provision of social security, etc. To perform all these functions more efficiently, democratic government leads to increase in public expenditure.
In simple words: Democratic governments tend to increase public expenditure due to their responsibility to protect citizens, fulfill collective needs, promote welfare, and efficiently perform various obligatory and optional functions.

🎯 Exam Tip: Remember that democratic governance, with its emphasis on welfare and development, inherently leads to higher public spending to meet diverse societal demands and implement various policies.

Question 5. Public finance is more elastic than private finance.
Answer: Yes, I agree with this statement. Public finance refers to the income and expenditure of public authorities, whereas, private finance is the income and expenditure of individuals and private sector organisations. The main objective of public finance is to offer maximum social advantage, while the main motive of private finance is to fulfil private interest. Public finance is more elastic compare to private finance because credit provision is much more in the market to increase public finance but, credit availability is limited to increase private finance. It is also possible to the government to adjust revenue and expenditure with one another in case of public finance.
In simple words: Public finance is more flexible than private finance because governments have greater ability to raise funds through taxes and borrowing, and can adjust spending to meet broader societal needs.

🎯 Exam Tip: Elasticity in finance refers to the ability to adjust; governments have a broader scope for revenue and expenditure adjustments (e.g., through policy changes) compared to private entities, making public finance more elastic.

4. Read The Given Passage And Answer The Questions:

'The conventional notion of social security is that the government would make periodic payments to look after people in their old age, ill-health. disability and poverty. This idea should itself change from writing a cheque for the beneficiary to institutional arrangements to care for beneficiaries. including by enabling them to look after themselves. to a large extent. The write-a-cheque model of social security is a legacy from the rich world at the optimal phase of its demographic transition, when the working population was numerals enough and earning enough to generate the taxes to pay for the care of those not working. This model is ill-suited for less, well- off India with growing life expectancy. increasing urbanization and resultant migration. Social security under urbanization will be different from social security in a static society.

Question 1. State the conventional notion of social security.
Answer: The conventional notion of social security is that the government would make periodic payments to look after people in their old age, ill-health, disability and poverty.
In simple words: Traditionally, social security was understood as the government making regular payments to support individuals facing old age, illness, disability, or poverty.

🎯 Exam Tip: For passage-based questions, directly extract the definition or concept as stated in the text to ensure accuracy and avoid personal interpretation.

Question 2. What kind of conceptual change is suggested in the given paragraph.
Answer: The given paragraph suggests that, the idea should change from writing a cheque for the beneficiary to institutional arrangement to care for beneficiaries. It will enable them to look after themselves to a large extent.
In simple words: The passage suggests a shift from merely providing financial cheques to beneficiaries towards creating institutional arrangements that empower them to be self-reliant and look after themselves.

🎯 Exam Tip: Identify keywords in the passage that indicate a transition or change in approach, such as "should itself change from" or "different from," to pinpoint the suggested conceptual shift.

Question 3. What is a legacy of social security from the rich world?
Answer: The write-a-cheque model of social security i is a legacy from the rich world.
In simple words: The "write-a-cheque" model of social security, where regular payments are made to non-working populations, is a legacy derived from rich countries during their demographic transition.

🎯 Exam Tip: Locate phrases in the passage that directly link a concept to its origin, like "legacy from," to accurately identify the answer.

Question 4. Which features of India make the traditional model of social security ill-suited for the economy?
Answer: Growing life expectancy, increasing urbanization and resultant migration are the features of India that make the traditional model of social security ill suited for the economy.
In simple words: India's traditional social security model is ill-suited due to increasing life expectancy, rapid urbanization, and significant migration patterns, which present unique challenges.

🎯 Exam Tip: Look for specific reasons or characteristics mentioned in the passage that describe why a particular model is inappropriate for a given context.

5. Answer The Following:

Question 1. State the types and importance of Government budget.
Answer: (B) Importance of Budget: Budget is important in number of ways.
(1) Tax rates presented in the budget indicates disposable income of the tax payer. It also determines the development of business and individuals.
(2) Government expenditure is also a part of budget. This public expenditure on defence, administration, infrastructure, education, health care, etc. affects the lives of the citizens and overall economy.
(3) Government uses budget as a medium for implementing economy policies in the country.
(4) Budgetary actions of the government affect production size and distribution of income, utilization of human and material resources of the country. Thus, implementing suitable budgetary policy is very important for overall development of the economy.
In simple words: A government budget outlines income and expenditure, playing a vital role in setting tax rates, guiding public spending on essential services, implementing economic policies, and influencing resource distribution for overall development.

🎯 Exam Tip: Emphasize the multi-faceted role of the budget, not just as a financial statement, but as a critical tool for economic policy, resource allocation, and social welfare.

Question 2. Explain the principles of taxation.
Answer: Principles of taxation are also called canons of taxation. There are four principles (canons) of taxation, propounded by Adam Smith
(1) Canon of Equity or Equality
(2) Canon of Certainty
(3) Canon of Convenience
(4) Canon of Economy
They are explained as follows :
1. Canon of Equity or Equality : According to Adam Smith, every person should pay taxes to the government in proportion to his ability to pay. Canon of equity or equality means rich people should pay more tax as compared to poor.
2. Canon of Certainty : Adam Smith suggested that the tax payer should know in advance that, how much tax he has to pay, at what time and in what form he has to pay tax to the government.
3. Canon of Convenience : According to this principle, every tax should be levied in such a manner and at such a time that, it becomes convenient to the tax payer to make payment.
4. Canon of Economy : This principle suggests that the cost of tax collection should be the minimum. If tax is collected economically, then such a tax is considered to be a good tax. Every citizen of a country has to pay tax, imposed upon him as it is compulsory contribution to the government. Tax is a major source of revenue to the government. Therefore, public authority (Government) must consider all the principles (canons) of taxation in the preparation and implementation of tax system.
In simple words: Adam Smith's principles of taxation-equity, certainty, convenience, and economy-advocate for a fair, predictable, easy-to-pay, and cost-efficient tax system.

🎯 Exam Tip: When explaining Adam Smith's canons, dedicate a sentence or two to define each principle, ensuring clarity on what makes a tax system effective and just.

Question 3. Explain non-tax sources of revenue of the Government.
Answer: Non-tax revenue refers to the revenue received by the government from various ? sources other than taxes. The sources of non-tax revenue are as follows:
Fees : It refers to charges paid, in return for certain specific services rendered by the government. E.g. fees paid for registration of house, car, education fees, etc.
Prices of Public Goods and Services : Various types of goods and services are produced, supplied and sold by modern government to the citizens. It; is added to public revenue when people s purchase them and pay their prices.
Special Assessment : It is special kind of tax, which is levied by local government on the residents of a particular area. In exchange of it, government provides some special facilities to them.
Fines and Penalties : It is imposed by government on those who violate the laws of the country. E.g. a traffic police charges fine and collects money if someone violates traffic rule. The objective behind collection of fines and penalties is not to earn money but to discourage the people from violating the laws framed by the government It is small source of income.
Gifts, Grants and Donations : The government receives gifts from its citizens and others. It is included in public revenue. The government may also get grants from foreign government and institutions for general and specific purposes. Foreign aid is also an important form of public revenue for developing country like India. However, this source of revenue is uncertain in nature.
Special Levies: It refers to the charges levied by government on those commodities, whose consumption is harmful to human health. Special levies are paid for using commodities like wine, opium and other intoxicants. Special levy is imposed, not to earn income, but to discourage the people from using harmful products.
Borrowings: Government borrows to raise fund because government expenditure generally exceeds government revenue, in a welfare state. When government borrows from foreign government or international organisations, it is known as external debt. It is more popular source of public revenue for investment in development of projects. Thus, public revenue in form of non-tax sources play very important role in socio-economic development of a country. Explain the classification of public expenditure.
In simple words: Non-tax revenue includes government income from fees for services, prices of public goods, special assessments for local benefits, fines for law violations, donations, special levies on harmful products, and borrowings.

🎯 Exam Tip: Provide distinct examples for each non-tax revenue source (e.g., registration fees for 'Fees', IMF loans for 'Borrowings') to demonstrate comprehensive understanding.

6. Answer In Detail:

Question 1. Explain various reasons for the growth of public expenditure.
Answer: Public expense is the expense incurred by the government (central, state and) local government). It is necessary for the protection of the citizens, for satisfying collective needs of the society and for ? promoting economy.and social welfare of a S country. Public expense is necessary to perform various functions of the government Public ; expense consists of revenue and capital expenses as well as developmental and non-developmental expenses.
1. High Growth of Population : In a developing country like India, population is rising rapidly. Therefore, government has to incur greater expense to fulfil the needs of growing population.
(2) Growing Urbanisation : Due to expansion of urban sector, government expense increases. Government has to make the provision of water supply, roads, energy, schools and colleges, public transport, hospitals, welfare centres, sanitation, drainage system, etc. It leads to growth in public expense.
(3) Public Health Care : Public health is a top most priority of modern welfare state. Government undertakes public vaccination programme, maintenance of dispensaries, maternity care and child welfare centres, etc
(4) Democracy : There is a democracy in India. A democratic form of government is very expensive due to regular elections and other public works. It leads to growth in public expense.
(5) An increase in Defence Expense : Government has to incur defence expense to protect the country from external attacks as well as to maintain law and order in a country. Hence, an increase in defence expense leads to growth of public expense.
(6) Disaster Management : Many natural calamities like earthquakes, flood, cyclones, Covid-19 and man-made problems like social unrest, economic instability, etc. occur frequently. In such cases, government has to spend for disaster management which increases public expense.
(7) Infrastructure Development : It is necessary to make provision of economic infrastructure like energy, transport, communication and social infrastructure like education, health, etc. for rapid economic development of a country. Thus, development of infrastructure facilities results into growth of public expense.
(8) Inflation: Due to inflation, prices of goods and services tend to rise. When government buys goods and services from the market for development of a country, government has to pay higher cost which raises public expense.
(9) Industrial Development : An increase in production depends upon industrial development. It leads to an increase in level of employment and overall economy growth. So, government implements various schemes and programmes for industrial development. It results into growth of public expense.
(10) Increase in Government Activities : The modern government performs various obligatory and optional functions for social and economic development of a country. It requires huge fund to spend on education, public health, public recreation, social welfare schemes, etc. Many other functions like maintenance of roads, lighting, public streets, construction of public houses, protecting life and property, public vaccination, garbage collection and ; disposal, prevention and control of epidemics etc. lead to growth of public expenses. Government also spends on provision of pure water supply, removal of slums, checking) food adulteration, etc. All these factors are responsible for the j growth of public expense.
In simple words: Public expenditure grows due to factors like population increase, urbanization, focus on public health, democratic governance costs, rising defense needs, disaster management, infrastructure development, inflation, industrial growth, and expanded government activities for social welfare.

🎯 Exam Tip: Categorize the reasons for expenditure growth (e.g., demographic, social, economic, administrative) to provide a structured and comprehensive answer, linking each point to its impact on government spending.

Intext Questions

Find Out (Textbook Page 70):

Question. More examples of obligatory and optional functions of the government.
Answer:

Question 1. List the reasons for growth in public expenditure other than those given in the textbook.
Answer:
1. Rise in per capita income.
2. Rural development.
3. Provision of transport and communication.
4. Reducing inequalities.
5. Expenditure on social services (like food, housing, education etc.)
6. Effects of war.
7. Pressure of social progress.
In simple words: Public expenditure can grow due to various factors not always covered in basic texts, such as a general increase in individual incomes, efforts to develop rural areas, improving connectivity, tackling economic disparities, investing in public welfare like food and housing, consequences of conflicts, and overall societal demands for progress.

🎯 Exam Tip: Focus on understanding how each factor contributes to increased government spending, particularly distinguishing between economic and social development causes.

Question 2. Identify the important Social Welfare Schemes in India.
Answer:

🎯 Exam Tip: Memorize the key objectives and launch dates of prominent welfare schemes, as they are frequently asked in exams to assess knowledge of government social initiatives.