Chapter - 8
Public Finance in India
Most Likely Questions:
1. | Choose the Correct Option | Solution | 5 Marks |
2 | Complete the Correction | Solution | 5 Marks |
3 | Give Economic Term | Solution | 5 Marks |
4 | Find the Odd Word | Solution | 5 Marks |
5 | Complete the following Statements | Solution | 5 Marks |
6 | Assertion and Reasoning Questions | Solution | 5 Marks |
7 | Identify and Explain the Concepts | Solution | 6 Marks |
8 | Distinguish Between | Solution | 6 Marks |
9 | Answer in Brief | Solution | 12 Marks |
10 | State with Reasons, Do you Agree/ Disagree | Solution | 12 Marks |
11 | Table, Diagram, Passage Based Questions | Solution | 8 Marks |
12 | Answer in Detail | Solution | 16 Marks |
Q. 1. A) Choose the correct option :
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
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
3) "Definition - Public finance is one of those subjects which are on the borderline between economics and politics." ......... given by
a) Adam Smith
b) Alfred Marshall
c) Prof. Hugh Dalton
d) Prof. Findlay Shirras
Options :
1) only a
2) only b
3) only c
4) only d
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 and d
4) c and d
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
6) Identify the right group of pairs from the given options.
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A
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B
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i) Direct tax
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a) Non-tax
revenue
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ii) Indirect
tax
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b) Inflation
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iii) Fees and
Fines
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c) GST
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iv) Surplus
budget
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d) Personal
income tax
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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
Q. 2. Distinguish between following concepts :
1) Public finance and Private finance.
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Public finance
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Private finance
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It refers to raising and spending of funds by the
government.
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It represents to raising and spending of funds by private
individual.
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It offers maximum social advantage to the society.
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It offers maximum fulfilment of private interest.
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In this, Government first decides the volume and different
ways of its expenditure.
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In this, an individual first considers his income and then
decide the expenditure.
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They have high degree of credit in the market.
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They hold limited degree of credit in the market.
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2) Internal debt and External debt.
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Internal
Debt
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External
Debt
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(1) Meaning
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Debt raised
on the basis of financial resources within the economy is called internal
debt.
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Debt raised
on the basis of financial resources outside the economy is called external
debt.
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(2) Nature
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Internal debt
is repaid using domestic currency. It is less complicated to manage.
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External debt
is repaid using foreign currency. It is more complex to manage.
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3) Developmental expenditure and Non-developmental expenditure.
4) Special assessment and Special levy.
5) Direct Tax and Indirect tax.
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Direct tax
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Indirect tax
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A direct tax is paid by a person on whom it is legally
imposed. It cannot be transferred.
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Indirect tax is imposed on one person but paid by the
other.
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Impact and incidence are on the same person i.e. the tax
payer is also tax bearer. Tax burden cannot be shifted.
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The impact and incidence may be on different persons i.e.
there is a shifting of thpe tax burden.
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Direct tax is either on the person’s income, wealth or
property.
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Indirect tax is on commodities and services.
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This tax is paid at the time of earning income.
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This tax is paid at the time of spending income.
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e.g. Income tax, Wealth tax etc.
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e.g. Sales tax, excise duty, service tax etc.
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Q. 3. State with reasons whether you agree or disagree with the following statement:
1) Obligatory function is the only function of the Government.
Ans.
I disagree with this statement.
Reasons: (1) In modern times, modern government performs many other optional functions in addition to the traditional obligatory functions of defence and civic administration.
(2) The government performs optional functions for the purpose of boosting economic and social development in the country. The optional functions of the government are constantly increasing.
(3) Provision of education and health services, implementation of social security schemes, promotion of industrial development. employment generation, etc. optional functions are carried out by the government.
Thus, obligatory function is not the only function of government; it is one of many functions.
2) Fines and penalties are a major source of revenue for the Government.
Ans.
I disagree with this statement.
1. Revenue from fees and penalties is considered non-tax revenue. The government typically collects less revenue from non-tax sources compared to tax sources.
2. The government earns revenue from fines and penalties only when individuals breaks the law.
3. However, it cannot be assumed that a large number of people will repeatedly violate the laws of the country.
3) The goods and services tax (GST) has replaced almost all indirect taxes in India.
Ans.
I agree with this statement.
Reason:
1. Indirect tax is levied on goods or services.
2. It is paid at the time of production or sale and purchase of commodity/ service.
3. Before GST was introduced, there were various indirect taxes like service tax, value added tax, excise, etc.
4. GST is comprehensive tax introduced with the objective of unifying all indirect taxes levied at different stages of production.
5. Hence, GST has replaced almost all indirect taxes in India.
4) Democratic Governments do not lead to increase in public expenditure.
Ans.
I disagree with this statement.
Reason:
1. Public expenditure refers to the expenditure incurred by the public authority (i.e., Central, State, and local bodies) for the protection of their citizens, for satisfying their collective needs, and for promoting their economic and social welfare.
2. The majority of the countries in the world are democratic in nature.
3. A democratic form of government is expensive due to regular election and other such activities.
4. There has been an increase in public expenditure over the years due to such a form of government.
5. hence, democratic government lead to an increase in public expenditure.
5) Public finance is more elastic than private finance.
Ans.
I agree with this statement.
1. Public finance aims to offer the maximum social advantage to society while private finance aims to fulfill private interests.
2. There is not much scope for changes in private finance.
3. On the other hand, the government determines the volume and different ways of its expenditure based on the need for an hour.
4. The government can also print notes through the RBI.
5. Hence, public finance is more elastic then private finance, i.e., the extent of public expenditure can be varied as per he needs.
Q. 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.
1) State the conventional notion of social security.
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.
2) What kind of conceptual change is suggested in the given paragraph.
The conceptual 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.
3) What is a legacy of social security from the rich world?
The write-a-cheque model of social security is a legacy from the rich world at the optimal phase of its demographic transition.
4) Which features of India make the traditional model of social security ill-suited for the economy?
The traditional model is ill-suited for less, well off India with growing life expectancy, increasing urbanization and resultant migration.
Q. 5. Answer the following :
1) State the types and importance of Government budget.
The budgetary provisions of public
expenditure and revenue need to be at different
levels as per the changing needs of the economy.
Accordingly, Government budget is of three
types :
1) Balanced Budget
2) Surplus Budget
3) Deficit Budget
1) Balanced Budget : Government budget
is said to be balanced, when estimated
revenue and expenditure of the government
are equal. That is, Government Receipts =
Government Expenditure.
2) Surplus Budget : Government budget
is said to be surplus, when estimated
Government receipts are more than the
estimated Government expenditure.
i.e. anticipated Government Receipts >
estimated Government Expenditure.
3) Deficit Budget : Government budget
is said to be deficit, when anticipated
Government receipts are less than the
estimated Government expenditure. That
is anticipated Government Receipts <
estimated Government expenditure.
2) Explain the principles of taxation.
Equity or Equality : Every person will pay the taxes to the government in proportion to his 'ability to pay'. It means rich people should pay more tax compared to the poor.
Certainty : The taxpayer should know in advance how much tax he has to pay, at what time he has to pay the tax, and in what form the tax is to be paid to the government.
Convenience : Every tax should be levied in such a manner and at such a time that it becomes convenient to the taxpayer.
Economy : The cost of tax collection should be the minimum. if a major portion of the tax proceeds is spent on the tax collection itself, then such a tax cannot be considered as a good tax.
3) Explain non-tax sources of revenue of the Government.
Public revenue received by the government
administration, public enterprises, gifts and
grants etc. are called as non-tax revenue. These
sources are different than the taxes. A brief
information about these sources are as follows :
1) Fees : A tax is paid compulsorily without
any return service whereas, fee is paid in
return for certain specific services rendered
by the government. For example- education
fee, registration fee, etc.
2) Prices of public goods and services :
Modern governments sell various types of
commodities and services to the citizens. A
price is a payment made by the citizens to
the government for the goods and services
sold to them. For example- railway fares,
postal charges etc.
3) Special Assessment : The payment made
by the citizens of a particular locality
in exchange for certain special facilities
given to them by the authorities is known
as ‘special assessment.’ For example local bodies can levy a special tax on the
residents of a particular area where extra/
special facilities of roads, energy, water
supply etc. are provided.
4) Fines and Penalties : The government
imposes fines and penalties on those who
violate the laws of the country. The objective
of the imposition of fines and penalties is
not to earn income, but to discourage the
citizens from violating the laws framed by
the Government. For example, fines for violating traffic rules. However, the income
from this source is small.
5) Gifts, Grants and Donations : The
government may also earn some income
in the form of gifts by the citizens and
others. The government may also receive
grants from the foreign governments and
institutions for general and specific purposes.
Foreign aid has become an important source
of development finance for a developing
country like India. However, this source of
revenue is uncertain in nature.
6) Special levies : This is levied on those
commodities, the consumption of which
is harmful to the health and well-being
of the citizens. Like fines and penalties,
the objective is not to earn income, but to
discourage the consumption of harmful
commodities by the citizens. For example duties levied on wine, opium and other
intoxicants.
7) Borrowings : The government can borrow
from the people in the form of deposits,
bonds etc. It also gets loans from foreign
governments and organizations such as
IMF, World Bank etc. Loans are becoming
more and more popular source of revenue
for the governments in the modern times.
Q. 6. Answer in detail :
1) Explain various reasons for the growth of public expenditure.
It is observed that there is a continous
growth in public expenditure in a developing
country like India.
Let us study some of the important reasons :
1) Increase in the Activities of the
Government : As mentioned earlier,
the modern government performs many
functions for the social and economic development of the country. These functions
include spread of education, public health,
public works, public recreation, social
welfare schemes etc. It is observed that
new functions are continuously being
undertaken and old functions are being
performed more efficiently on a large scale
by the government. This leads to increase in
public expenditure.
2) Rapid Increase in Population : Population
of developing countries like India is
increasing fast. In 2011 Census, it was
121.02 crores. As a result, the government
has to incur greater expenditure to fulfil the
needs of the increasing population.
3) Growing Urbanization : Spread of
urbanization is a global phenomenon
of the day. This leads to increase in the
government expenditure on water supply,
roads, energy, schools and colleges, public
transport, sanitation etc.
4) Increasing Defence Expenditure : In
modern times, defence expenditure of
the government is increasing even in the
peace time due to unstable and hostile
international relationships.
5) Spread of Democracy : Majority of the
countries in the world are democratic in
nature. A democratic form of government is
expensive due to regular elections and other
such activities. This results in the increase
in total expenditure of the government.
6) Inflation : Just like a private individual, the
government has to buy goods and services
from the market for the spread of economic
and social development. Normally, prices
show a rising trend. Due to this, the
government has to incur increasing costs.
7) Industrial Development : Industrial
development leads to an increase in
production, employment and overall growth
in the economy. Hence, the government
makes huge efforts for implementing
various schemes and programmes for
industrial development. This results in
increase in government expenditure.
8) Disaster Management : Many natural and
man-made calamities like earthquakes,
floods, cyclones, social unrest etc. are
occurring more frequently. The government
has to spend a huge amount for the
disaster management which increases total
expenditure.
Modern governments are working for
‘welfare state’. Hence, there is a continuous
increase in the public expenditure.
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