Economics Notes: Public Finance (Part-II)

Economics Notes: Public Finance (Part-II) 

PUBLIC FINANCE

A. Tax revenue – It consists of the proceeds of taxes & other duties levied by the government. The various taxes that are imposed by a government can be categorised into two groups.

1. Direct Taxes

2. Indirect Taxes

1. Direct taxes – Direct Taxes are those taxes which are paid by the same person on whom they have been imposed. Tax burden cannot be shifted on to others.

Example- Income Tax, wealth tax.

2. Indirect taxes – Those taxes whose burden (partial or whole) can be shifted.

Example- Excise duty.

Note- the Basis of classifying taxes into direct tax & Indirect tax is whether the burden of the tax is shiftable to others or not.

B. Non-Tax revenue – It includes receipts from sources other than taxes. The main sources of non-tax revenues are -Interest, Profits & dividends, Fees & fines, Special assessment, Gifts & grants, Escheats

Capital receipts- Capital receipts are defined as any receipt of the government which either creates a liability or leads to the reduction in assets. Capital receipts include the following 3 items.

Recovery of loans

Disinvestment

Small savings

Budget expenditure – It refers to the estimated expenditure of the government under various heads. In India, it is classified into two categories.

1. Revenue expenditure

2. Capital expenditure

Revenue Expenditure – It refers to all those expenditures of the government which

do not result in a creation of physical or financial assets.

do not cause any reduction in liability of the government.

It relates to those expenses incurred for the normal functioning of the Government departments & provision of various services, interest payments on debt incurred by government & grants given to state government & other parties.

Capital expenditure – An expenditure which either creates an Asset or reduces liability is called capital expenditure. It consists mainly of expenditure on Acquisition of Assets like land, buildings, machinery, equipment, investments in shares, etc. & loans and advances granted by the central government to state & union territory government, government companies, corporation & other parties.

Other classifications of Public Expenditure:- 

1. Plan Expenditure and Non-plan expenditure:-Public expenditure is classified as plan expenditure and non-plan expenditure. 

Plan expenditure- Plan expenditure refers to that expenditure which is provided in the budget to be incurred on the programmes. For example, expenditure on agriculture, power, communication, industry, transport, general economic and social services etc.

Non-plan expenditure- It refers to the government expenditure other than the expenditure related to the plan of the government. Such an expenditure is a must for every Country having planning or no planning e.g. expenditure on police, judiciary, military, expenditure on normal running of government departments, expenditure on relief measures for earthquake/flood victims. 

2. Developmental Expenditure and Non-Developmental Expenditure:- Public expenditure is also classified as development expenditure and non-development expenditure. 

Development expenditure- It refers to expenditure on activities which are directly related to the economic and social development of the country. This includes expenditure on education, agricultural and industrial development, rural development, social welfare, scientific research etc. Such expenditure it not a part of the essential functioning of the government. It directly contributes to the development of the economy. It adds to the flow of goods and services. 

Non-development expenditure- It refers to expenditure incurred on essential general services of the Government such expenditure is essential from the administrative point of view. Expenditure on police. Judiciary, defence, general administration, interest, payments tax collection, subsidies on food etc. fall under this category.    

Economics Notes: Public Finance (Part-I)

Economics Notes: Public Finance (Part-I) 

PUBLIC FINANCE

Meaning of Budget – Government budget is an annual statement, showing the item-wise estimation of receipts & expenditure during a fiscal year.

Elements of Budget 

1. It is a statement that shows estimated receipts & estimated expenditure during a fiscal year.

2. It shows estimates of government receipts & expenditure during a fixed period generally in a year.

3. Budget requires the approval by the parliament.

Objectives of Government Budget 

1. Reallocation of resources

2. Redistribution of income & wealth 

3. Economic stability

4. Management of public Enterprises

5. Promotion of economic development

NOTE-In short, a budget is a powerful weapon in the hands of government through which it can affect the generation, distribution & spending of National Income.

Structure of the Budget – The components of budget can also be categorised according to receipts & expenditures. On this basis two broad components are as follows:-

A. Budget receipts

B. Budget expenditure

Budget receipts- It refers of estimated money receipts of the government from all sources during the fiscal year.

Budget receipts are classified as

1. Revenue receipts

2. Capital receipts

Revenue receipts- It refers to those receipts of the government which neither create a liability nor lead to reduction in assets.

For example- revenue from taxes is a revenue receipt as it does involve any corresponding liability for the government.

Tax is a unilateral (one-sided) compulsory payment by people to the government. Taxes do not have to be repaid by the government in future.

ECONOMICS NOTES

ECONOMICS NOTES 

Inflation

Definition: A rise in the general level of price in an economy. That is sustained over time.

• The opposite of Inflation in ‘deflation’.
• Inflation, in general, is just a price rise.When the general level of prices is falling over a period of time it is called deflation.
• The rate of inflation is measured on the basis of price indices which are of two kind WPI & CPI
• WPI - Wholesale Price Index
• CPI - Consumer price Index

Rate of inflation (Year x)

• In the index, the total weight is taken as 100 at particular year of the past i.e. Base year (Year of reference)
• Inflation is measured ‘point to point’. It means that the reference dates for the annual inflation are January to January of two consecutive years. This is similar for even weekly inflation.

Types of Inflation: Broadly there are 2 types of inflation.

(a) Demand - Pull Inflation:

• A mismatch between demand & supply pulls up the price.
• Either demand increases over the same level of supply or the supply decreases the same level of demand.
• This is Keynesian idea.

(b) Cost - Push Inflation:-

• An increase factor input costs (i.e. wage & raw materials) push up the prices.
• A price rise which is the result of the increase in the production cost is cost - push inflation.

A measure of check inflation:-

(1) Supply side:            

• Govt may import.
• Govt may increase production.
• Govt may improve storage. Transportation, hoarding etc

(2) Cost side: 

• Govt may cut down production cost by giving tax breaks, cuts in duties etc.
• By adopting Better production process, technological Innovation etc.
• Increasing Income of people also helps in checking inflation.

(3) Other steps:           

•  Tighter monetary policies can be introduced by RBI, this might help in a short run.
• Increasing production with the help of best production practices is a long term solution.

Other types of inflation: In General there are 3 Broad Categories i.e.

(i) Low inflation:- 

•  It is slow & predictable.
•  Takes place in a longer period.
•  The range of increase is usually in single digit.
•  It is also called CREEPING INFLATION

(ii) Galloping Inflation:- 

• It is very high inflation
• Range of increase is usually in double digit or triple digit 
• It is also known as hopping inflation, jumping inflation & Running Runaway inflation. 

(iii) Hyper-Inflation:-

• This type of inflation is large and Accelerating. 
• (This might have annual rates in Millions or even Trillion.
• (Range of increase is very large but increase takes place in a very short span of time. The price shoots up overnight.

Over variants of inflation:-  
(i) Bottleneck inflation:-

• This inflation takes place when supply falls drastically & the demand remains at the same level. 
• Such situation arises due to supply ride accidents, hazards or Mismanagement.
• It is also known as ‘structural Inflation’
• It can be put Under ‘demand-pull inflation

(ii) Core inflation:-

• This nomenclature is based on the inclusion or Exclusion of the good & services while calculating inflation.  
• In India, it was 1st time used in the financial year 2001-02. 
• In India, it means inflation of Manufactured goods. 

FIVE YEAR PLAN(part II)

FIVE YEAR PLAN(part II) 

FIVE YEAR PLAN

7th Plan (1985-1990)

the Main objective was Modernization, growth, self-reliance and social justice.

Emphasised on Ecological and Environmental production.

JRY – Jawahar Rojgar Yojana was launched in 1989.

This plan focused on the promotion of sunrise industries especially food processing and electronics.

For the 1st time, the share of public sector in total plan output was less than 50%.

Two Annual plans

New Industrial policy was launched.

Beginning of large-scale liberalisation.

LPG (Liberalization, Privatisation and Globalization) was one of the main Agenda.

1991 Economic Reforms

Economic Reforms 1991:-

External Trade policy was liberalised

Licensing regime was diluted (License Raj was Abolished)

CRR, SLR were reduced

Rupee was Devaluated

Import Tariff was reduced.

MRTP was abolished(Introduced in 1969)

FERA was changed to FEMA (FERA act 1973)

8th Plan (1992-97)

Infrastructure development was emphasised.

W. Miller Model was adopted in the plan.

Main objective was human resource development.

This plan focused on controlling population explosion.

Universalisation of primary education was stressed in this plan.

National Income & Industrial growth rate were higher than the targeted rate.

73rd Amendment act was introduced which gave a constitutional status to PRI (Panchayati Raj Institution)

74th Amendment act was introduced which provide the urban local government a constitutional status.

9th Plan (1997-2002)

The main objective was ‘Equitable distribution & growth with equality’.

Other features of this plan were:-

Self-reliance in Technology.

Self-sufficiency in food grains Economy.

Integrated development of all sectors of the Economy.

10th Plan (2002-2007)

The main objective of this plan was Growth with emphasis on human development.

Monitorable targets were Introduced for checking poverty, unemployment, illiteracy, Gender gap (sex Ratio), population growth, IMR (Infant Mortality Rate), MMR (Maternal Mortality Rate) and other socio-economic Aspects.

Tenth Plan also shed light on Increasing forest and tree cover to 25% by 2007.

Introduced broad framework to provide potable drinking water to all villages within the plan period.

NHM (2005-06) (National Horticulture Mission)

11th Plan (2007-2012)

The main objective was towards future sustainable & inclusive growth.

The central vision of the 11th plan was to build on our strengths to trigger a development process which ensures broad – based improvement in the quality of life of the people, especially the poor, SCs/STs, OBCs, Minorities & Women.

The target of the 11th plan was 9 percent from 7.6 percent recorded during the Tenth Plan.

12th Plan (2012-17)

The Theme of this plan is, “faster, sustainable & more inclusive growth”.

Several Monitorable targets are

(i) Growth rate of 8%

(ii) Reduce TFR (total Fertility Rate) to 2.1 by the end of 12th five-year plan)

(iii) Provide Electricity to all villages.

(iv) Connect all villages with all-weather roads.

(v) Provide access to banking services to 90% Indian households.

(vi) Major subsidies and welfare related beneficiary payment to be shifted to a direct cash transfer (DCT) facility using Aadhar platform with linked bank account.

FIVE YEAR PLAN

FIVE YEAR PLAN

Five Year Plans of India

1st Plan (1951-56)
1. Highest priority was given to agriculture Including Irrigation and power projects.
2. Based on Harrod-Domar model


3. In 1952 community Development program was started (CDP)

2nd Plan (1956-61)
1. Based on Mahalanobis Strategy 
2. The main objective was rapid Industrialization
3. Construction of steel plants in public sector at Bhilai, Durgapur, Rourkela.
Bhilai plant was set up  by with USSR collaboration
Durgapur Steel Plant was set up with the British collaboration
Rourkela Steel Plant  was set up with  German collaboration

3rd Plan (1961-66)
1. Based on John Sandy and S. Chakravarty Model.
2. The main objective was self-reliant & self-sustained Economy, Development of agriculture, self-reliance in food grains and integrated development of agriculture and Industrial sector. (positive growth in Agriculture sector was attained).
3. This plan is referred as a FAILED PLAN by many scholars. The cause of Failure was failed Monsoon, drought and Famine.
4. 2 wars with china in 1962 and with Pakistan in 1965 are considered to be other reasons for failure.

Three Annual Plans
1. Though the 4th plan was ready but due to the weak financial situation after the defeat from china. The government came out with 3 Annual plans.
2. Plan Holiday means, ‘the planning on holiday’. The annual plans are referred as plan holiday.(1966-67, 1967-68, 1968-69)

4th Plan (1969-74)
1. Based on S. Manne and A. Rudra model
2. Based on Gadgil strategy.
3. Main Objective was self-reliance and growth with stability.
4. It was the 1st move in the direction on Nationalisation.
5. 1971 -  war with Pakistan.
6. Nationalization of 14 banks was done in 1969
7. MRTP act was introduced in this plan (MRTP – Monopolies and Restrictive trade Practices Act)
8. FERA was Introduced in 1973 (Foreign Exchange regulating Act)

5th Plan (1974-79)
1. Planning commission model
2. The Main objective was self – reliance and poverty eradication.
3. 20-points program was introduced in this plan.
4. The slogan “Garibi Hatao” was Introduced in this plan.
5. This policy also focused on import substitution and Export promotion.
6. National program on Minimum needs in which primary education, drinking water, rural roads, housing etc. were included
7. Food for work program was started (1977-78)
8. Emergency was introduced in 1975 (National Emergency)
9. This plan was terminated one year before the schedule due to change in government.

Annual Plan (1979-80) The plan was termed as Rolling plan.
Note Rolling plan – In this plan targets of the previous years are to be Achieved in next year.Rolling plan was first advocated by Gunnar Myrdal

6th Plan (1980-1985)
1. The Model adopted in this plan was tailored by planning commission.
2. NREP – National Rural Employment program was introduced in 1980.
3. Rural landless employment guarantee program was launched in 1983,
4. Dairy Development program TRYSEM (Training rural Youth for self-employment), 
5. National seed program and KVIP were launched in 1983. (KVIP – Khadi and village industrial program)

FINANCE COMMISSION

Study Notes on FINANCE COMMISSION

FINANCE COMMISSION

Although the Constitution has made an effort to allocate every possible source of revenue either to the Union or the States, but this allocation is quite broad based.  For the purpose of allocation of certain sources of revenue, between the Union and the State Governments, the Constitution provides for the establishment of a Finance Commission under Article 280.  According to the Constitution, the President of India is authorized to set up a Finance Commission every five years to make recommendation regarding distribution of financial resources between the Union and the States.

Constitution

Finance Commission is to be constituted by the President every 5 years. The Chairman must be a person having 'experience in public affairs'. Other four members must be appointed from amongst the following:-

1.A High Court Judge or one qualified to be appointed as High Court Judge;

2.A person having knowledge of the finances and accounts of the Government;

3.A person having work experience in financial matters and administration;

4.A person having special knowledge of economics

Functions

The Finance Commission recommends to the President as to the distribution between the Union and the States of the net proceeds of taxes to be divided between them and the allocation between the States of  respective shares of such proceeds; the principles which should govern the grantsin-aid of the revenue of the States out of the Consolidated Fund of India ,the measures needed to augment the

Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State any other matter referred  to the Commission by the President in the interest of sound finance. 

STATE FINANCE COMMISSION

Article 243I of the Indian Constitution prescribes that the Governor of a State shall, as soon as may be within one year from the commencement of the Constitution (Seventy-third Amendment) Act, 1992, The State Finance Commissions are constituted once in five years to review the financial position of the local bodies and to recommend principles governing the distribution of finances between the states and local bodies and measures needed to improve the financial position of the local bodies. As per the constitutional requirement, states made the provision in the state panchayat raj/municipal Acts for the constitution of State Finance Commissions. Most states, however, have left it to the state governments to prescribe the details of composition, qualifications, term, etc. The states have mostly incorporated the constitutional provisions in their Acts. In some cases the details of the composition, working procedures and other related aspects were also incorporated in Acts or Rules framed there under. In some cases certain qualifications have been prescribed and others they were left open. This resulted in wide variations between the State Finance Commissions and left much scope for variations in their appointment, organization and working.

The principles which should govern:

The distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them under this Part and the allocation between the Panchayats at all levels of their respective shares of such proceeds; The determination of the taxes, duties, tolls and fees which may be assigned as, or appropriated by, the Panchayats; The grants-in-aid to the Panchayats from the Consolidated Fund of the State; The measures needed to improve the financial position of the Panchayats: Any other matter referred to the Finance  Commission by the Governor in the interests of sound finance of the Panchayats. Article 243Y of the Constitution further provides that the Finance Commission constituted under Article 243 I shall make similar recommendation vis-a-vis municipalities.

The Governor is required to cause every recommendation made by the State Finance Commission together with an explanatory memorandum as to the action taken thereon to be laid before the Legislature of the State.

Goods in Economy

Study Notes on Types of Goods in Economy

Complementary Goods 

Definition: Two or more goods that satisfy the wants or needs when consumed jointly or production of one good automatically triggers the production of other good. Satisfaction is greater when both goods are consumed together. (What are Substitute Goods?)

Features of Complement Goods:

•Such goods have negative cross elasticity of demand. They will have a perfectly inelastic demand.

•Goods cannot function without each other.

•Dependent Nature & non-interchangeable

Examples of Complement Goods:

•Car & Petrol/Diesel

•Printers and ink cartridges

•DVD players and DVDs

•Computer hardware and software,

•Flashlight and battery

Giffen Goods

What are Giffen Goods?

A giffen good is an inferior good (a good that people buy more of when their income goes down) with the unique characteristic that an increase in price actually increases the quantity of the good that is demanded.  This provides the unusual result of an upward sloping demand curve. The Giffen goods which fail with Law of Demand. Giffen goods are goods that are substitutes for a more expensive good, that people buy more of when they cannot afford a superior good.( Funny example is China  made IPhone).

So what is Law of Demand Actually? How Giffen goods fail?

To understand Giffen goods, you must understand both the substitution effect and the income effect.

•Substitution effect: When the price of a good decreases, there is more consumption of this good.  This is always positive.

•Income effect: When the price of a good falls, the total expenditure (or portion of your income spent on this good) changes.  This can be positive or negative.

A negative income effect will only occur for inferior goods. For a Giffen good, the item is so inferior that if its price falls you will buy less of it (extremely negative income effect) and that if its price rises you will buy more of it (your income falls so you buy more inferior goods).

Veblen Goods

What are Veblen Goods in Economy?

Veblen goods provide the consumer greater satisfaction (or utility) as the price increases. A Veblen good is a good where demand rises as price rises. People think more expensive goods are better quality, and so people buy more. Studies suggest people do get more satisfaction from receiving expensive goods. It is possible that designer clothes or luxury cars may sometimes meet the criteria of Veblen goods. This is often termed the snob effect – people equate price to quantity. They are not inferior goods.

Fine Examples

•Luxury Cars

•Gucci bag

•Expensive Wines

The utility of such goods is associated with their ability to denote status. Decreasing their price decreases the quantity demanded because their status denoting utility becomes compromised.

Substitute Goods:

This means a good's demand is increased when the price of another good is increased. Conversely, the demand for a good is decreased when the price of another good is decreased. That is people search for cheaper alternative. These Goods are in complete Contrast with Complement Goods, Giffen Goods, Veblen Goods (What are Complement Goods, Giffen Goods &  Veblen Goods?)

Characteristics of Substitute Goods:

•Born from concept of Competition.

•They can serve the same purpose/use.

•Provide needs in Many Ways to Consumers.

•They provide freedom to choose and pressure goods to supply at reasonable price.

•The increased demand for one of the goods will subsequently cause a decrease in demand for the other. For examples, If X and Y are substitutes if, when the price of X rises, the demand for Y rise.

•They have positive cross elasticity of demand.

Examples of Substitute Goods in Economy:

•Pepsi & Coca Cola Drinks

•Coffee and Tea

Inferior Good: An inferior good means an increase in income causes a fall in demand. It has a negative YED.

Normal Good: This means an increase in income causes an increase in demand. It has a positive YED. Note a normal good can be income elastic or income inelastic.

Luxury Good. A luxury good means an increase in income causes a bigger % increase in demand. It means that the YED is greater than one. For example, high definition TV’s 

would be luxury. When income rises, people spend a higher % of their income on the luxury good. (Note: A Luxury good is always a normal good but not vice versa.

Public Goods – goods with characteristics of non-rivalry and non-excludability, e.g. national defence. See: Public goods

Merit Goods. Goods which people may underestimate benefits of. Also often has positive externalities, e.g. education. See: Merit goods

Demerit Goods. Goods where people may underestimate costs of consuming it. Often has negative externalities, e.g. smoking, drugs. See: Demerit goods

Private goods – goods which do have rivalry and excludability. The opposite of a public good See: Private goods

Free Goods – A good with no opportunity cost, e.g. breathing air. 

ALL THE BEST..

Important Notes Of "Finance Commission of India"

Important Notes Of "Finance Commission of India"

Dear Readers,

FINANCE COMMISSION OF INDIA

A finance commission is set up every five years by the President under Article 280 of the Constitution. Finance Commission of India came into existence in 1951.It was formed todefine the financial relations between the centre and the state. These recommendations cover a period of five years. The commission also lays down rules by which the centre should provide grants-in-aid to states out of the Consolidated Fund of India. It is also required to suggest measures to augment the resources of states and ways to supplement the resources of panchayats and municipalities.

Composition of the Fourteenth Finance Commission
The Fourteenth Finance Commission has been set up under the Chairmanship of Dr.Y.V.Reddy
[Former Governor Reserve Bank of India].
Other Members of the Commission are:

• Ms. SushmaNath [Former Union Finance Secretary],
• Dr.M.Govinda Rao [Director, National Institute for Public Finance and Policy, New Delhi].
• Dr.SudiptoMundle, Former Acting Chairman, National Statistical Commission.
• Prof Abhijit Sen (Member, Planning Commission) is the part timeMember of the Fourteenth Finance.
• Commission. Shri Ajay Narayan Jha is the Secretary, Fourteenth Finance Commission.

Qualifications of the Members

The Chairman of the Finance Commission is selected among people who have had the experience of public affairs. The other four members are selected from people who:

• Are, or have been, or are qualified, as judges of High Court, or
• Have knowledge of Government finances or accounts, or
• Have had experience in administration and financial expertise;
• Have special knowledge of economics

Procedure and Powers of the Commission:
The Commission has the power determine their own procedure and:

• Has all powers of the civil court as per the Court of Civil Procedure, 1908.
• Can summon and enforce the attendance of any witness or ask any person to deliver information or produce a document, which it deems relevant.
• Can ask for the production of any public record or document from any court or office.
• Shall be deemed to be a civil court for purposes of Sections 480 and 482 of the Code of Criminal Procedure, 1898.

Tenure of the 14th Finance Commission:

The Finance Commission is required to give its report by 31st October, 2014.Its recommendations will cover the five year period commencing from 1st April, 2015.

Among the major recommendation

• It includes the centre to share 42% of the divisible pool of tax to the states which is 10% more than the present share.
• It recommended doing away with the distinction between unconditional and conditional transfers.
• Previously the transfers were a mix of conditional and unconditional funds, where the conditional transfers is given for serving some specific purpose. Here the state having the flexibility to utilize the conditional transfers as per the needs.
• The commission, on deciding the share of states has done away with the component of previous commission namely, fiscal discipline. Instead it introduced two new components that are changes in population between 1971 and 2011 and giving credit to the success in retaining forest cover.
• The commission along with recommended on implementation of Goods and Services Tax and laid out a fiscal road map for the economy.

All The Best !!!!!!