Public Finance in IndiaSecondary Data Based Project Report

In the partial fulfillment of the Post Graduate Diploma in Management (PGDM)

3rd SemesterAcademic year (2010-2011)

School Of ManagementKharghar, Navi Mumbai

Project GuideDhomya Raval

(Faculty)

Submitted byBinu Dinanath Pandey

Objective To understand how government of India manage its public expenditure, Revenue and debt.

Scope: What are public finance and its nature?Similarities and difference between public and private financePrincipal of maximum social advantageWhat is public revenue, its sources and classification?Tax and non-tax revenueIndian tax structure and featuresRole of direct and indirect tax in developing countriesCanons/ principle of taxationWhat are public expenditure, its classification, causes, and effect?Canons/ principle of public expenditure and Wagner’s lawMeaning and classification of public borrowing Debt obligation of the central government of India (internal and external debt)Burden of public debt and management of public debt

Methodology: Secondary data based project: It is the data which has already been collected by someone or by government for some other purpose and research study. The data collected from various sources:

Book Internet College library

Resource and reference: Indian economy by usha iyer Public finance by a c pigou Money, banking, international trade and public finance by D

M mithani

Website: www.rbi.org.inwww.flipkart.com/publicrevenuewww.pubicfinance.inwww.finmin.nic.inwww.financialexpress.com/publicfinancewww.indiabudget.nic.in

Time line:Sr.no particular Date1

2

3

4

Public finance and its importance

Similarities and difference between public and private financePrincipal of maximum social advantage

Public expenditure and public revenue its component

Public debt

25th September 2010

30th September 2010

6th October 2010

16th October 2010

Secondary data based project review

Meaning of public finance:"Public finance" (government finance) is the field of economics that deals with

budgeting the revenues and expenditures of a public sector entity, usually

government. Governments, like any other legal entity, can take out loans, issue

securities and invest. Based on the taxing authority of the entity, they issue bonds

such as tax increment bonds or revenue bonds. A "public bond" or security may give

tax advantages to its owners.

“public finance”, according to Dalton,” is concerned with the income and expenditure

of public authorities’ and with the adjustment of one-to other, adjustment not

necessarily equality, but to whatever arithmetical relationship, in given conditions, is

best”.

Public Finance in India also comes under the purview of a branch of economics

which determines and assesses the policies of the Indian government stipulated in

the annual finance budget. Public finance identifies that types and consequences of

tax measures and expenditure on citizens, institutions, and the entire economy.

Public finance is also concerned with improving and upgrading economic

procedures that support governmental

Difference between private and public finance: these are the differences between the private and public finance.1: Adjustment of income and expenditure: a government first prepares an estimate of expenditure and then means to raise that sum and the individual must adjust his expenditure to his income.

2: Budgeting: the unit for the public budget is one year but an individual needs not balance his budget during a given period.

3: Deficit financing: deficit financing is a peculiar privilege of government but an individual cannot do it, unless he is prepared to go behind the bars.

4: Different objectives: an individual tries to maximize his satisfaction or profit from a given amount of resources but the objective of government expenditure is to maximize social benefit.

5: Publicity of finance: budgets are published and the widest publicity is given to them. On the other hand, the secrecy surrounds individual finance.

6: Coercion: a government has to pass a law and compel the citizen to pay a tax while an individual lacks the coercive authority

Principle of maximum social advantage:

Public expenditure is subject to diminishing marginal social benefit and taxes are subject to increasing marginal social dis-utility or cost. As the State increases its taxation and expenditure activities, the social benefit from each additional rupee spent falls while the dissatisfaction from each additional rupee taxed increases. This way a stage is reached when the rising dissatisfaction becomes equal to falling marginal benefit of expenditure. At this stage the State should stop expanding its activities.

To understand the concept of maximum social, one has to consider the two aspects: Marginal social sacrifice. Marginal social benefits

Marginal social sacrifice: Taxes imposed on public puts burden on them and they have to undergo some sacrifice. Taxes impose a burden on the people as they have to reduce their consumption expenditure or reduce their level of savings. As additional units of tax imposed. The sacrifice that is inflicted on the public by imposing an additional unit of taxation is known as marginal social sacrifice.

Marginal social benefits: The public expenditure leads to social benefits. The social benefits accrued to the public by an additional unit of expenditure is called as marginal social benefit in other word the marginal social benefits is subject to diminishing marginal utility.

Limitation of maximum social advantage:

1. There is no basis for the assumption that every tax is a burden upon the society and every state expenditure is a benefit for it2. The benefits and ill-effects of a public budget spill over beyond the period covered by the budget.3. If we assume all taxes are harmful and all expenditure is beneficial, we arrive at absurd results.4. Every State is committed to certain expenses – a liability from which it cannot free itself.5. At times, an imbalanced budget is often an effective weapon affecting various remedial and welfare measures.

Difference between public finance and private finance:

Public finance refers to gathering capital to expand/run the organization from the

public through issue of shares or bonds.

Private finance refers to providing the capital to expand/run the organization from

one’s own pocket

Public Finance and Private finance are both concept from economics. Public Finance

deals with the salary of collective or governmental activities and the design and

administration of these activities.

Public Finance deal with income distribution and social equity, Government policies

can help in reallocation of incomes by verbs payment or through tax systems.

On the other hand, Private Finance is a method used by masses governments to set

up a public and private sector partnership. It involves privatization and deregulation.

A number of projects are undertaken all around the world underneath this initiative.

The aim of these projects is to provide infrastructure and also operational services.

Dissimilarities:

No. Particulars Public Finance Private Finance1 Adjustment of

income and expenditure

At first Government determines its expenditure, and then tries to collect money to meet up the determines expenditure

Individual determines its expenditure according to his/her income

2 Objectives Public finance is mainly related to social welfare

Private finance is mainly related to his/her and family’s welfare

3 Timing Government prepares budget for 1 year

Generally, there is no specific time-table for preparing budget in case of individual

4 Concealment of income and expenditure

There is no scope to conceal the income and expenditure of Government

There is possibility to conceal the income and expenditure of individual if he/she wishes

5 Determinants Public expenditure depends on the fulfilment of specific social and economic objectives

Private expenditure depends on his/her consumption pattern, social status, living standard etc.

6 Debt Government can borrow from both internal and external sources

Individual can only borrow from external source

7 Issue of note If necessary, Government can issue notes to meet up its expenditure

There is no scope to issue note in case of individual

8 Focus on Government emphasizes on long-term project which will give benefit after a long period

Generally individual emphasizes on short-term plan which will give benefit within a short-period

9 Loan defaulter

There is no scope to be loan defaulter. Because Government collects money from public

Individual can be load defaulter

10 Marginal utility of money expenditure concept

All the times marginal utility of money expenditure is not maintaining in case of public expenditure

All the times individual try to maintain marginal utility of money expenditure

11 Deficit budget Deficit budget is common phenomenon in case of Government budget

Individual always prepares surplus budget

12 Burden of debt

Burden of public debt is not imposed directly on Government. Government collects it from the public

Burden of individual debt is directly imposed on individual

of the country

Public revenue:

The revenue collected by central, state and local government from the

public from various sources is known as public revenue.

It includes revenue from taxes, non-tax sources, borrowing from the public

and banks, profits of public undertakings, deficit financing and foreign aid.

By implementing of proper tax system, the country could minimize

economic inequality and concentration of monopoly power.

It helps to provide various types of welfare programs to the public.

Public Expenditure:

The expenditure incurred by central, state and local government on various

types of goods and services to satisfy the collective wants of the public is

known as public expenditure.

It includes the expenditure incurred on developmental, non-developmental,

transfer payments, non-transfer payments, revenue expenditure and capital

expenditure etc.

Public expenditure or public finance has to play a specific role of promoting

economic growth in the developing countries besides maintaining price

stability.

It helps in fair distribution of income and expansion in employment

opportunities.

Public revenue:

Meaning of public revenue:

The income of the government from all sources is called public revenue.

According to Dalton, public income can be classified as:

a) Public revenue.

b) Public Receipts

Public revenue: public revenue consist of taxes, revenue from administrative

activities like fines, fees, income, from public enterprises, gifts and grants

Public receipts: public receipts include public revenue + the receipts from

public borrowing the receipts from the sales of public assets and printing and

issuing of currency notes.

Sources of Public Revenue

Tax revenue:

Direct taxes:

1. Corporate tax

2. Personal income tax

Public Revenue

Tax Revenue

Non-tax Revenue

3. Capital gains tax

4. Wealth tax

Indirect taxes:

1. Customs duty

2. Central excise duty

3. VAT

4. Service tax

Non- tax revenue

Principle of taxation:

1. Canon of equity

2. Canon of certainity

3. Canon of convenience

4. Canon of economy

5. Canon of productivity

6. Canon of diversity

Wagner law:

Wagner's law is a principle named after the German economist Adolph Wagner (1835-1917). The law predicts that the development of an industrial economy will be accompanied by an increased share of public expenditure in gross national product:

The advent of modern industrial society will result in increasing political pressure for social progress and increased allowance for social consideration by industry.

Wagner's Law suggests that a welfare state evolves from free market capitalism due to the population voting for ever-increasing social services. Neo-Keynesians and socialists often urge governments to emulate modern welfare states like Sweden. In spite of some ambiguity, Wagner's statement in formal terms has been interpreted by Richard Musgrave as follows