Chapter 8: Government Budget and the Economy Class 12 Economics NCERT Solutions

NCERT Solutions for Class 12 Economics Chapter 8 – Government Budget and the Economy

NCERT Textbook Questions Solved – Class 12 Macro Economics

Question 1: Why must public goods be provided by the government?

Answer: Public goods are non-rivalrous and non-excludable (e.g., street lighting, national defense). Private producers lack incentive to supply them due to non-payment issues, leading to market failure. Therefore, the government must provide these goods to ensure universal benefit.

Question 2: Distinguish between revenue expenditure and capital expenditure. Give examples.

Answer:

Question 3: Elucidate how fiscal deficit gives the borrowing requirement of the government.

Answer: Fiscal Deficit = Total Expenditure – Total Receipts (excluding borrowings).
It reflects the amount of funds the government needs to borrow to meet expenditure needs. A higher fiscal deficit implies higher borrowings and future debt burden.

Question 4: Relationship between revenue deficit and fiscal deficit.

Answer: Revenue Deficit = Revenue Expenditure – Revenue Receipts.
Fiscal Deficit = Revenue Deficit + Capital Expenditure – Non-debt Capital Receipts.
Thus, fiscal deficit covers both consumption and investment needs; revenue deficit implies borrowings for consumption expenses.

Question 5: Does public (government) debt impose a burden?

Answer: Yes, if excessive:

• It hampers economic growth.
• Leads to political dependency (in case of foreign borrowings).
• Increases tax burden on citizens.
• Promotes inefficient government spending.
• Causes national wealth drain through foreign repayments.

However, productive debt can stimulate growth.

Question 6: Are fiscal deficits necessarily inflationary?

Answer: No, not always:

• Underemployment or recession: Fiscal deficits boost demand without inflation.
• At full employment: Fiscal deficit causes inflation due to supply bottlenecks.

Thus, fiscal deficit’s impact depends on the economic situation.

Question 7: Discuss the issue of deficit reduction.

Answer: Methods:

• Increase tax revenue through higher rates and broader tax base.
• Reduce unnecessary government expenditure.
• Disinvestment in PSUs to raise non-debt capital.
• Privatize non-essential government functions.

Maintaining fiscal discipline reduces future debt burden.

I. Very Short Answer Type Questions (1 Mark)

• Government budget: Annual statement of estimated revenue and expenditure.
• Objective: Reallocation of resources.
• Tax: Legally compulsory payment without direct benefit.
• Service tax as indirect tax: Impact and incidence differ.
• Sources of non-tax revenue: Commercial revenue (profits, interest) and administrative revenue (fees, fines).
• Borrowing: Not a revenue receipt (creates liability).
• Tax: Not a capital receipt (no asset/liability effect).
• Interest: Revenue receipt.
• Borrowings: Capital receipt.
• Subsidies: Revenue expenditure.
• Loan repayment: Capital expenditure.
• Recovery of loans: Capital receipt.
• Revenue deficit: Revenue Expenditure – Revenue Receipts.
• Revenue deficit example: Rs 200 crore (1200 – 1000).
• Fiscal deficit: Excess of total expenditure over total non-borrowed receipts.
• Primary deficit: Fiscal deficit minus interest payments.
• Zero primary deficit: Fiscal deficit equals interest payments only.

II. Multiple Choice Questions (1 Mark)

• Budget placed before: (c) Both Lok Sabha and Rajya Sabha
• Budget is: (a) Financial statement
• Budget in Constitution: (c) Article 112
• Fiscal year: (b) 1 April to 31 March
• Capital receipts: (d) All of them
• Direct tax: (a) Personal income tax
• Indirect tax: (c) VAT
• Fiscal deficit amount (given borrowings): (d) 70 crore
• Borrowing from banking system: (a) Deficit financing
• Budget deficit: (b) Budget deficit
• Adding borrowings to budget deficit gives: (d) Fiscal deficit
• Interest payment: (a) Revenue expenditure
• Budgetary deficit (1000-1500): (a) 500 crore
• Fiscal deficit from primary deficit 4400 + 400: (b) 4800 crore
• Fiscal deficit from primary deficit 10,000 + 8000: (a) 18000 crore
• Fiscal deficit given borrowings 75,000 crore: (b) 75,000 crore
• Borrowings in budget: (b) Fiscal deficit
• Non-tax revenue example: (c) Dividends
• Primary deficit formula: (d) Fiscal deficit – Interest payments
• Direct tax is collected from: (d) Income earners
• Revenue deficit financed by: (c) A and B (Borrowing and Disinvestment)
• Statement not true for fiscal deficit: (b) Difference between total expenditure and total receipts
• Budgetary Deficit (given data): (b) Rs. 10,000 crore
• True statement about fiscal deficit: (c) Borrowing by government represents fiscal deficit

III. Short Answer Type Questions (3–4 Marks)

Question 1: Explain the objective of stability of prices of government budget. [CBSE (F) 2010]

Answer: Free market forces create business cycles — recession, depression, recovery, and boom. To stabilize the economy, the government uses the budget to combat inflation and deflation, ensuring economic stability, encouraging investment, and boosting growth and development.

Question 2: Name two sources each of non-tax revenue receipts. [CBSE 2004]

Answer:

• Commercial Revenue: Profit from PSUs (e.g., Railways, LIC) and interest on loans to states or enterprises.
• Administrative Revenue: Fees (passport, court) and license fees (vehicle registration).

Question 3: Distinguish between Revenue receipts and Capital receipts. [CBSE 2005, 2010]

Answer: Revenue receipts do not create liabilities or reduce assets and are used for day-to-day government operations. Capital receipts either create liabilities (borrowings) or reduce assets (sale of PSUs).

Question 4: Distinguish between Direct tax and Indirect tax.

Answer: Direct taxes (e.g., income tax) are paid directly by individuals or organizations. Indirect taxes (e.g., GST) are paid indirectly via goods and services.

Question 5: Differentiate between Revenue Budget and Capital Budget.

Answer: Revenue Budget deals with routine income and expenditure. Capital Budget deals with asset creation, borrowings, and long-term investments.

Question 6: Differentiate between Developmental and Non-Developmental Expenditure.

Answer: Developmental expenditure enhances productive capacity (e.g., education, infrastructure). Non-developmental expenditure involves administrative functions (e.g., defense, salaries).

Question 7: Implications of a large revenue deficit. Two measures to reduce it. [CBSE Sample Paper 2010]

Answer: A large revenue deficit implies government dis-savings and reliance on borrowings for consumption, leading to inflation.
Measures:

• Cut unproductive expenditure.
• Increase tax and non-tax revenue.

Question 8: Implications of fiscal deficit. [A/2005; CBSE 06C, 07]

Answer: Fiscal deficit can cause inflation (via money supply rise), increase foreign dependence, create financial burdens for future generations, and raise interest payments.

IV. True or False (with Reasons)

• Government budget = Actual receipts/payments: False (Estimated values)
• Revenue deficit rise leads to fiscal deficit rise: False (Reverse causal relationship)
• Service tax = Indirect tax with same incidence: False (Burden shifted)
• Direct tax = Proportional: False (Generally progressive)
• Primary deficit = Capital deficit – Interest: False (It is Fiscal deficit – Interest)
• Non-debt capital receipts only from disinvestment: False (Also loan recovery)
• Fiscal deficit = Non-inflationary: False (Inflationary at full employment)
• Expenditure on railway line = Capital expenditure: True (Creates asset)

V. Long Answer Type Questions (6 Marks)

Question 1: Government’s role through budget in resource allocation. [CBSE 2015]

Answer: Government corrects resource misallocation by taxing harmful goods (e.g., cigarettes) and subsidizing socially beneficial goods (e.g., education, healthcare) to balance profit motive with social welfare.

Question 2: Use of budget to reduce income inequality. [AI 2015]

Answer: Progressive taxation on rich and subsidies for poor, increased welfare spending (education, healthcare), and public distribution systems can reduce income and wealth inequality.

Categorization into Revenue and Capital Receipts

Categorization into Direct and Indirect Taxes

• Corporation tax: Direct tax
• VAT: Indirect tax
• Service tax: Indirect tax
• Wealth tax: Direct tax
• Income tax: Direct tax
• Entertainment tax: Indirect tax
• Corporate tax: Direct tax
• Excise duty: Indirect tax
• Custom duty: Indirect tax
• Capital Gains tax: Direct tax

Categorization into Revenue and Capital Expenditure

• Subsidies: Revenue Expenditure
• Defense capital equipment purchase: Capital Expenditure
• Construction of school building: Capital Expenditure
• Administrative services expenditure: Revenue Expenditure
• Loan repayment: Capital Expenditure
• Purchase of metro coaches: Capital Expenditure
• Salary to Army officers: Revenue Expenditure
• Interest on national debt: Revenue Expenditure

VI. Higher Order Thinking Skills (HOTS)

• Debt trap: Cycle of loans taken to repay earlier loans.
• Difference: Revenue deficit = current imbalance; Fiscal deficit = total borrowing needs.
• Primary vs Fiscal deficit: Primary = Fiscal deficit – Interest payments.
• Deficit financing: Via monetary expansion, public borrowing, external borrowing.
• Fiscal deficit without revenue deficit: Possible if capital budget deficit exceeds revenue budget surplus.

Value Based Questions (VBQs)

• Reducing price of fruits/vegetables: Subsidize production; distribute via PDS.
• Budget deficit still necessary in India: Low per capita income, high developmental needs.
• Union Budget reduces poverty/inequality: Through progressive taxes and welfare expenditure.
• Revenue vs Capital Expenditure: Free stationery, Ladli aid, Mid-day meal = Revenue; Computer lab construction = Capital.
• Reducing revenue deficit: Cut spending; increase tax revenue.
• Direct vs Indirect taxes: Balance both for fairness and coverage.
• Taxing all commodities: No; protect common people through minimal essential goods tax.
• Difficulty in taxing all: Transparency, evasion issues.
• Budget 2013-14 tax reforms: Higher excise duty on cigarettes and tax on incomes > ₹1 crore aimed at public welfare.
• Price regulation in agriculture: Maintain stability via price floors/ceilings and buffer stocks.
• Regulating rural loan interest rates: RBI control, concessional loans via RRBs and cooperative banks.