Class 12 Economics Chapter 8: Public Finance in India

Key concepts: Public Finance in India

Public finance

The study of the principles of income and expenditure of the government at the central, state and local levels. Its main parts are public expenditure, public revenue, public debt, fiscal policy and financial administration.

Public expenditure

Spending by public authorities to protect citizens and promote welfare. It is classed as revenue or capital, and as developmental (productive, e.g. education) or non-developmental (e.g. war, administration).

Tax

A compulsory payment by a citizen to the government with no direct return benefit. Adam Smith's canons are equity, certainty, convenience and economy.

Direct and indirect tax

A direct tax (e.g. personal income tax) is borne by the person on whom it is levied. An indirect tax (e.g. GST) is levied on goods or services and its burden can be shifted to others.

Non-tax revenue

Government income other than taxes: fees, prices of public goods and services, special assessment, fines and penalties, gifts and grants, special levies and borrowings.

Goods and Services Tax (GST)

A nationwide indirect tax that started on 1 July 2017 and replaced most indirect taxes. It has CGST, SGST, IGST and a compensation part, and the GST Council recommends rates.

Public debt

Borrowing by the government. Internal debt is raised inside the country in domestic currency; external debt is raised from foreign governments or bodies such as the IMF and World Bank.

Government budget

A statement of expected receipts and proposed spending for the next financial year. It is balanced, surplus or deficit, and is divided into revenue and capital budgets.

Quick revision: important points

• Obligatory functions: defence, law and order. Optional: education, health, pensions.
• Adam Smith's four canons of taxation: equity, certainty, convenience, economy.
• Three types of direct tax by rate: proportionate, progressive (India), regressive.
• GST came into effect on 1 July 2017 (101st Amendment); it replaced excise, service tax, VAT etc.
• Surplus budget suits inflation; deficit budget suits depression; balanced budget: receipts = expenditure.
• Financial year in India runs from 1 April to 31 March; Article 112 provides for the annual statement.

Practice MCQs with answers

1. Which of the following is an obligatory function of the government?

   1. Paying pensions to retired persons
   2. Maintaining internal law and order
   3. Running public health services
   4. Providing education to all
   Show answer

   Answer: B. Maintaining internal law and order
   Protection from external attack and maintaining law and order must be done by every government, so they are obligatory. Education, health and pensions are optional.

2. Public finance is best described as the study of:

   1. Money lent by banks to businesses
   2. Private savings of families
   3. Principles of income and expenditure of the government at central, state and local levels
   4. Rates of interest in the money market
   Show answer

   Answer: C. Principles of income and expenditure of the government at central, state and local levels
   The word 'public' means the government and 'finance' means income and expenditure, so public finance studies government income and spending.

3. Who said that public finance lies on the borderline between economics and politics?

   1. Hugh Dalton
   2. Findlay Shirras
   3. Adam Smith
   4. Taussig
   Show answer

   Answer: A. Hugh Dalton
   Hugh Dalton described public finance as a subject on the borderline of economics and politics, concerned with adjusting public income and expenditure.

4. Which feature belongs to public finance and NOT to private finance?

   1. Income is considered first and then expenditure is fixed
   2. Credit is limited
   3. The effect on the national economy is marginal
   4. The government first decides how much to spend and then raises funds
   Show answer

   Answer: D. The government first decides how much to spend and then raises funds
   In public finance the government decides the volume of expenditure first. An individual, in private finance, first looks at his income.

5. Why can the government meet a shortage of funds in a way an individual cannot?

   1. Because it can print notes through the Reserve Bank of India
   2. Because it never has to repay loans
   3. Because its credit is very low
   4. Because its finance is rigid
   Show answer

   Answer: A. Because it can print notes through the Reserve Bank of India
   The government can print notes through the RBI, and its credit status is high. A private person has no such right.

All Class 12 Economics chapters

• Chapter 1: Introduction to Micro and Macro Economics
• Chapter 2: Utility Analysis
• Chapter 3A: Demand Analysis
• Chapter 3B: Elasticity of Demand
• Chapter 4: Supply Analysis
• Chapter 5: Forms of Market
• Chapter 6: Index Numbers
• Chapter 7: National Income
• Chapter 8: Public Finance in India
• Chapter 9: Money Market and Capital Market in India
• Chapter 10: Foreign Trade of India

Class 12 Economics notes: all chapters