KALYAN CITY LIFE

Different Types of Government Budget - Diagram ↓

A. Balanced Budget ↓

Balanced budget is a situation, in which estimated revenue of the government during the year is equal to its anticipated expenditure.

Government's estimated Revenue = Government's proposed Expenditure.

For individuals and families, it is always advisable to have a balanced budget.

Most of the classical economists advocated balanced budget, which was based on the policy of 'Live within means'. According to them, government's revenue should not fall short of expenditure. They also favoured balanced budget because they believed that government should not interfere in economic activities and should just concentrate on the maintenance of internal and external security and provision of basic economic and social overheads. To achieve this, government has to have enough fiscal discipline so that its expenditures are equal to revenue.

What is a Budget ? Meaning and Concept

Government has several policies to implement in the overall task of performing its functions to meet the objectives of social & economic growth. For implementing these policies, it has to spend huge amount of funds on defence, administration, and development, welfare projects & various other relief operations. It is therefore necessary to find out all possible sources of getting funds so that sufficient revenue can be generated to meet the mounting expenditure.

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Planning process of assessing revenue & expenditure is termed as Budget.

The term budget is derived from the French word "Budgette" which means a "leather bag" or a "wallet". It is a statement of the financial plan of the government. It shows the income & expenditure of the government during a financial year, which runs generally from 1^stApril to 31^st March.

Budget is most important information document of the government. One part of the government's budget is similar to company's annual report. This part presents the overall picture of the financial performance of the government. The second part of the budget presents government's financial plans for the period upto its next budget.

The Solutions To Manage Public Debt In India ↓

The increase in Public debt puts a burden on the citizens of the country. The burden of public debt adversely affect the growth and development of the economy. Therefore there is a need to effectively manage public debt.

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Management of public debt involves; repayment of public debt, controlling the amount of borrowings and productive use of borrowed funds for development.

Following are the measures to be undertaken to reduce & repay public debt.

1. Reduction in Primary Deficit

Corrective action with respect to the growing internal debt must be carried out in two stages. In the first stage, action must be directed toward slowing down the pace of growth of the debt ratio or reducing it to a reasonable level. In the second stage, attempts must be made to contain most revenue expenditures within the revenues raised by the Government so that Government's net borrowing is used only for productive purposes.

Introduction To The Public Debt In India ↓

During recent years, public debt in India has been growing at an alarming rate. The under developed nature of the economy & institutional credit deficiencies makes the financing of economic development a complicated problem.

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Hence the government has to play a key role in stimulating the rate of capital formation & in promoting the economic development of the economy.

So public debt can be used by the government as means for mobilising the resources.

The following table indicates the composition of public debt of the Central Government of India.

What is Redemption ? Meaning ↓

Redemption means repayment of a loan. Redemption refers to escaping from the burden of public debt.

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Various Methods of Public Debt Redemption ↓

The various methods of public debt redemption are as follows :-

1. Sinking fund method

The Government creates a fund called sinking fund by accumulating a part of the public revenue every year for the repayment of debt. This is the most systematic and best method of debt redemption. The burden of debt is spread evenly over the period of accumulation of the fund. Sinking fund creates confidence among the lenders and increase the credit worthiness of the government.

Introduction To The Burden of Public Debt ↓

Over the years, the public debt of the India's Central and that of State government has increased considerably during the planning period. The Government borrows funds by way of public debt to meet the various development and non-development expenses.

Table below indicates composition of public debt of the Central Govt. of India.

Apart from internal debt, there are also internal liabilities of the central government in the form of small savings of the public, provident funds, reserve funds & deposits of Government department.

Both internal and external debt carry a burden on the economy of nation.

What is Public Debt ? Meaning ↓

Public debt or public borrowing is considered to be an important source of income to the government. If revenue collected through taxes & other sources is not adequate to cover government expenditure government may resort to borrowing. Such borrowings become necessary more in times of financial crises & emergencies like war, droughts, etc.

Public debt may be raised internally or externally. Internal debt refers to public debt floated within the country; While external debt refers loans floated outside the country.

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The instrument of public debt take the form of government bonds or securities of various kinds. Such securities are drawn as a contract between the government & the lenders. By issuing securities the government raises a public loan & incurs a liability to repay both the principal & interest amount as per contract. In India, government issues treasury bills, post office savings certificates, National Saving Certificates as instrument of Public borrowings.

Introduction - Rise in Government Expenditure ↓

Public expenditure is also referred as Government expenditure. It is incurred by the government to provide public goods & services, and to service debts.

The expansion in government activities during the planning period has resulted in a huge rise in the public expenditure.

Growth of the Public Expenditure ↓

Before independence, there was no planning in India and hence no effort was made on the part of the government to provide welfare services but the accelerating growth of government expenditure began in late seventies.

The table shows the rapid rise in public expenditure over the years. The ratio of public expenditure to GDP has increased steadily from 9.1% in 1950-51 to 28.3 in 2005-06.

What is Public Expenditure ? Meaning, Definition

Public expenditure refers to Government expenditure i.e. Government spending. It is incurred by Central, State and Local governments of a country.

Public expenditure can be defined as, "The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure."

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Throughout the 19^th Century, most governments followed laissez faire economic policies & their functions were only restricted to defending aggression & maintaining law & order. The size of pubic expenditure was very small.

But now the expenditure of governments all over has significantly increased. In the early 20^th Century, John Maynard Keynes advocated the role of public expenditure in determination of level of income and its distribution.

In developing countries, public expenditure policy not only accelerates economic growth & promotes employment opportunities but also plays a useful role in reducing poverty and inequalities in income distribution.

Introduction - Public Expenditure is Increasing ↓

Adam Smith wrote in the 'Wealth of Nations' that the government should restrict their activities to;

1. Defence against foreign aggression.
2. Maintenance of internal peace and order.
3. Public development work.

All other functions besides these were considered beyond the scope of the state & expenditure on them was treated as unjust & wasteful.

But there had been a spectacular expansion in the functions of state & this resulted in phenomenal increase in public expenditure for this we shall take a look at contribution by Adolph Wagner & Peacock-Wiseman hypothesis.

1. Effects on Production

The effect of public expenditure on production can be examined with reference to its effects on ability & willingness to work, save & invest and on diversion of resources.

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1. Ability to work, save and invest : Socially desirable public expenditure increases community's productive capacity. Expenditure on education, health, communication, increases people's productivity at work and therefore their incomes. With rise in income savings also increase and this in turn has a beneficial effect on investment and capital formation.
2. Willingness to work, save and invest : Public expenditure, sometimes, brings adverse effects on people's willingness to work and save. Government expenditure on social security facilities may bring such unfavourable effects. For e.g. Government spends a considerable portion of its income towards provision of social security benefits such as unemployment allowances old age pension, insurance benefits, sickness benefit, medical benefit, etc. Such benefits reduce the desire to work. In other words they act as disincentive to work.
3. Effect on allocation of resources among different industries & trade : Many a times the government expenditure proves to be an effective instrument to encourage investment on a particular industry. For e.g. If government decides to promote exports, it provides benefits like subsidies, tax benefits to attract investment towards such industry. Similarly government can also promote a particular region by providing various incentives for those who make investment in that region.

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What is E-Banking ? Online Banking ↓

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E-banking refers to electronic banking. It is like e-business in banking industry. E-banking is also called as "Virtual Banking" or "Online Banking".

E-banking is a result of the growing expectations of bank's customers.

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E-banking involves information technology based banking. Under this I.T system, the banking services are delivered by way of a Computer-Controlled System. This system does involve direct interface with the customers. The customers do not have to visit the bank's premises.

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What is ATM ? Automated Teller Machine ↓

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ATMs are electronic machines, which are operated by a customer himself to deposit or to withdraw cash from bank. For using an ATM, a customer has to obtain an ATM card from his bank. The ATM card is a plastic card, which is magnetically coded. It can be easily read by the machine.

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To operate an ATM card, the customer has to inset the card in the machine. He has to enter the pass word (number). If the authentication or pass word (number) is correct, the ATM permits a customer to make entries for withdrawal or for deposit. On completion of the transaction, the customer's card is ejected from the ATM.

What is Crossing of Cheque ?

A cheque is a negotiable instrument. During the process of circulation, a cheque may be lost, stolen or the signature of payee may be done by some other person for endorsing it. Under these circumstances the cheque may go into wrong hands.

Crossing is a popular device for protecting the drawer and payee of a cheque. Both bearer and order cheques can be crossed. Crossing prevents fraud and wrong payments. Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus, crossing is necessary in order to have safety. Crossed cheques must de presented through the bank only because they are not paid at the counter.

1. Cheque is an instrument in writing

A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even printed. Oral orders are not considered as cheques.

2. Cheque contains an unconditional order

Every cheque contains an unconditional order issued by the customer to his bank. It does not contains a request for payment. A cheque containing conditional orders is dishonoured by the bank.

3. Cheque is drawn by a customer on his bank

A cheque is always drawn on a specific bank mentioned therein. Cheque drawn by stranger are of no meaning. Cheque book facility is made available only to account holder who are supposed to maintain certain minimum balance in the account.

What is a Cheque ? Meaning ↓

Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimised.

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Definition of a Cheque ↓

"Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."

What is a Bank ? Introduction ↓

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking system.

The term bank is either derived from old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging.

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A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it.

Type 1. Saving Banks

Saving banks are established to create saving habit among the people. These banks are helpful for salaried people and low income groups. The deposits collected from customers are invested in bonds, securities, etc. At present most of the commercial banks carry the functions of savings banks. Postal department also performs the functions of saving bank.

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Type 2. Commercial Banks

Commercial banks are established with an objective to help businessmen. These banks collect money from general public and give short-term loans to businessmen by way of cash credits, overdrafts, etc. Commercial banks provide various services like collecting cheques, bill of exchange, remittance money from one place to another place.

In India, commercial banks are established under Companies Act, 1956. In 1969, 14 commercial banks were nationalised by Government of India. The policies regarding deposits, loans, rate of interest, etc. of these banks are controlled by the Central Bank.

What is Recurring Deposit Account ? Meaning ↓

Recurring deposit account is generally opened for a purpose to be served at a future date. Generally opened to finance pre-planned future purposes like, wedding expenses of daughter, purchase of costly items like land, luxury car, refrigerator or air conditioner, etc.

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Recurring deposit account is opened by those who want to save regularly for a certain period of time and earn a higher interest rate.

In recurring deposit account certain fixed amount is accepted every month for a specified period and the total amount is repaid with interest at the end of the particular fixed period.

Meaning of Current Bank Account ↓

Current bank account is opened by businessmen who have a higher number of regular transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also known as Demand Deposit Account.

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Current account can be opened in co-operative bank and commercial bank. In current account, amount can be deposited and withdrawn at any time without giving any notice. It is also suitable for making payments to creditors by using cheques. Cheques received from customers can be deposited in this account for collection.

In India, current account can be opened by depositing Rs.5000 (approx. US $ 100) to Rs. 25,000 (approx. US $ 500). The customers are allowed to withdraw the amount with cheques, and they usually do not get any interest. Generally, current account holders do not get any interest on their balance lying in current account with the bank.

Current account holder get one important advantage of overdraft facility.