Notable sources of Non-Tax revenue (In descending order) 2020-21
Income from selling various goods & services such as railways, postal services, selling of India Yearbook-, Yojana-Kurukshetra magazines, fees that CISF charges for giving protection to Private Airports, auction of spectrum & mining rights, selling of commemorative coins etc.
✓ Interest receipts (received on Union’s loans to states,
railways, CPSE, foreign countries.) is a revenue receipt. [Had those borrowers repaid loan-principal, then that portion is ‘Capital Receipt.]
✓ Dividends and profits received from CPSE, PSBs, RBI. [Had Union sold its shares to a third party (disinvestment / privatization), then that will be ‘Capital Receipt’].
Similar Non-tax revenue earned by UT without Legislature
Grant in Aid / Donations received by Union. [Had Union received ‘loan’, it’ll be ‘Capital Receipt’.]
Sum of Above= Total Non-Tax Revenue Receipts = ~ 4 lakh crore
What is Total Revenue Receipts?
Total Revenue Receipts= NET Tax receipts (~16.0 lcr) + Non-Tax receipts (~4 lcr)= ~20lcr.
revenue budget: the tax receipts»_space; non-tax
Budget - Revenue-expenditure consists of?
Revenue-expenditure are usually associated with -
1- Expenditures spent on day to day functioning of the organs of the state =
- salaries & pensions, stationery, electricity bill, phone bill etc.
- in Executive, Judiciary, Legislature;
- Various Constitutional & Statutory bodies.
2- Expenditures that do not create income generating assets or permanent assets or financial assets.
-Thus, money SPENT on loan-interests, subsidies, scholarships, grants etc. counted here
Notable Revenue Expenditures (In descending order) 2020-21
Interest to be paid on previous loans is Revenue Expenditure. [Whereas Union repays loan-principal, its ‘Capital Expenditure’]
- Grant-in-Aid to States & Local Bodies for Disaster
Management, Panchayati Raj Development etc. as per Finance Commission recommendations. Additionally, Govt also gives grants to foreign countries for its soft diplomacy. - Grant = Amt doesn’t have to be returned with Interest. (Whereas If Govt gave ‘loans’ to States/CPSE/Foreign Countries then it’s an income generating financial asset = counted under Capital Expenditure).
Subsidies: Within them descending order Food subsidy Fertilisers fuel Interest subsidies Others (Price stabilization fund, Cotton & Jute etc.)
Defence revenue expenditure (e.g. soldier salaries, fuel for tanks)
Pension to retired employees (In the last 3 years it has kept rising.)
➢ Economic services related revenue expenditure (Agriculture, energy, transport, communication, Science technology)
➢ Social services related revenue expenditure ( health, education, social security):
➢ Expenditure on Administrative machinery (Police, Jail, External Affairs etc.), Elections, Parliament, Judiciary:
➢ Revenue expenditures of UT without Legislature
Total Revenue Expenditure = ~26 lakh cr⬆
What is Revenue Deficit?
Revenue Deficit = Revenue Receipt MINUS Expenditure = ~6 lakh cr⬆ (2020-21)
Projected (nominal) GDP for 2020-21 is ₹ 225 lakh crores. So Revenue Deficit as a percentage of GDP = (6 divided by 225) x 100= 2.7 %⬆
Difference between Tax and subsidies?
Tax (₹ ~16 lakh crores in Budget 2020)
- Tax is a compulsory contribution imposed by State. Refusal to pay the tax is punishable.
- Tax doesn’t promise specific and direct goods/services to the taxpayer.
Subsidies (₹ ~ 2.6 lakh cr in Budget 2020)
- A subsidy is a benefit given to an individual or firm by the government to reduce some type of burden. A person may refuse to accept the subsidy, he will not be punished.
- A specific benefit is promised e.g. 6000 to farmers, idli@₹ 1 rupee in Amma Canteen (Tamilnadu).
What are the different Types of subsidies with selected examples?
- Given in direct cash (or bank transfer): PM KISSAN 6k for farmers, LPG Pahal ~200 per cylinder.
- Given in kind: free school bags, uniform and books to the poor children, free medicines in public hospitals, free insurance.
- Indirect subsidies: cheap fees in government colleges, cheap kerosene, cheap urea, cheap crop insurance premium etc.
Here govt. is paying some money to an organization so they may provide goods/services @cheap rate to the beneficiary. - Implicit Subsidies: Govt suppresses the supply so to increase the prices to help a sector. E.g. Indian govt banned import of American chicken/poultry/eggs. So, shortage of chicken helps local Indian poultry industry to demand high prices from public. Here Indian poultry receiving ‘implicit subsidy’ (from public), even though Govt is not paying them money.
- Cross-Subsidisation: To keep rail travel cheap for the poor people, Railways keeps the passenger tickets lower than its input cost. To compensate this loss, Railways keeps freight (goods transport) prices higher. This is called “Cross subsidization”.
- Regulatory subsidies: e.g. if State Electricity Regulatory Commission directs companies- that electricity to farmers must NOT to be beyond ₹ “x” per unit.
- Procurement subsidies: e.g. FCI purchasing food grains from farmers at minimum support price (MSP).
- Interest subsidies / subvention: govt pays “x%” interest on agriculture, MSME, affordable housing loans.
What is the Impact of Subsidies?
❖ 👍🏻 Merit Goods: Healthcare, education, scientific research, LPG, solar panels, wind mills etc. Here subsidies can increase the positive externalities.
(Cheap LPG → poors don’t use firewood → more trees & less indoor pollution.)
❖ 👎🏻 But subsidies on diesel, kerosene generate negative externalities on the environment.
❖ 👎🏻 Urea subsidies to industries → cheap urea to farmers → excessive consumption → soil & water pollution, algae-blooms.
❖ 👎🏻 Subsidy leakage: When ghost beneficiaries (non-existent persons propped up by corrupt officials), and ineligible (rich) people are receiving subsidy.
Past Economic Surveys on subsidy delivery?
Economic survey 2014-15:
✓ We should use Jandhan Aadhar Mobile (JAM) trinity to reduce the subsidy leakage.
📘📘 Economic survey 2015-16:
✓Direct benefit transfer (DBT) can’t be a panacea in every case, because males of the house may waste DBT-money on liquor & tobacco. So, in some cases, Biometrically Authenticated Physical Uptake (BAPU) mechanism will be better i.e. beneficiary goes to a grain / fertilizer shop and uses his Aadhaar & fingerprint to purchase subsidized goods.
📘📘 Economic survey 2016-17:
➢ The present subsidy delivery mechanism suffers from two errors:
○ Inclusion Error: Non-poor (=affluent people) are receiving ~40% of subsidies.
○ Exclusion Error: real poor are not getting subsidies due to corruption
✓ So better to abolish all type of subsidies and directly deposit a specific sum of money into beneficiary’s bank account to help him buy goods/services from open market = Universal Basic Income (UBI)
How can we reduce subsidy bill?
ES19: Use ‘Behavioural economics’ to ↓ subsidy bill
To reduce Government’s subsidy burden: Above the Poverty Line (APL) households should be encouraged to voluntarily surrender their LPG subsidies using following tools of Behavioral economics:
✓ People have a strong tendency to go with the status quo. So, ‘Default ticked option’ in LPG registration forms should be ‘I wish to give up the subsidy’, so a person will be ‘forced’ to untick the option to avail the subsidy benefit.
✓ Similarly, income tax forms should contain extra-fields with pre-ticked options like ‘I want to give up LPG subsidy’.
✓ The online /SMS-based ‘subsidy giving up process’ should be quick and hassle-free. It should not take more than a few minutes. Because every additional minute required to complete the formalities= increases the chances that person will drop out in the middle of the process.
✓ People act positively when they see others act positively, and particularly when they can relate to such individuals. So, online “scroll of honour” should show name/photos/social media-profiles of others in their area who gave up subsidies.
✓ Advertisements to highlight that “Rich people are helping in poverty removal by giving up subsidies.“
✓ When people are watching a movie with social message (such as Padman, Toilet Ek Premkatha etc), it should contain ad asking people to give up full / partial subsidy.
✓ Once a person gives up subsidy, he should be shown the photos of poor people benefitting from his act / or a video with a beneficiary saying ‘thank you’.
7th Pay commission ministry and recommendation for salaries under revenue expenditure
Setup by Finmin → Department of Expenditure.
1st: Srinivasa Varadachariar (1946).
7th: (Retd) Justice AK Mathur (2014).
Its recommendations became effective from 1/1/2016.
Major highlights were:
✓ New system of “Pay Matrix” instead of previous system of pay band and grade pay.
✓ Regulatory bodies salaries increased: Chairman ₹ 4.50 lakh / month, members ₹ 4l.
✓ Minimum pay in Central service increased to ₹ 18k / per month (Group-D).
✓ Maximum pay: ₹ 2.25 lakh per month for Apex scale (e.g. Secretary of a Dept.), and ₹ 2.50l (for Cabinet Secretary)
✓ It adopted Dr. Aykroyd formula to computing wages at periodic interval (formula tracks the changes in prices of the commodities used by a common man). So, critiques believe there will not be an 8th Pay Commission because salaries will be updated automatically at regular interval, using this formula.
✓ It abolished various type of ‘interest free allowances’ e.g. Purchase of bicycle etc.
✓ It continued ‘interest-bearing advances’ for purchase of computer, house building (upto ₹ 25 lakhs). [= employee can borrow money from department but he will have to
return it with interest.]
✓ Various reforms for defence and CAPF services.
✓ Made stronger rules in Modified Assured Career Progression (MACP) system so lazy officials don’t get promoted.
Dearness Allowance, Gratuity, House Rent Allowance, One Rank One Pension (OROP) are words associated with?
Pay Commission
What is Dearness Allowance, Gratuity, House Rent Allowance, One Rank One Pension (OROP)?
- Dearness Allowance (DA): It’s given by an employer to protect the employees against rise in inflation. In government services, both working employees and retired pensioners are given dearness allowance.
- House Rent Allowance (HRA): rent allotted by the employer for employee’s accommodation (house).
- Gratuity: It’s a lump sum amount “x” given by an employer to the employee for rendering services continuously for “y” number of years. Usually given at
retirement. Norms governed under Payment of Gratuity Act, 1972 - One Rank One Pension (OROP): 2015- The govt. promised equal pension to military personnel retiring in the same rank with the same length of service, regardless of the date of retirement. Although, Ex-servicemen unhappy about the base year & calculation formula.
What is National Recruitment Agency (NRA)? What does it do?
Present: multiple recruitment exams conducted by multiple agencies at different points of time throughout the year.
Future: NRA will conduct Common Eligibility Test for recruitment to Non-Gazetted personnel in Government and PSBs. → SSC and IBPS will conduct Mains exams for
respective posts → time and cost saved for both candidate and recruiting agencies.
💼Budget-2020: we’ll set up NRA & open a (computerized) test centre in every district.
Impact of Revenue deficit?
REVENUE DEFICIT (2.7% OF GDP)
When government spends more than its income in revenue account, it incurs:
- Revenue deficit = Revenue expenditure – Revenue receipts.
- Since a major part of revenue expenditure is committed expenditure (like Interest repayment on previous loans, staff-salaries & pensions which Govt can’t ‘avoid’), so it
is quite difficult to ⬇ the revenue deficit.
- So, when revenue deficit ⬆, government will be forced to borrow more money or cut down the expenditure in the capital part (= less new schools, bridges and hospitals).
This will result in lower human development and lower economic growth (less new bridges → ⬇ demand of steel/cements → ⬇ growth in those sectors).
What is Effective Revenue Deficit?
EFFECTIVE REVENUE DEFICIT (1.8% OF GDP)
- We’ve counted Grant-in-Aid to States / Local Bodies as ‘Revenue Expenditure’, but some portion of that ₹₹ may have been spent by the States / Local Bodies for building Panchayat-Bhavans, Disaster Management Training Institutes, Cranes & Bulldozers for Disaster rescue operations etc. which are actually “Capital Assets”.
- Therefore, Budget 2011 (Chidambaram) introduced a new concept:
- Effective Revenue Deficit = Revenue Deficit (~6 lakh cr) MINUS Grants to various bodies which were spent for creation of Capital Assets (2 lakh cr)
- ERD= ~4 lakh crores (1.8% of GDP) for 2020⬆. (⬆means increased than last year)
