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Unit 4 of 4 · BBA Sem 2

Unit 4: Macroeconomic framework of the Indian economy

Managerial Economics-II notes · PTU syllabus (BBAGE 201-18)

3 min read4 topics9 exam questions
On this page
  1. Unit summary
  2. Public finance
  3. The tax system in India
  4. Financial administration and the budget
  5. The Finance Commission
  6. Key terms
  7. Quick revision
  8. Important questions

Unit summary

This unit applies macroeconomics to India's public finances: public finance and its components, the Indian tax system, financial administration (the budget process) and the Finance Commission.

After this unit you can

  • Explain the meaning and scope of public finance
  • Describe the Indian tax system, including direct taxes and GST
  • Explain financial administration and the budget process
  • Explain the role of the Finance Commission

PTU syllabus topics

  • Public finance
  • the tax system in India
  • financial administration and the Finance Commission
ClassificationPublic finance in India
Public finance

  • Public revenue

    Taxes and non-tax revenue

  • Public expenditure

    Development and non-development spending

  • Public debt

    Internal and external borrowing

  • Finance Commission

    Shares taxes between Centre and States

1

Topic 1

Public finance

Public finance studies the income and expenditure of government and how they are managed.

ClassificationComponents of public finance
Public finance

  • Public revenue

    Taxes and non-tax revenue

  • Public expenditure

    Development and non-development spending

  • Public debt

    Internal and external borrowing

  • Financial administration

    Budgeting, accounting, audit

  • Fiscal policy

    Using these tools for economic goals

2

Topic 2

The tax system in India

ComparisonDirect vs indirect taxes
Direct taxes
Indirect taxes

Burden

Borne by the person taxed

Shifted to consumers

Examples

Income tax, corporate tax

GST, customs duty

Nature

Progressive

Often regressive

  • Goods and Services Tax (GST, 2017) replaced many indirect taxes with a single destination-based tax: CGST + SGST on intra-state supplies and IGST on inter-state supplies. The GST Council decides rates.
  • Taxes are levied by the Centre (income tax, customs), states (SGST, stamp duty, excise on alcohol) and local bodies (property tax).
  • Canons of taxation (Adam Smith): equity, certainty, convenience and economy.
3

Topic 3

Financial administration and the budget

The Union Budget (Annual Financial Statement, Article 112) estimates government receipts and expenditure for the year.

Budget partContents
Revenue budgetRevenue receipts (taxes, non-tax) and revenue expenditure (salaries, interest, subsidies)
Capital budgetCapital receipts (borrowings, disinvestment) and capital expenditure (assets, loans)
Key formulasDeficit measures

  • Revenue deficit

    Revenue expenditure − revenue receipts

  • Fiscal deficit

    Total expenditure − (revenue receipts + non-debt capital receipts)

  • Primary deficit

    Fiscal deficit − interest payments

Stages: preparation (Finance Ministry), enactment (Parliament passes the Finance Bill and Appropriation Bill), execution (ministries spend) and audit (CAG).

4

Topic 4

The Finance Commission

The Finance Commission is a constitutional body (Article 280), appointed by the President every five years. It recommends:

  • the sharing of central taxes between the Centre and states (vertical devolution) and among states (horizontal distribution);
  • grants-in-aid to states;
  • measures to supplement the resources of local bodies.

The 15th Finance Commission recommended a 41% share of the divisible tax pool for states.

Key terms

Public finance
Study of government income and expenditure
GST
A unified indirect tax on goods and services
Fiscal deficit
Total government borrowing requirement
Union Budget
The annual statement of central government finances
Finance Commission
Constitutional body recommending tax sharing with states

Quick revision

  • Direct tax: income tax; indirect: GST, customs.
  • GST: CGST + SGST intra-state; IGST inter-state.
  • Fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts).
  • Finance Commission: Article 280, every five years.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.Define public finance.
  2. Q2.Differentiate between direct and indirect taxes.
  3. Q3.What is GST?
  4. Q4.Define fiscal deficit.
  5. Q5.Under which article is the Finance Commission constituted?

Long-answer questions

  1. Q1.Explain the meaning and components of public finance.
  2. Q2.Explain the tax system in India, including GST.
  3. Q3.Explain the budget process and the deficit measures.
  4. Q4.Explain the composition and functions of the Finance Commission.

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