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ECONOMY AND GOVERNMENT

There is a qualitative change in the livingconditions of most of the countries in theworld with the acceptance of the 'welfarestate' concept. It is generally believed thatthe increased intervention of governmentin economic activities helped to achievethe qualitative change. Still, each countryhas to solve the problems like poverty,inequality, unemployment, illiteracy,health issues, environmental issues, etc.Governments all over the world strive tosolve these problems and to improve thequality of life.

Depending upon the economic systemprevailing in a country, the method ofsolving these problems is also different.

The important economic systemsprevalent in various countries are thefollowing

• Capitalist economy

• Socialist economy

• Mixed economy

The ongoing globalization process in theworld aims at limiting the role of thegovernment. However, a number ofsituations still exist in the world,demanding the intervention of the

It is clear from the above that the intensityof government intervention is different ineach system.

Can you find out which of the systemsIndia has adopted?

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Economic systems

Capitalist system

It is an economic systemcharacterized by privatefree enterprise andminimum governmentintervention.

Market solves theproblems under thissystem.

It is a system in whichboth public and privatesector work together. Itsolves the socio-economic problems withthe help of both market andplanning.

Socialist system

It is an economic system inwhich productive factorsare owned by governmentand less importance is paidto private sector.Centralized planningsystem solves the socio-economic problems in thecountry.

Mixed economic system

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12government. A classic example of this isthe special packages implemented byvarious governments to tackle theeconomic crisis in 2008.

How did governments come to occupythis much of importance?

Private enterpreneurs will invest moneyin the field where there is profit.Naturally, market economy cannot solvethe entire problems. The 2008 WorldEconomic Crisis substantiates this.

Private sector has less interest in thefollowing fields.

• Rural road development

• Drinking water scheme

• Immunization

• Food security

Private sector is not bothered about socialissues. All these show that whenevermarket fails, government has to interfere.The situation in which governmentintervenes is shown in the following chart.

Basic InfrastuctureDevelopment:For the progress of an economy,the government invests moneyin infrastructure facilities likeroads, dams, power stations,drinking water schems,educational institutions, healthfacilities.

ReduceInequality:The gap between therich and poor getswidened. To reduceinequality govern-ment adopts meas-ures like provision ofsubsidies to thepoor, raising the taxrates on the rich, im-plementing specialpackages for weakersections.

Reduce Poverty andUnemployment: Poverty is theresult of lack of money to meetbasic needs. The state ofunemployment is the result ofunutilized human resources. Inorder to solve these, govern-ment implements poverty eradi-cation programmes and em-ployment generation schemes.

Social Services:

In order to achieve social goalsgovernment has to intervene in sectors likeeducation, health, etc.

Protection of Environment:

Unrestricted exploitation ofresources, environmental problems, etcare part of economic activities. Itnecessitates the intervention of thegovernment to protect resources andenvironment.

Defence and law and order:It is the duty of the government toprotect the nation from foreignaggression. Maintaining law and or-der is also the responsibility of thegovernment.

Maintain Stability:

Economic instability weakens theeconomy and leads to crisis.Unplanned activities cause crisis. To avoidthis and to maintain stability the govern-ment implements different programmes.

Social Security Measures:Government implements schemes thatprovide social security to socially andeconomically backward sections. e.g. Dif-ferent pension schemes, insuranceschemes, health and educationalservices at concessional rate, etc.

Economic Activities :

Government implements a number ofprogrammes with the aim ofincreasing production in agriculture,industry, etc.

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12Which of the activities mentioned above

are found in your society? List them.

Government make a lot of expenditure forthese activities. As a result, thegovernment has a responsiblity togenerate income for this. Let us see theimportant sources of income and types ofexpenditure of the government.

Public expenditure and RevenueThe expenditure of government is knownas ‘public expenditure’ and income of thegovernment as ‘public revenue’.

It is understood from the above that agovernment undertakes a lot of activities.On the basis of this, find out the sectors inwhich government spends money.

Assume that government increasesexpenditure for rural road construction.It provides employment to the peopleand generates income. In this situationgovernment expenditure is convertedinto the revenue of the public. Howdoes this help the life of the people?

Recently, the public expenditure of allgovernments is mounting up. Whichare the fields in which expenditure goesup?

• Defence

• Rural development

Do you think that people are benefitedout of this?

Prepare a note after making an enquiry.

Which are the sources of income formeeting the expenses of government?

Are you involved in any programmes offund mobilization by the government?

The income of the government (publicrevenue) is classified into tax revenue andnon-tax revenue.

The income from all sources of taxesconstitutes tax revenue. Income from fees,grants, profit, etc. represent non-taxrevenue.

Tax revenue constitutes the lion’s share ofpublic revenue.

You must have heard a lot about taxes.The background of Mahatmaji's "Saltsatyagrah" is the introduction of tax onsalt.

Tax RevenueTax is a compulsory payment, made bypeople to the governments withoutexpecting any direct return for it. Theperson who pays the tax is called the taxpayer.

When a person pays the tax imposed onhim, the burden of the tax is borne by him.The reason is that this activity reduces hisincome to that extent. The loss in theincome due to the payment of tax is called'tax burden". It is the duty of a citizen topay tax.

Suppose the government imposes 10%

tax on a person who earns `100000

annually. What would be the tax

burden? Calculate.

Dhandi March under the leadership of Mahatmaji

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Direct taxes are given below:

Personal income tax: It is a tax imposedon a person when income is beyond a limitprescribed by law. As income increasestax burden also increases.

Corporate income tax: It is a taximposed on the income of a company.

Find out the personal income tax rates inIndia.

Therefore the tax burden is shifted by thetrader to the consumer.

The following are the important indirecttaxes:

Excise duty : It is a commodity tax. It isimposed on the production of acommodity. It has no connection withsales.

Customs duty: It is the tax imposed onthe import and export of commodity. Itis used as an instrument to regulateforeign trade.

Sales tax: It is a tax imposed on the saleof a commodity.

Service tax: It is a tax imposed on theservices.

Value added tax (VAT) :It is a taximposed on the value added at each stageof production of a commodity.

Direct tax

Tax payer cannot transfer the burden oftax to another person.

Indirect tax

Tax -payer can transfer the burden of taxto others.

Tax

Taxes are of two types. See the following chart

Important Indirect Taxes

In the case of indirect taxes, taxes areimposed on one person but paid byanother person.

Example:-Take the case of a toilet soap.

Assume that the price of soap is 20 andtax rate is 10%. Trader remits 2 by wayof taxes. The trader in turn sells the soapfor 22 by adding the tax in the price.

Income slabs Tax rate

The attitude of avoiding tax payment

exists in different forms (not

collecting bills for the product, non

verification of the genuineness of bill,

tax evasion etc). How do these affect

the welfare activities?

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12Important taxes in India

• State taxes• Sales tax/VAT• Stamp duty• State excise duty

• Local taxes• Building tax• Professional tax• Entertainment tax• Advertisement tax

Increase in tax rate leads to increasein the prices of commodities. Whichof the following will you

recommend for tax imposition? Why?

• Gold jewellery

• Petroleum products

• Diamond jewellery

• Salt

• Life saving medicines

• Luxury cars

High tax rate is imposed on liquor and drugs.What is the objective behind this?

• Increased income?

• Social welfare?

Whether increase in corporate tax or sales taxaffects the living condition of common man?Why?

• Fall in the profit

• Increase in prices of commodity

• Increase in the burden of life

Important Non-tax Revenues

How much of income is derived by centralgovernment from all these sources? Findout this from figure (12.3).

• Central taxes• Corporation income tax• Personal income tax• Union excise duty• Customs duty

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12BudgetBudget is the annual statement showingthe income and expenditure of thegovernment during a financial year. InIndia the financial year is from 1st April to31st March. The following are the maincomponents of a budget:-

• Activities the government propose toimplement.

• Sources of income• Important expenditure items

Budget has great significance because ithas to properly direct the activities of thegovernment.

Different types of BudgetBalanced budget→expenditure = revenue

Deficit budget→expenditure> revenue

Surplus budget→expenditure< revenue

The details of the central budget for theyear 2010-11 are given in figure (12.1)

Central Budget 2010-11 Major Expenditure Items

Figure - 12.1

Repayment of principal and interestDefenceSubsidyGrants to states and union territoriesPensionPoliceEconomic services (Agriculture, Industry, Power, Transport, Communication,Science & Technology etc)Other Public Services - Parliament, Tax Revenue, Foreign affaris, etc.Social Services - Education, Health, Broadcasting, etc.

(in croresof Rs)

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Central Budget - 2010 -11

Figure - 12.2 Figue - 12.3

Sources of Tax Revenue

Corporation TaxIncome TaxCustoms DutyUnion Excise DutyService TaxOther Taxes

Sources of Non-Tax Revenue

Borrowing Interest

Profit Grants

Other sources

Examine diagrams 12.2 and 12.3 and find out the answer for the following

• Which type of tax is the largest source of revenue for the central government?

• Which type of tax draws less income?

• Arrange the tax sources in the ascending order on the basis of income.

• Which is the main source of non-tax revenue?

• From which source is the least income derived?

• Arrange them in the ascending order.

(in croresof Rs)

Find out the following with the help of the diagram

• On which item does the government spend more money?

• Which of the items gets the lowest share?

• Prepare a list of expenditure items in the ascending order.

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• Classify the following budgets

Revenue - ` 14800

Expenditure - ` 14800 .............................. budget

Revenue - ` 14800

Expenditure - ` 16200 .............................. budget

Revenue - ` 14800

Expenditure - ` 13200 .............................. budget

• Prepare a table showing the revenue and expenditure of local bodies.

• Will higher taxes for high income group reduce the economic inequality? How?

Follow up activities