Overview of Public Finance and Economic Development

SHRI. J.A. YADAV Department of Economics P.D.V.P. College, Tasgaon

Total Area of Country: 3287263 sq.km Percentage of World Area: 2.42% (7thplace) Forest and Tree Cover Area: 782871 sq. km (23.81% of the total area) Total Forest cover area: 692027 sq.km Agricultural Area: 141.23 million hectares (43% of total) Irrigated area: 40% of net sown area Rainfed Area as % of net sown area: 55% Largest State (Areawise) Rajasthan Smallest State (Areawise) Goa

Total Population (Census 2011): 121.06 cr Decadal Growth Rate (2001-11): 17.7% Rural population growth: 12.3% Urban population growth: 31.8% Percentage of World population (2011): 17.5% Total Rural population (2011): 82.35 cr Total Urban population (2011): 17.65 cr Sex ratio (2011) 943 Child Sex ratio (2011): 919 State with highest Female-Male Ratio (2011): Kerla (1084)

Density of Population (2011): 382 per sq.km Birth Rate (2011): 21.8 per thousand population Death Rate (2011): 7.1 per thousand population Life expentancy (at the time of birth)66.1 yrs Male (2002-6) 64.6 yrs Female (2002-6) 67.7 yrs Literacy Rate: 73% Male: 80.9 Female: 64.6

It refers to the in detailed highlights of the major and minor factors or issues being studied in public finance. Mrs. Ursula Hicks: The main content of public finance consist of the examination and appraisal of the methods by which governing bodies provide for the collective satisfaction of wants and secure the necessary funds to carry out their purposes.

Public Revenue Public Expenditure Public Debt Financial Administration Fiscal Policy Economic Stabilization

Removal of Poverty Removal of Unemployment Saving Investment Equilibrium Economic Stability Maximization of Social Welfare Economic Development Reduction in Economic Inequality Provision of Collective Wants

Economic Growth Economic Stability Economic Planning Importance /Role of Public Finance in Developing Countries Capital Formation Economic Planning Economic Development Reduction in Economic Inequality Importance /Role of Public Finance in Developing Countries:

The classical economists like Adam Smith believed in minimum state activities and taxation. J.B.Say : The very best of all plans of finance is to spend little and the best of all taxes is that which is least in amount Adam Smith and Ricardo believed that the private expenditure is productive and the state expenditure is unproductive . They remarked, every tax is an evil and every public expenditure is unproductive .

But, according to Dalton: It is not true that every tax is an evil. For example, taxes on narcotic drugs, alcohol and other intoxicants reduce consumption of such commodities, which are injurious to health and good to the society. Likewise, public expenditure is good. State expenditure on agriculture, industries public health, education, justice etc. cannot be regarded unproductive, as such expenditure increases economic and social welfare Prof. Dalton: It is not true that all public expenditure is good. Expenditure on unnecessary ways is an abvious evil.

The principle of Maximum social advantage is the Principle of Public Finance . It is the fundamental rule, which should determine fiscal operations of the government. This principle is formulated and popularized by Dr. Dalton and Prof. Dalton calls it as the principle of maximum social advantage and Prof. Pigou as principle of Maximum Aggregate Welfare. The principle provides guidance to the govt. regarding public revenue and public expenditure or public finance operations so as to maximize social advantage or welfare. Dr. Dalton and Prof. Pigou Pigou. . Dr.

Principle say that, the government should collect revenue and spend it to maximize the welfare of the people. When govt. Imposes taxes, some disutility is created. But when it spends the money, there is some gain in utility. The government should adjust the revenue and expenditure in such a way that utility is maximized and disutility is minimized.

Extent of Public Revenue and Expenditure Extent of Public Revenue and Expenditure: With every additional unit of tax raised, the burden of sacrifice will go on increasing and the amount of benefit will go on decreasing. The government should stop at that point where the benefit derived from a unit of money spent by the government will be equal to the sacrifice imposed in raising that unit of revenue. It is the optimum point of public finance operations. They should be up to the point, where the marginal utility due to public expenditure is equal to the marginal disutility due to public expenditure is equal to the marginal disutility due to taxation or public revenue. It can be presented diagrammatically as follow

Distribution so distributed by the govt. among different uses that the marginal return or benefit of satisfaction is the same for all of them. It is the principle of equi-marginal utility or maximum satisfaction applied to public finance. Suppose, the marginal utility of expenditure on agriculture is greater than on defence, the expenditure on agriculture would give greater satisfaction than defence. Hence, the revenue should be transferred from defence to agriculture till the marginal utilities in both uses are the same. Distribution of of Revenue Revenue: The revenue should be

Distribution of taxation on different sources should be distributed according to the principle of least sacrifice. It should be distributed on different sources that marginal sacrifice of each source is the same. If the utility of last rupee paid by A is less than that of the last rupee paid by B, taxing of B, should reduce and that of A should increase till the marginal sacrifice of the last rupee of both A and B is the same. Distribution of of Taxation Taxation Burden Burden: The burden

There are three fundamental principles: Public expenditure should be carried on up to the point where the marginal social benefit is equal to the marginal social sacrifice. Public revenue should be distributed on different needs of expenditure that the marginal social benefit or return of satisfaction from each of them is equal. The taxes should be distributed in such a way that the marginal utility of money or marginal social sacrifice paid in taxation is equal to all taxpayers.

Preservation of the Community Improvements in Production Improvement in Distribution Stability and full employment Provision of Future

It is very difficult for the govt. to balance the marginal disutility and marginal utility The concepts of marginal social sacrifice and marginal social benefit are vague and difficult to understand This principle cannot be applied to each and every activity of the government. This principle cannot be applied to special welfare programme for the poor people. The development of the backward regions or areas cannot be achieved by incurring more expenditure as per this principle.

Adams the support of the state. Seligman person to the government to defray the expenses incurred in the common interests of all without reference to special benefits conferred. Bastable the wealth of a person or body of persons for the service or the public powers. Dalton imposed by a public authority irrespective of the exact amount of service rendered to the tax payer in return and not imposed as a penalty for any legal offence. Adams: A tax is a contribution from citizens for Seligman: A tax is a compulsory payment from a Bastable: A tax is a compulsory contribution of Dalton: A tax is a compulsory contribution

Tax is a compulsory contribution to the govt. from the people. Tax evasion is a legal offence. Tax is imposed and collected by the govt. only. It is imposed and collected to meet the govt. expenditure. Tax is not a penalty or fine for offence, but a contribution to the public revenue. There is absence of the direct relationship between the tax paid and services received by the people. It is a dominant and certain source of public revenue for the govt. Taxes are imposed on the individuals, institutions and goods and services.

Adam Smith Cannon of Equality Cannon of Certainty Cannon of Convenience Cannon of Economy Bastable Canon of Productivity Canon of Elasticity Canon of Diversity Canon of Simplicity Canon of Expendiency Canon of Coordination Canon of Neutrality Adam Smith: Bastable:

Impact of Tax Shifting of Tax Incidence / Burden of Tax

J J. .S S. . Mill very person who it is intended or desired should pay it. Dalton by the person whom it is legally imposed. Findlay and wealth of a individual is direct tax. For Expenditure tax, Corporation tax etc. Mill: A direct tax is demanded from the Dalton: A direct tax is a tax which really paid Findlay Shirras Shirras: A tax imposed on income Example: Income tax, Wealth tax,

Economy Equity Civil Consciousness Reduction in Inequality Certainty Elasticity Educative value Easy to understand Control of Inflation Convenience Productive Ability to Pay

Inconvenient Unpopular Uneconomical Possibility of Evasion Uncertainty Inequitable Narrow Scope Unsuitable for Underdeveloped countries Curtails Capital Formation Political Decision Extravagance of Money Inflation

J J. .S S. .Mill demanded from one person in the expectation and intension that he shall identify himself at the expenses of another. Dalton on one person but paid partly or wholly by another, owing to a consequential change in the terms of some contract or bargain between them. Prof affect through their consumption. Mill: Indirect taxes are those which are Dalton: An indirect tax is one which is imposed Prof. . Shirras Shirras: Indirect taxes are those which the income and property of persons

Convenient Elastic Evasion Impossible Equity Higher investment and production Social Welfare Progressive Wider Coverage Suitable to developing countires Easy to Collect Productive Popular

Regressive Uncertain No civil consciousness Discourage Savings Inflation Uneconomical Inequitable No direct link with the government Unemployment Socially Unjust

Meaning incurred by public authorities-central, state and local governments, either for the satisfaction of collective needs of the citizens or for promoting their economic and social welfare. It refers to the expences of the public authorities central, state and local governments either in protecting the citizens or in promoting their economic and social welfare. Expenditure undertaken by the government at different levels (Central, State, Local govts. ) is public expendithure Meaning: Public expenditure is the expenditure

Increase in Government Activities Industrial Development Social Security Measures Nationalisation Development of Agriculture Inflation Depression Problems of Defence

Urbanization Approach Towards Government Economic Development/ Welfare State Growth and Social Justice Democratic Government Economic Planning Population Growth Increasing International Relations

Effects on Production 1. Effects upon Ability to Work, Save and Invest: Public expenditure can increase the ability of the people to work, save and invest in many ways. Public expenditure on education, medical services, cheap housing facilities, means of transport increase the efficiency of persons to work. Effects on Production: 1. Effects upon Ability to Work, Save and Invest and communication etc., will all

2. Effects on Willingness to Work, Save and Invest: and invest is concerned, it depends to a great extent upon the character of public expenditure and the policy of the government. For example, old age pension, provident fund benefit, insurance against sickness and employment at state expense, provide security and safety to person and, therefore, reduce his willingness to work and save. 2. Effects on Willingness to Work, Save and Invest: As far as the willingness t work, save

3. Effects on Diversion of Economic R Public expenditure diverts resources from private to public use in many ways, e.g. the government expenditure on defenses, police, civil administration, etc, diverts resources from private sector to public sector. It is wrong to assume that this diversion of resources from private use to government use deduces the amount of consumption of goods with the people, and reduces economic welfare of the people. 3. Effects on Diversion of Economic Resources:

P.E.Taylor promise by the Treasury to pay to the holders of these promises a principal sun and in most instances interest on that principal J. K. Mehta government for several purposes is public debt . Findlay a state owes to its subject or to the nationals of other countries P.E.Taylor: The debt is in the form of J. K. Mehta: The debt or loans raised by the Findlay Shirras Shirras: National debt is a debt which

Internal and External Productive and Unproductive Redeemable and Irredeemable Short term and Long-term Voluntary and Compulsory Marketable and Non-marketable Gross and Net

Individuals Non-Banking Financial Institutions Commercial Banks Central Bank External Sources IMF, IBRD, IDA, IFC

To meet Budget Deficits To meet War Expenditure To Remedy a Depression To Develop the Economy Revival from Natural Calamities Development of Public Sector To provide Infrastructural Facilities To provide Social Services Economic Planning Repayment of Debt

Effects on Consumption Effects on Investment Effects on Production Effects on Distribution Effects on National Income Effects on Employment Effects on Social Welfare Effects on Resource Allocation Effects on Liquidity Effects on Private Sector Effects on Money Market Effects of External Debt

Meaning McGraw Hill Dictionary of Modern Economics Deficit financing is a practice by a government of spending more than it receives in revenue Prof. V.K.R.V. excess of expenditure incurred by the government over its revenue . Indian Planning Commission: financing is used to denote the direct addition to gross national expenditure through budget deficits, whether the deficits are on current revenue or of capital account . Meaning: McGraw Hill Dictionary of Modern Economics: Prof. V.K.R.V. Rao Rao: Deficit financing means an Indian Planning Commission: The term deficit

Governments cash balance with the central bank Loans from the Central Bank Loans from the Commercial Banks Issuing of New Currency

To Meet Financial Needs To Meet War Expenditure Instrument of Economic Development Mobilization of Surplus, Idle and Unutilized Resources Financing of Plans To Raise Effective Demand To Stimulate Private Investment Migration of Productive Resources Revival from Depression Employment Generation

Price Rise Increase in Money Supply Speculative Activities Less Investment Economic Inequality Unfavourable Balance of Payment Fall in Value of Money

Favourable Economic Development Economic Planning Employment Profit of Central Bank Industrial Development Control of Trade Cycles Revival from Natural Calamities Utilization of the Productive Resources Poverty Favourable Effects Effects:

Unfavourable Effects: Problem of Inflation Excessive Expansion of the Bank Money Adversely Affects the Economic Development Problem of the Economic Inequality Adverse Balance of Payment Fall in the Value of Money Speculative Activities Fall in Savings and Investment Unfavourable Effects: