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Economics Concept: Budget, Balance of Payments, Inflation, National income of India

Budget

Budget (from originating from french word 'bougette') generally refers to a list of all planned expenses and revenues of government

A budget has two accounts, namely, (1) revenue account and (2) capital account

Revenue Account :

Revenue account includes all receipts and expenditure, which are of recurring nature and which do not pertain to sale and purchase of assets.

It consist of revenue Receipt and Revenue Expenditure :

Revenue Receipts :

It consist of both tax – revenue and non - tax revenue .
The tax revenue includes revenue form direct and indirect taxes.
The non-tax revenue receipts include revenue from currency, Coinage and mint, interest receipts, dividends, profits, revenue from general services (such as police, jails, supplies and disposal, and public works), revenue from social and community services (such as education, health, housing, broadcasting and so on) and revenue from other services (such as agriculture and allied services, industry and mines, transport and communications).

Revenue Expenditure :

Any expenditure from revenue receipt.

Revenue Deficit = Revenue Expenditure – Revenue Receipt.

Capital Account :

The capital account includes the heads which pertain to receipts and expenditures of long term nature and sale and purchase of assets. It also consist of Capital Receipt and Capital Expenditure.

Capital Receipt :

Capital account receipts include market loans, borrowings from Reserve Bank of India and others through the sale of treasury bills and loans from foreign governments and others to the central government.

Capital Expenditure :

It include expenditure on acquisition of various physical assets like land, buildings, machinery and equipment, investments in shares and debentures and loans to state governments and other bodies.

Here Capital Deficit = Capital Expenditure – Capital Receipt.

Different Types of Deficit :

Budget Deficit = Deficit on Revenue Account plus Deficit on Capital Account. Or Total expenditure – Total Income.
Fiscal Deficit = Budget Deficit + Borrowing.
Monetised Deficit = Net increase in borrowing from RBI in a fiscal year.
Primary Deficit = Fiscal Deficit – Interest payment.

Balance of Payments

The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time.

A complete BoP account comprises the following two broad accounts:

(a) Current Account; and

(b) Capital and Financial Account.

Current Account :

The current account deals with the trade of goods and services between two countries.

In brief current account includes:

Payments related to foreign trade, current business and services.
Short term banking and Credit facilities.
Payments due as interest on loans and dividends.
Foreign travel, education, medical expenses.
Remittances i.e. money sent by individuals working abroad back at home

If Current Account balance is positive , then it is termed as Current account surplus and if it is negative then It is termed as Current Account Deficit(CAD).

Capital account Transactions

It includes those transactions which are undertaken by a resident of India such that his/her assets or liabilities outside India are altered (either increased or decreased).

It includes:

Foreign direct investment (FDI) refers to long term capital investment such as the purchase or construction of machinery, buildings or even whole manufacturing plants.
FII(Foreign Institutional Investment )or Portfolio investment refers to the purchase of shares and bonds in Indian share market by the foreigners.
ECB(External Commercial Borrowing): Money borrowed by Commercial companies from abroad.
Sovereign Debt : Money borrowed by Govt Of India.

Inflation

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time

Types of Inflation:

Demand pull inflation: This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same.
Cost-push Inflation: If there is increase in the cost of production of goods and services, due to increase of wages and raw materials cost, there is likely to be a consequent increase in the prices of finished goods and services.
Stagflation: It is a situation in which the inflation rate is high and the economic growth rate is low.
Reflation: It is the act of stimulating the economy by increasing the money supply or by reducing taxes. It is an act of pumping money in the market to increase the circulation so that economy can be stipulated again.
Disinflation: It is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time.
Deflation: It is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate).
Hyper inflation: It is the extremely rapid escalation of prices (typically more than 50% per month) for goods and services.

How to Measure Inflation:

CPI(Consumer Price Index):

A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households.
CPI, based on 260 commodities including certain services, measures the change in prices at the retail level. Prices of sample goods and services are collected periodically (usually every month) by the Ministry of Statistics and Programme Implementation, and the change, if any, is noted.
The base year of CPI was changed to 2012 from 2010. Base year for WPI and IIP (Index of Industrial Production) was also changed to 2012 in April this year.
A base year is used to compare the measure of rates. For simple understanding, this can be taken as ‘first’ year in the time set. Prices in the base year are often taken as 100 to simplify calculations.
Unlike WPI, there is not a single measure of CPI. In India, four CPI indices are used to determine inflation at the consumer level. These are: CPI-IW (Industrial Worker), CPI-UNME (Urban Non-Manual Employees), CPI-AL (Agricultural Labourers), and CPI-RL (Rural Labourers).
Unlike the WPI, the new series of CPI based on recommendations of Abhijit Sen committee assigns the highest weight to primary articles like food, beverages and tobacco (49%).

Wholesale Price Index(WPI) :

The Wholesale Price Index or WPI is the price of a representative basket of wholesale goods . Base year for WPI is 2004 – 05.
The basket used in WPI is composed of three groups: Manufactured Products (65 percent of total weight), Primary Articles like food, etc. (20.1 percent), and Fuel and Power (14.9 percent). The WPI is calculated by the Ministry of Commerce and Industry.

National Income of India

According to the National Income Committee (1949), “A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication”.
Thus, national income measures the net value of goods and services produced in a country during a year and it also includes net earned foreign income. In other words, a total of national income measures the flow of goods and services in an economy.
National income is a flow not a stock. As contrasted with national wealth, which measures the stock of commodities held by the nationals of a country at a point of time, national income measures the productive power of an economy in a given period to turn out goods and services for final consumption.

Concepts of National Income India

The various concepts of national income are as follows :

Gross National Product Formula ( GNP ) :

Gross National Product refers to the money value of total output or production of final goods and services produced by the nationals of a country during a given period of time, generally a year.
As we include all final goods and services produced by nationals of a country during a year in the calculation of GNP, we include the money value of goods and services produced by nationals outside the country.
Hence, income produced and received by nationals of a country within the boundaries of foreign countries should be added in Gross Domestic Product ( GDP ) of the country. Similarly, income received by foreign nationals within the boundary of the country should be excluded from GDP.

In Gross National Product Equation Form : GNP = GDP + X – M,

where,

X = Income earned and received by nationals within the boundaries of foreign countries

M = Income received by foreign nationals from within the country.

If X = M, then GNP = GDP.

Similarly, in a closed economy X = M = 0, then also GNP = GDP.

Gross Domestic Product:

Gross Domestic Product ( GDP ) is the total money value of all final goods and services produced within the geographical boundaries of the country during a given period of time.
As a conclusion, it must be understood while domestic product emphasizes the total output which is raised within the geographical boundaries of the country; national product focuses attention not only on the domestic product, but also on goods and services produced outside the boundaries of a nation. Besides, any part of GDP which is produced by nationals of a country, should be included in GNP.

NDP(Net Domestic Product ) :

NDP is obtained by subtracting depreciation value ( i.e., capital stock consumption ) from GDP.

Net National Product Formula ( NNP ) :

NNP is obtained by subtracting depreciation value ( i.e., capital stock consumption ) from GNP.
In Net National Product Equation Form : NNP = GNP – Depreciation. Or NNP = NDP + X – M
NNP at factor cost or National Income = NNP at Market price – ( Indirect Taxes – Subsidy ) = NNP at MP – Indirect Tax + Subsidy.

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