What is Public Finance? Detailed Explanation

Finance, to the layman, would mean budgeting, saving, and investment at a personal level. However, there is an equally important, if not so noticeably apparent, area of finance: that of public finance. Public finance forms a major function in any country's economic setup and is something which, one way or another, touches upon the life of each and every citizen. Now, in this comprehensive overview, we come to look at what Public Finance exactly means, what its major components are, and how it affects India.

Definition of Public Finance

Public finance refers to the collection of revenue and its administration and spending by governments. In fact, its functional area relates but does not pertain to an overall perspective concerning taxation, budgeting, expenditure, and borrowings. To phrase it in a single phrase, public finance infuses the financial backbone of government functions; in other terms, it hails a means of efficient resource allocation toward the needs of society.

Operational Aspects of Public Finance in India

1. Revenue Generation

Revenue generation refers to any process through which a government generates funds that help it finance its activities. In the context of India, it could mean the following sources: Taxes: These are the largest source of government revenue, arriving in many forms, including: Income Tax: This is usually levied upon the individual and business entities depending on their returns. For instance, wage earners are aware that part of their earnings is deducted for income tax. Well, the revenue is vital in financing various public services.

The GST basically constitutes part of the integrated indirect taxation that was imposed for the first time in 2017 and replaced many of the previous ones. This indirect tax structure made compliance increase, since it does impose taxes on the sale of goods and services, therefore making it easier to deal with. Due to enhanced revenues from it, government initiatives and services also improved and became dependable, as did many others.

Property Tax: The levies collected on one's property, usually valued at market value. The major concerns of municipal governments are a source of financing various municipal facilities or services, which include waste management and roadways maintenance.

Example: The GST that was levied on a purchase price for buying a new smartphone contributes to the revenue of the government for going to the upkeep and maintenance of public infrastructures and services.

Other than that, the other major source is borrowing, which takes place when the amount collected owing to taxation falls short. In this case, these governments borrow money by ways of selling bonds or even taking up loans from both foreign and domestic sources, a system helpful for undertaking bigger projects and covering temporary deficits.

For instance, the Indian government can raise funds by issuing bonds for constructing a new highway. The money is refunded within due time, usually with interest.

Grants and Aids: India also receives grants from many other international bodies besides states. These can be given for developmental activities in cases of disasters or particular programmes for infrastructural and public service construction or development.

Example: International aids during natural calamities like floods and earthquakes bring quick response for immediate relief and help recover from such calamities.

2. Expenditure

Expenditure explains how the collected fund is spent by the government. Effective expenditure is quite essential in order to give public services a boost and provide economic stability to the country. The Indian government spends on a number of different items, the major categories including:

Public services: These are those services which, in daily life, get applied to the citizens and help power the economic development. Examples include:

Healthcare: Invest in hospitals, clinics, and public health programs so that everyone gets to have medical treatment. The Government of India spends various funds on different health schemes, like Ayushman Bharat, for health cover for millions of people.

Education: Lending to schools, colleges, and universities assists in this direction for quality education, coupled with training. Schemes like Beti Bachao Beti Padhao have been designed to ensure better educational facilities for girls in order to usher in gender equity.

Basic Infrastructure: It involves investment in development related to roads, bridges, public transport, and utilities, keeping in view economic development along with an improvement in the living standards. Projects like Pradhan Mantri Gram Sadak Yojana target rural connectivity through proper road network.

Example: National Rural Health Mission covers funding of primary health centers in rural areas with the objective of providing medical facilities to the underprivileged section of the society.

Social welfare schemes: These are for the care of underprivileged and weak sections of society.

Pension It means financial support to retired people and senior citizens. Atal Pension Yojana is the pension provided to workers in the unorganized sector by which their old age becomes economically secure.

Subsidies: These are those subsidies that lower the prices of essential commodities and services for poor families. The food grains are distributed at subsidized rates with a view to ensuring food security amongst economically weaker sections under the Public Distribution Scheme.

Unemployment Benefit: This financial assistance is to the temporarily unemployed people with whose help their consumption may be carried on until they are employed.

Example: MGNREGA assures wage laborers of wage and employment in rural areas, and hence during bad times, it becomes their savior.

Defense and Security: Money spent on national defense and enforcement to protect the country and its citizens. Money is spent for the Indian Armed Force, police, and security agencies.

Example: The Indian defense budget is supportive of military equipment and infrastructure modernization and hence ensures national security and preparedness.

3. Budgeting

This is considered to be the most crucial role in public finance as it deals with planning and laying out financial resources. Government of India prepares an annual budget listing:

Projected Revenue: The total estimated income that a government will get from different sources of taxes, borrowings, and other receipts. While doing such an estimate, it usually considers normal or current economic conditions and tax policies.

Planned Expenditure: Plans that give an indication of developing public services, infrastructural works, and welfare programmes. The Budget outlines the plan on how funds would be apportioned across various sectors in an attempt to meet national needs.

This deficit and surplus management brings into the budget that there is a deficit on/account surplus whereby the expenditure goes beyond revenues or vice versa respectively. It is of high essence that proper balancing between the two factors is done in order to maintain economic stability.

Example: If the budget estimates a deficit, the government could be bound to interfere with revenue-enhancing/expenditure-reducing policies in an attempt to manage the shortfall.

Role of Public Finance in the Lives of Indians

Public finance affects the lives of the Indian citizens in terms of:

Infrastructural Development: Good public finance encourages infrastructural development relating to roads, transport systems, and utilities. The latter will improve the daily life of the people and benefit economically as well because it enhances trade and locomotion.

Social Services: Health Care, Education, and Welfare Plans improve the living conditions of people, particularly when they are needy. Plans related to Swachh Bharat Abhiyan undertake cleanliness work related to environmental sanitation and public health.

It lays the grounds for economic stability along with development too. It allows for the stabilization of the economic atmosphere by balancing the budget and the management of debt in which investment and development shall take place.

Challenges in Public Finance

There are challenges associated with the management of public finance:

Unsustainable Crowd Out and Squeeze: High levels of government debt crowd out and squeeze critical investments, unleashing economic instability. Good debt management practices ensure long-term fiscal health and go a long way.

Revenue Collection: The task of collecting revenue through taxation in a large and heterogeneous country such as India is not an easy task. Ways of enhancing tax compliance and administration must therefore be considered.

Efficiency of Spending: For any given resource constraint, spending needs to be made to achieve maximum output. It is an accountable and transparent spending regime that holds the key for securing better value from resources deployed.

Conclusion

Public finance holds a position of primacy in the understanding of ways through which governments arrange and channel resources for sustenance and survival. This becomes imperative in India, while finances for infrastructure, supporting social services, and economic equilibrium are concerned. Proper understanding of the constituents of public finance and its impact would go a long way towards comprehending the facets of government financial management which touch your daily life besides influencing the overall economy. In fact, good public finance would continue to contribute towards the development process of India while its national objectives were realized and an improvement in the livelihood of its people came about.