Capital Receipts and Capital Expenditures
A receipt that results in either reduction in government assets (sale of share, disinvestment) or increase in some liability (government borrowings) is a capital receipt. These receipts are NOT a part of normal operations of government business. Capital Receipts include market loans, external loans, small savings, Government Provident Funds, Accretions to various Deposit Accounts, Depreciation and Reserve Funds of various departments like Railways.
The Capital receipts are of two types viz. Debt receipt and non-debt receipts. The debt receipts are those which government needs to repay along with interest. Non-debt receipts are those which come to the government by sale of some assets. Most of the capital receipts of the government are debt receipts and are shown as liabilities of the Government’s balance sheet.
Borrowings by the Government
The Government borrows from domestic as well as foreign sources. All borrowings are called capital debt receipts. However, interest paid on such borrowings is placed under Revenue expenditures.
It’s worth note that Government of India is the largest borrower in India and the market borrowings are the largest source of capital receipts of the Government.
Government raises its market loans by selling dated government securities by Auction since 1992-93. These auctions are conducted by the Reserve Bank of India, as debt manager to the Central Government. These bonds are of either fixed interest rate (called Fixed Coupon Securities) or of floating interest rate (called Floating Rate Bonds (FRB)).
Apart from these, Government also issues short term money market instruments viz. 364/182/91 days Treasury Bills. These treasury bills offer short-term investment opportunity to financial institutions, banks, etc. Finally, government also issues Cash Management Bills, which are issued to meet the temporary cash flow mismatches of the Government. The Cash Management Bills are issues only when Government needs a short term cash. Thus, the maturities of the Cash Management Bills are always less than 91 days. The above borrowings are from the market.
Government also borrows from common people like all of us in the form of small saving schemes. At present, the active small saving schemes are as follows:
- Post Office Saving Account
- Post office fixed deposits of 1, 2, 3 & 5 years
- Post Office RDs (Recurring Deposits)
- Post Office Monthly Income Account
- Senior Citizens Saving Scheme
- National Saving Certificates
- Public Provident Fund (PPF)
- Sukanya Samriddhi Account
- Kisan Vikas Patra
- Monthly Income Scheme
The money of all of these goes to National Small Savings Fund. This fund is a part of Public Account of India and is active since 1.4.1999.All withdrawals are also taken out of this fund. What remains as balance in the fund is invested in the Central and State Government Securities. How should be these invested and in which securities, this is decided by the Government from time to time. At present, the term of Central and State Government Securities is 10 years, 9.5 per cent interest rate.
Then finally, government issues savings bonds for people to invest in them. There are two kinds of Bonds viz. Tax Saving and not Tax Saving. Obviously the interest rate in taxable bonds is higher.
Miscellaneous Capital Receipts
Miscellaneous Capital Receipts refers to the money receipt by disinvestment of the public sector companies. This money comes from sale of government share / equity in public sector companies. In 2013-14, Government received around Rs. 40,000 crore in lieu of sale of its shares in Hindustan Copper, ITDC, MMTC, National Fertilizer, Neyveli Lignite, State Trading Corporation Ltd, Power Grid Corporation of India Ltd, NHPC Ltd, Indian Oil Corporation, Engineers India Ltd, BHEL, Hindustan Aeronautics Ltd. The money from this disinvestment earlier used to go to ‘National Investment Fund’ (NIF). Currently, this fund is merged with the Public Account of India and these proceeds are maintained in the public Account as a separate head – NIF.
The Money from NIF is used for several purposes as decided by the Government. These include recapitalisation of Public Sector Banks’, investment in Indian Railways, investment in other public sector units towards capital expenditure.
The money which the Government of India had lent in the past to the states, to the PSUs and to the Union Territories, and to the parties and Governments abroad, when recovered back, are called Capital Receipts. Here, please note that Loan recovery is Capital Receipt but the interest received on these loans is revenue receipts.
Capital Expenditure is that expenditure which results in increasing of government asset (giving out loans) or reduce in some liability (paying back old loans). Following are the key examples of capital expenditures.
The loans given by the Government to the states, PSUs and other governments come under Capital Expenditures because such loans are assets of the government.
The loans that were borrowed in past but are now returned back are included in the capital expenditures; because they result in reduction of liability.
Expenditures resulting in asset creation
The government’s budget expenditures on infrastructure, machinery, land, roads, bridges etc. and purchase of arms and equipments, modernization of the army etc. are also Capital Expenditures.
In Public Finance or Economy, The term Capital Deficit is not used. Generally, we read about the Capital crunch which refers to the expenditures needed by the Government for Capital Expenditures.