Capital Part of Indian Budget

Points to Ponder in This Article – Understand what constitutes the capital part of the Indian budget. With time government makes certain changes like planned and non-planned expenditure has been done away with from 2017 from the annual financial statement, targets of FRBM act are constantly in question & are debated to change into a range rather than a fix value. Hence, just understand what comes under the capital part of Indian budget system.

Capital Budget consists of capital receipts (like borrowing, disinvestment) and long period capital expenditure (creation of assets, investment). Capital receipts are receipts of the government which create liabilities or reduce financial assets, e.g., market borrowing, recovery of loan, etc. Capital expenditure is the expenditure of the government which either creates assets or reduces liability.

Capital Part of Indian Budget

Capital Receipt
Capital Expenditure
  Debt

  • Internal (RBI, Treasury bills, G-Sec etc.)
  • External (IMF, WB, ADB, Foreign nations etc.)
  • Public money in small savings, State PF (As Gov. needs to repay it at later stage)

 

Non Debt

  • Disinvestment (Selling Shares of PSU)
  • Loan (principal) recovered from State/UT/PSU/Foreign nations
  • Money spent on 5 year plans – capital assets / goods (buildings, machines etc.)- including Defense assets.
  • Loan (principal) given to State/UT/PSU/Foreign nations
  • Loans Paid

 

  • Disinvestment matter falls under Department of Disinvestment under Finance minister
  • Within Capital Receipt →Debt Internal > External
  • Within capital Expenditure → Five year plans > Defense > loans (PSU, State, UT)

 


Annual Financial Statement format changed in 1987

Annual Financial Statement

Total Income
Revenue (Receipt) Capital (Receipt)
Tax Non-tax Debt Non Debt
  • Direct
  • Indirect
  • Dividend-profitOthers (Selling goods / Services)
  • Interest received
  • Grants received
  • UT contributions
  • Internal
  • External
  • Public money
  • Disinvestment
  • Loan (principal) recovered

 

Total Expenditure
Plan Expenditure (Revenue + capital) 

  • Money given to Union’s own five year plans
  • Money given to States’ five year plans
Non plan Expenditure (Revenue + capital) 

  • Anything that doesn’t fall in Plan Expenditure

 

Non plan Expenditure
Revenue Expenditure Capital Expenditure
  • Interest paid on loan taken by UnionSubsidies, freebies, Debt relief to farmers
  • Defense revenue Expenditure (lightbill, phonebill, diesel, bullets etc.)
  • Salaries and pensions
  • Losses in Postal dept.
  • Grants given to States/UT/Foreign nations
  • Defense capital Expenditure (e.g. buying machines, vehicles etc.)
  • Loans given to PSUs/States/UT/Foreign nations.

 

  • Non plan expenditure > Plan expenditure
  • Majority of government money goes into revenue Expenditure approx. 60% of total expenditure
  • Highest amount of Plan Expenditure goes to Gender Plans > Child Plans > SC Plans > ST Plans
  • Within Non-merit goods subsidies Food >  Fertilizer > Petro (Society pays →individual benefits)

 


Deficits in Government Budget & Financing

Revenue Deficit Revenue Expenditure – Revenue Receipt
Effective Revenue Deficit Revenue deficit –  Grants given to State/UT for creation of capital assets
Budget Deficit Total expenditure – Total receipts = Revenue deficit + capital deficit
Fiscal Deficit Budget deficit + Borrowing  = (Total Expenditure – Total Receipts) + Borrowing
Primary Deficit Fiscal deficit – Interest on previous loans

 

  • A falling level of primary deficit implies that new borrowings are being used to meet old debt liabilities.
  • Hence decreasing primary deficit means the rise in interest payment → Bad for economy
  • Deficits Higher to Lower → FD > RD > ERD > PD > BD

 

Fiscal Responsibility and Budget Management (FRBM) Act targets to FM
Effective Revenue deficit Eliminate (0%) by 31/3/2015
Fiscal deficit Reduce it to 3% of GDP by 31/3/2017

 


Countervailing & Anti-Dumping Duty

Countervailing Duty: To encourage exports, government grants subsidy to exporters which results in decreased cost of production for them. Hence exports are able to export at cheaper rates. It largely affects producers of importing country. To counterbalance (countervail) this, importing countries impose duty on imported good to raise the price of subsidized product to offset it lower price.

Anti Dumping Duty: Dumping means exporting goods to other country in large quantity at a cheaper rate. In India, anti-dumping duty is recommended by the Union Ministry of Commerce while it is imposed by the Union Ministry of Finance.There are 2 types of dumping:

Price Dumpingselling goods in foreign country at price lower than the price of home country.

Cost Dumping: It means selling goods in foreign countries at a price lower than cost of production. It is aimed at wiping out the domestic producers from the market. It is also called Predatory dumping.

  • Duty imposed on dumped goods is called Anti-Dumping duty
  • Countervailing duty is to counter the low cost of products due to subsidy while Anti-Dumping duty is to offset voluntary low price to capture the market.
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