Capital Receipt and Capital Expenditure: Meaning and Sources of Capital Receipts
The Government Budget is a statement of expected receipts and expected expenditures of the Government (for the coming fiscal year) that reveals the budgetary policy of the Government to achieve the twin objective of growth and stability. The financial/fiscal year is taken from 1st April to 31st March. The Budget unfolds (i) the financial performance of the Government during the past year and (ii) the expected financial performance and Government policies for the coming year. The financial performance is an explanation of what happened during the past year. The budget’s emphasis is more on the other side., i.e., Government programs and policies for the upcoming year. The government budget has two aspects: Revenue and Capital. Revenue consists of transactions that are regular and recurring, and the government receives them in the ordinary course of business. Capital consists of transactions that are non-recurring and not routine.
The revenue budget displays the government’s current receipts and the expenditures that may be covered by those receipts. The statement of anticipated revenue receipts and expenditures for a fiscal year is known as a Revenue Budget. The Revenue Budget consists of Revenue Receipt and Revenue Expenditure.
1. Capital Receipt
The receipts during a fiscal year that either creates liability or cause a reduction in the government’s assets are known as Capital Receipts. These are non-recurring and not routine.
Capital Receipts show the following characteristics; i.e., a receipt will be considered a Capital Receipt if it fulfils the following two conditions:
- If a receipt creates corresponding government liabilities, then it is a Capital Receipt. For example, when government takes a loan, it creates a liability, and it is to be paid back. As a result, it is considered a Capital Receipt.
- If a receipt results in a decline in the government’s assets, then it is a Capital Receipt. For example, the proceeds from the sale of the government’s shares cause a reduction in the assets of the government. As a result, these are treated as Capital Receipts.
Simply put, a Capital Receipt consists of:
- Proceeds from disinvestment, i.e., when the government sells shares of public sector enterprises to the private sector.
- Government borrowings from within the country and abroad.
- Loan recovery from state government and other debtors.
Sources of Capital Receipts
1. Recovery of loans:
The central government provides loans to state governments or union territories to address financial difficulties. The debtors are the assets of the government. As the assets of the government decrease when these debts are recovered, they are categorized as Capital Receipts. It is a non-debt-creating Capital Receipt.
While lending creates assets, borrowing creates liability for the government. The money raised by the government to meet excess expenditure is referred to as Borrowing. Therefore, borrowings must be considered Capital Receipts. It is a debt-creating Capital Receipt.
The government borrows from:
- The public in general (which is known as market borrowings).
- The Reserve Bank of India.
- Foreign governments, like loans from the USA, UK, etc.
- International organizations like the World Bank and IMF.
3. Other Receipts:
It includes all other Capital Receipts like disinvestment and small savings.
- Disinvestment: It is the opposite of investment. When the government transfers ownership (wholly or partially) of the Public Sector Undertakings to the private sector, it is known as disinvestment. It is also known as privatisation. It is treated as a Capital Receipt as it causes a reduction in the assets of the government. It is a non-debt-creating Capital Receipt.
- Small Savings: These include the funds raised by the government in the form of National Saving Certificates, Post Office Deposits, Kissan Vikas Patra, etc. It is treated as a Capital Receipt as it creates liability for the government.
How to categorize a receipt as a revenue receipt or Capital Receipt?
- A receipt is treated as a revenue receipt if it does not create a liability for the government or does not lead to a reduction in assets.
- A receipt is treated as a Capital Receipt if it either creates a liability for the government or leads to a reduction in assets.
2. Capital Expenditure
The estimated expenditure of the government in a fiscal year which affects the assets and liabilities status of the government is known as Capital Expenditure. It comprises expenditures, such as the acquisition of land, building, machinery, and other equipment; construction of dams and steel plants; investment in shares, loans, and advances by the Central Government to state and union territory governments; public sector undertakings and other entities.
Capital Expenditure shows the following characteristics, i.e., expenditure will be considered as a Capital Expenditure if it fulfils the following two conditions:
- If an expenditure does not create assets for the government, then it is a Capital Expenditure. For example, the equity of domestic or international firms that the government has purchased is Capital Expenditure.
- If an expenditure causes a reduction in the liabilities of the government, then it is a Capital Expenditure. For example, Loan repayment reduces the liability of the government, thus, it is treated as a Capital Expenditure.
Capital Expenditure can be further classified into:
(i) Plan Capital Expenditure:
It includes expenditure related to Five Year Plans and centralized support for state and union territory plans.
(ii) Non-Plan Capital Expenditure:
It includes expenditure that is not related to Five Year Plans. Simply put, it consists of a vast range of general, economic, and social services of the government, For example, expenditure as a relief to earthquake victims, etc.
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