Types of Government Receipts and Expenditures - A walkthrough

Written by HARIKRISHNAN.T
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We can hear a lot of terms like revenue receipts, capital receipts, plan expenditures and non-plan expenditures etc. in any budget. This article is for those who does not have any prior knowledge in this field (like meJ) to get a basic idea about these terms.

Any entity let it be individuals, corporates or government, will have various sources of income as well as various heads of expenditures.  For a government income can be generated from various sources at the same time expenditures can also be used for various purposes.



First let’s discuss about income part.

Income or receipts a government receives can be subdivided into 2 parts.
1.       Revenue receipts
2.       Capital receipts

What is revenue receipts? Revenue receipts is a particular type of government receipts which neither reduce assets nor create liabilities. Confused? Ok I will explain it with the help of an example. Consider the Tax revenues (Corporation Tax, Taxes on Income, Wealth Tax, Customs, Union Excise Duties, Service tax etc.) or the non-tax revenues (such as interest income or dividends and profits from various entities) a government receives. These revenues are not creating any additional liability for the government at the same time it is not reducing any assets also. So these types of government receipts are called revenue receipts. We can divide revenue receipts into mainly 2 categories. They are
  • Tax revenues (Corporation Tax, Taxes on Income, Wealth Tax, Customs, Union Excise Duties, Service Tax, and Taxes of Union Territories)
  • Non tax revenues (Interest receipts, Dividend and Profits, External Grants, Other Non-Tax Revenue, Receipts of Union Territories)


Next is capital receipts.

What is capital receipts? Just opposite of revenue receipts. It is a particular type of government receipt which either create liabilities or reduce assets.

How capital receipts will create liabilities for the government? Well usually government will borrow money from various sources such as pension funds, individuals, foreign institutions etc. These borrowings are creating liability for the government because government has to repay the principal at a later point of time at the same time it has to provide periodic interest also. So this is definitely going to create a liability for the government.

OK dude, I understood how capital receipts are creating liabilities for the government. But I'm little bit confused about the latter part ‘reducing assets’. Can you explain me on that?

Well, we have a lot of public sector undertakings in which government has very large stakes. So government can raise capital by divesting some of its stake. Thus it fetches money for government at the same time reduces the assets of government also.

So we can divide capital receipts into mainly two categories. They are

  • Non-debt receipts (it includes Miscellaneous Capital Receipts such as divestment thereby reducing the assets owned by government)
  • Debt receipts (it includes Market Loans, Short term borrowings, Securities issued against Small Savings etc. thereby creating liabilities for the government)
As of now we have discussed about income part. Now let’s focus on expenditures.

In the expenditure front we have
  • Plan expenditures
  • Non-plan expenditures
What is meant by plan expenditures? Plan expenditures are the expenditures those are productive in nature means it helps to increase the productive capacity of the economy. For example building roads, rails, infrastructure, factories etc.

Non plan expenditures include various heads such as interest payments on government debts, subsidies, social services, salaries and pension to government employees etc.

Also we have
  • Revenue expenditures
  • Capital expenditures

Revenue expenditure neither creates asset nor reduces liability of the government. This type of expenditure is incurred every year as a result it is recurring in nature. Revenue expenditures include interest payments on loans taken by the government, salaries, pension, subsidies etc.

Capital expenditure either creates asset or reduces liability of the government. Investment on infrastructure, communication, factories etc. are the part of capital expenditure because it creates asset for the government and repayment of loans taken by the government also is an example for capital expenditure because it reduces the liability of the government.

Hope this article help you to get a very basic understanding about the above mentioned terms. J

Comments/suggestions always welcome J

Regards,
Harikrishnan

Views are personal :)



Cigarette revenues and ITCs bottomline

Written by HARIKRISHNAN.T
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FMCG major ITC announced their 3rd quarter results on 21st January. They were able to post a net profit of Rs.2635 crores from a revenue of Rs.8942.59 crores. But the stocks has dipped by 4% because of the muted performance. I just wanted to know about the various segment performances and the contribution towards the topline and bottomline growth.

First lets see the overall performance of ITC during Q3-2014 (Read the complete details from http://www.itcportal.com/about-itc/shareholder-value/key-financials/Q3-1415.pdf)



Now lets see the performance of various segments

ITC has diversified business activities that includes mainly 5 segments. They are

FMCG (Cigarettes and others including packaged foods, snacks, apparels, education and stationery products, personal care products etc)
Hotels
Paperboards and packaging
Agribusiness
Information Technology

Standalone details contain the revenue and income details about the first 4 categories. So lets have a look at the figures





From these figures we can conclude that Cigarettes is the main driver of ITCs bottomline growth. It contributes only 42% to the standalone revenues, but when it comes to profit, it has a whopping 86% share of total standalone profit.

Earnings from Cigarettes is very much sensitive to the policy actions of the government. That is the reason why company has diversified into several other segments. Hotels, agribusiness, paperboards and packaging contributes around 14% to the standalone profit. But FMCG others category was not able to contribute to the bottom line even though it has a robust 23% share in revenues. It is because company is investing heavily in brand building and business development processes. So we can expect that in the coming years this category will also have a significant contribution towards the bottomline, considering our consumption oriented society and demographic dividend. 

Notes:
All the details are of 3 months ended 31-12-2014 (standalone). All figures are in INR crores
The financial results obtained from http://www.itcportal.com/about-itc/shareholder-value/investor-relations.aspx
The complete details obtained from http://www.itcportal.com/about-itc/shareholder-value/key-financials/Q3-1415.pdf
Views are personal.




Indian IPO Market in 2014

Written by HARIKRISHNAN.T
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2014 was a spectacular year for the Indian equities. we have witnessed benchmark indices Sensex and Nifty making life time highs. A new wave of optimism has started to observe in financial markets. It was a broad based rally with almost every stock participating in the euphoria of investors. The market outlook began to change from October 2013 after a series of rumours that Narendra Modi led National Democratic Alliance will come to power at the centre. Indian equities saw its values sky-rocketing after witnessing a clear Majority for BJP at the centre. This optimism coupled with the expectations of cooling of inflation, downward spiral of crude oil prices, hopes that RBI will be able to cut its lending rates after witnessing inflation is settling around their comfort zone, business friendly government at the top added as a catalyst to the euphoria.

Rising markets always means a large number of IPOs. But 2014 did not witness any major momentum shift in the number of initial offerings.

There were mainly 5 companies participated in intial public offering in 2014. They are

Wonderla Holidays
Snowman Logistics
Sharda Crop
Shemaroo Entertainment
Monte Carlo

lets see their listing price and other details



From this figure we can see that all the IPOs except Monte Carlo had a very good run so far. Especially Wonderla and Snowman logistics helped to double investors wealth.

So the question arises is what is the reason for a very less number of IPOs compared with a very strong equity market. The possible reason could be that usually the entire IPO procedure usually takes an average of 12 to 18 months. We witnessed a significant change in the sentiment only by the end of May 2014 especially after the Parliament election. Retail investor participation is a very crucial factor in the success of any IPO. But according to Kotak securities, the retail participation in the market is still very minimal. According to them it is too early to expect retail investors to enter the stock market as a whole, since their wealth and with it their risk appetites, haven't increased. According to Anand Rathi Financial Services, Retail investors right now are taking mutual fund routes to enter market. So it will take time for them to invest in direct equities.

So once retail investors enter into the market by taking direct equity exposure we can expect a turnaround in IPO market also. So 2015 and 2016 should be a better year for primary markets compared to previous years.

Challenges ahead : There are a lot of macro economic indicators suggesting that India can expect a turnaround in growth in the coming years. Estimates from IMF world bank and from other agencies supporting this. But all will depends on the global economy also. China is in a slow growth mode. Euro-zone also facing deflationary pressures. Even though falling crude oil is positive for Indian economy, it can have serious repercussion in US E&P sector and the junk bond market associated with that. A positive synergy among nations is necessary in order to create a better macro economic environment.