Where India spends and earns its revenues

By

Dec. 3 2014, Updated 8:00 a.m. ET

Spending revenue

There are two broad heads that India spends under:

  1. Plan expenditure
  2. Non-plan expenditure

Plan expenditure is closely associated with economic growth. It focuses on investment in order to enhance productive capacity. Non-plan expenditure is mainly obligatory in nature. It includes investment areas that are necessary for a country to function.

Plan and non-plan expenditure are divided into revenue and capital expenditure. Revenue expenditure is a routine expense. It’s a result of maintaining fixed assets instead of increasing their earning capacity. It’s repetitive in nature. Its benefits last for one accounting year.

In contrast, capital expenditure is used to acquire or enhance a fixed asset’s capacity. It’s usually a one-off expense. Its benefits last for several years.

Central Plan Outlay by Sectors

Article continues below advertisement

Historically, non-plan expenditure accounted for more of India’s total expenditure. Out of India’s total expenditure of ~$294.24 billion for fiscal year 2015, 68%—or ~$200 billion—is non-plan expenditure. As a result, you can see that even with lots of spending, only ~$94 billion is being put to productive use for capacity building or enhancement. The rest is being spent on the India’s regular functioning and maintenance costs.

According to the latest budget for fiscal year 2015, the government outlined 324,636 rupees, or ~ $53.2 billion, as central government assistance for state and union territory plans under revenue expenditure. This is the highest expenditure for the government under planned expenditure. It’s also the highest expenditure overall if we don’t count debt servicing.

Subsidies under non-plan expenditure are the second biggest expenditure overall. They’re higher under the non-plan head—not including interest payments and the prepayment premium. The government plans to spend 260,658 rupees, or ~ $42.7 billion, in fiscal year 2015.

Article continues below advertisement

Earning revenue

Revenues mainly come from two sources:

  1. Revenue receipts
  2. Capital receipts

Revenue receipts include tax and non-tax revenue. Capital receipts include debt and non-debt receipts. Tax revenue is the Indian government’s main revenue source. Non-tax revenue refers to money that’s received from surpluses from public companies, external grants, and interest received on loans. Debt receipts mainly refer to the government’s market loans and short-term borrowings. Non-debt receipts include cash received from miscellaneous sources and recoveries from loans and advances.

Revenue receipts contribute to the government’s revenue the most. For fiscal year 2015, it’s estimated that revenue receipts will contribute over 66% of the overall receipts. Market borrowings are the government’s largest source of funds—461,205 rupees, or ~ $75.6 billion. Corporation tax and income tax are next at 451,005 and 284,266 rupees, or ~$74 billion and ~$46.6 billion, respectively.

The current government intends to contain the fiscal deficit at 4.1% of the gross domestic product (or GDP) for fiscal year 2015.

Although it remains to be seen whether India’s government achieves this stretched target, there’s little doubt that improvement in India’s fiscal situation will bode well for investors in exchange-traded funds (or ETFs) like the WisdomTree India Earnings Fund (EPI), the iShares MSCI India ETF (INDA), the iShares S&P India Nifty 50 Index Fund (INDY), the PowerShares India Portfolio (PIN), and the iPath MSCI India Index ETN (INP).

Trade balance is another important indicator. In the next part of this series, we’ll discuss India’s trade situation.

Advertisement

More From Market Realist