Assets and Liabilities Management in Indian Central Government

Transcription

1 Assets and Liabilities Management in Indian Central Government Project Trainee: Chandrakanth Nimmala, MBA 3 rd semester, Department of Management Studies, Indian Institute of Technology, Roorkee. Guide: Dr. V. N. Sastry Professor IDRBT, Hyderabad Institute of Development and Research in Banking Technology (IDRBT) Road No. 1, Castle Hills, Masab Tank, Hyderabad

2 CERTIFICATE This is to certify that Mr. Chandrakanth Nimmala, pursuing MBA 3 rd Semester at the Department of Management Studies, Indian Institute of Technology, Roorkee has done a project as an intern at the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad from May 16 to July 16, He has completed the project Asset and Liability Management in Indian Central Government under my guidance and analyzed Budget data of Central Government of India. He is sincere, hard working and has an attitude for independent thinking.. I wish him a bright future. Dr. V. N. Sastry (Project Guide) Professor IDRBT, Hyderabad 2

3 ACKNOWLEDGEMENT I would like to express my sincere gratitude to the Institute for Development and Research in Banking Technology (IDRBT) and particularly Dr. V. N. Sastry, Professor, IDRBT who was my guide in this project. I would not hesitate to add that this short stint in IDRBT has added a different facet to my life as this is a unique organization being a combination of academics, research, technology, communication services, crucial applications, etc., and at the same time performing roles as an arm of regulation, spread of technology, facilitator for implementing technology in banking and non-banking systems. I am extremely grateful to Dr. V. N. Sastry for his advice, innovative suggestions and supervision. I thank him for introducing me to an excellent project. I am thankful to Department of Management Studies, IIT Roorkee for giving me this golden opportunity to work in a high-end research institute like IDRBT. I am thankful for IDRBT for providing such an amazing platform to work on real application oriented research. Finally, I thank one and all who made this project successful either directly or indirectly. Index Chandrakanth Nimmala MBA, Department of Management Studies, 3

4 Abstract 1. Introduction 1.1 Asset and liability Management 1.2 Indian Government Budget and its Classifications 1.3 Types of Government Deficits 1.4 Objective and scope of Report 2. Statistics and Analysis of Central Government Budget 2.1 Revenue and Capital Receipts 2.2 Revenue and Capital Expenditure 2.3 Deficits 2.4 Analysis on Receipts and Expenditures 2.5 Causes for increase of Expenditures 3. Asset and liabilities with Respect to GDP 3.1 Details of Assets and Liabilities of Central Government 3.2 Statistical analysis on Assets, Liabilities and GDP 3.3 Conclusion References 4

5 Abstract Asset and Liability Management deals with risks that arise due to mismatches between the assets and liabilities (debts and asset). The Asset-Liability Management helps the Indian Government to make effective changes either on asset side or on liability side or on both sides in time to achieve the targeted goals. The liabilities of Indian central Government have shown an excess over its assets and the excess has been steadily increasing. In almost huge percent of the Government s liabilities is not matched by assets. This is a serious concern. Further, Receipts of interest on loans and advances, and dividends and profits on investment taken together have almost never exceeded Government s interest Payment. So, the Indian Government needs more comprehensive and effective Asset and Liability management to address these issues. The project involves analysis on Assets and Liabilities of Indian Government, examining to what extent Public Debt has been used to build up productive and remunerative assets and up to what extent the assets are matched with the liabilities, It also includes identifying and analyzing the strategies to minimize the gap between assets and liabilities of Indian Government. 5

6 1. Introduction 1.1 Asset and Liability Management Asset and Liability Management is a practice of managing risks that arise due to mismatches between the assets and liabilities (debts and asset). Three pillars of ALM process ALM Inform System ALM Organization ALM Process MIS Structure and responsibilities Risk parameters, Risk identification, Risk measurement, Risk management Information Availability, Accuracy, Adequacy, Expediency Level of Top Management involvement Risk policies and tolerance Scope of ALM Process Liquidity Risk Management Management of Market Risk Trading Risk Management Capital Planning Growth projection Assets and liabilities 6

7 Asset: Represents the ownership of value which can be converted into cash (eventhough cash is an asset). Classification Tangible assets The assets that can be touched (these are liquid assets and these are short term) It has two subclasses Current assets :These are the assets which can be converted into cash or used to pay liabilities within 12 months. Includes Cash Cash equivalents Short term investments Accounts Receivable Inventory Fixed assets: These are the items of value which Government has bought and will use for an extended period of time. 7

8 Fixed Assets Include Land Buildings: Office, Residential Bridges Roads Irrigation Projects Other Capital Projects Machinery Power Projects Equipment Vehicles etc Intangible Assets These are non physical assets and rights that have value to the firm because they give the firm some kind of advantage in market place. It includes i) Good will: It is an accounting concept meaning the value of an entity over and above the value of its assets. ii) Copy rights; It s a legal concept, enacted by most of the Government, giving the creator of the original work exclusive rights to it, usually for a limited period. iii) Trade mark: It is typically a name, word, phrase, logo symbol, design, image or a combination of these elements. iv) Patent: it s a form of Intellectual Property. It consists of a set of exclusive rights granted by sovereign state to an inventor of their assignee for the limited period of time in exchange for the public disclosure of an invention. Financial Assets They are classified into three. 1) Capital outlay General services 8

9 Defence services Other general services Social services Economic services Agriculture and allied activities Rural development Special area programme Water and power development: Irrigation and flood control Energy Transport services Railways Other transport services Communication services: Postal services Telecommunication services Other communication services Science and technology and environment General economic services Industry and minerals 2) Loans and advancements 1. State Governments 2. Union Territories 3. Foreign Governments 4. Investment in special securities of states under small savings fund: Public sector enterprise Railway Development and Revenue Reserve fund Posts and telegraphs Revenue and reserve fund Port trust Municipalities Co-operative and educational Institutions Displaced Persons and private Institutions Government Servants 3) Cash Balances under MSS Market Stabilization Scheme was introduced as an agreement between the Government and the Reserve Bank of India. Under the scheme, RBI issues bonds on behalf of the Government and the money raised under Bonds are impounded in a separate account with RBI. Liabilities 9

10 It is defined as an Obligation of an entity arising from past transactions or events the settlement of which may result in the transfer or the use of assets, provision of services or other yielding of economic benefits in the future Classification of Liabilities Treasury Bills i) Treasury Bills are the instruments of short term borrowing by the Central/State govt. ii) They are promissory notes issued at discount and for a fixed period. iii) These are issued to raise funds for meeting Expenditure needs and also provide outlet for parking temporary surplus funds by investors. iv)treasury bills can be purchased by any one (including individuals) except State govt. v)these are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. vi) Rate of interest is Market determined, based on demand for and supply of funds in the money market. vii) These are highly liquid and safe investment giving attractive yield. Dated Securities These are those instruments which have tenure over one year. The returns on dated securities are based on fixed coupon rates akin to corporate bonds. These are considered risk free. 1.2 Indian Government Budget and its Classifications 10

11 1.2.1 Components of Government Budget Revenue Budget Revenue Budget is a financial statement which includes the Revenue Receipts of the Government (i.e. Revenue collected by way of taxes & other Receipts). It also contains the items of Expenditure met from such Revenue. Revenue Receipts These are the Incomes which are received by the Government from all sources in its ordinary course of Governance. These Receipts do not create a liability or lead to a reduction in assets. Revenue Receipts are further classified as tax Revenue and non-tax Revenue. I.Tax Revenue Tax Revenue consists of the Income received from different taxes and other duties levied by the Government. It is a major source of Public Revenue. Every citizen, by law is bound to pay them and non-payment is punishable. Taxes are of two types i) Direct Taxes ii) Indirect Taxes. 11

12 Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden cannot be shifted to someone else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes. There is no direct benefit to the tax payer. Indirect taxes are those taxes which are levied on commodities and services and affect the Income of a person through their consumption Expenditure. Here the burden can be shifted to some other person. E.g. Custom duties, sales tax, services tax, excise duties, etc. are indirect taxes. ii. Non-Tax Revenue Apart from taxes, Governments also receive Revenue from other non-tax sources. The non-tax sources of public Revenue are as follows:- Fees: The Government provides variety of services for which fees have to be paid. E.g. fees paid for registration of property, births, deaths, etc. Fines and penalties: Fines and penalties are imposed by the Government for not following (violating) the rules and regulations. Profits from public sector enterprises: Many enterprises are owned and managed by the Government. The profits receives from them is an important source of non-tax Revenue. For example in India, the Indian Railways, Oil and Natural Gas Commission, Air India, Indian Airlines, etc. are owned by the Government of India. The profit generated by them is a source of Revenue to the Government. Gifts and grants: Gifts and grants are received by the Government when there are natural calamities like earthquake, floods, famines, etc. Citizens of the country, foreign Governments and international organizations like the UNICEF, UNESCO, etc. donate during times of natural calamities. Special assessment duty: It is a type of levy imposed by the Government on the people for getting some special benefit. For example, in a particular locality, if roads are improved, property prices will rise. The Property owners in that locality will benefit due to the appreciation in the value of property. Therefore the Government imposes a levy on them which is known as special assessment duties. 12

13 I. Revenue Expenditure Revenue Expenditure is the Expenditure incurred for the routine, usual and normal day to day running of Government departments and provision of various services to citizens. It includes both development and non-development Expenditure of the Central Government. Usually Expenditures that do not result in the creations of assets are considered Revenue Expenditure. 2) Capital Budgeting Capital Budget consists of Capital Receipts and Capital Payments. Capital Receipts Capital Receipts Includes Loans raised by Government from public, called market loans, borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies, Recoveries of loans from State and Union Territory Governments and other parties. Land, Capital Payments It consist of Capital Expenditure on acquisition of assets like Buildings, Machinery, Equipment, Investments in shares, etc., Loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties. Capital Budget also incorporates transactions in the Public Account. 13

14 1.2.2 Different Types of Government Budget Balanced Budget Balanced Budget is a situation, in which estimated Revenue of the Government during the year is equal to its anticipated Expenditure. Government s estimated Revenue = Government's proposed Expenditure. Government's Revenue should not fall short of Expenditure. The Government should not interfere in economic activities and should just concentrate on the maintenance of internal and external security and provision of basic economic and social overheads. To achieve this, Government has to have enough fiscal discipline so that its Expenditures are equal to Revenue. Unbalanced Budget The Budget in which Income & Expenditure are not equal to each other is known as Unbalanced Budget. Unbalanced Budget is of two types :- i) Surplus Budget ii) Deficit Budget 14

15 Surplus Budget The Budget is a surplus Budget when the estimated Revenues of the year are greater than anticipated Expenditures. Government expected Revenue > Government proposed Expenditure. Surplus Budget shows the financial soundness of the Government. When there is too much inflation, the Government can adopt the policy of surplus Budget as it will reduce aggregate demand. Increase in Revenue by levying taxes on people reduces their disposable Incomes, which otherwise could have been spend on consumption or saved and devoted to Capital formation. Since Government spending will be less than its Income, aggregate demand will decrease and help to reduce the price level. However, in modern times, when Government have so many social economic & political responsibilities Deficit Budget Deficit Budget is one where the estimated Government Expenditure is more than expected Revenue. Government estimated Revenue < Government proposed Expenditure. In such cases deficit amount is generally covered through public borrowings or withdrawing resources from the accumulated reserve surplus. In a way a deficit Budget is a liability of the Government as it creates a burden of debt or it reduces the stock of reserves of the Government. In developing countries like India, where huge resources are needed for the purpose of economic growth & development it is not possible to raise such resources through taxation, deficit Budgeting is the only option. 15

16 At the Point E, Budget is balanced. To the left of point E the Government Budget is in deficit and to the right of point E, the Budget is in surplus. When the Government incurs a Budget deficit it is financed by borrowing. The Government borrows from the public by issuing Government bonds. This gives rise to Government debt or public debt. 16

17 1.3 Types of Budgetary Deficit Revenue Deficit Revenue Deficit takes place when the Revenue Expenditure is more than Revenue Receipts. The Revenue Receipts come from direct & indirect taxes and also by way of non-tax Revenue. The Revenue Expenditure takes place on account of administrative expenses, interest Payment, defence Expenditure & subsidies. Budgetary Deficit Budgetary Deficit is the difference between all Receipts and Expenditure of the Government, both Revenue and Capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. Fiscal Deficit Fiscal Deficit is a difference between total Expenditure (both Revenue and Capital) and Revenue Receipts plus certain non-debt Capital Receipts like recovery of loans, proceeds from disinvestment. Primary Deficit The primary deficit is obtained by deducting interest Payments from the fiscal deficit. Thus, primary deficit is equal to fiscal deficit less interest Payments. It indicates the real position of the Government finances as it excludes the interest burden of the loans taken in the past. Monetized Deficit Monetized Deficit is the sum of the net increase in holdings of treasury bills of the RBI and its contributions to the market borrowing of the Government. It shows the increase in net RBI credit to the Government. It creates equivalent increase in high powered money or reserve money in the economy. Conclusion These entire budgetary deficits reveal fiscal imbalance. Fiscal imbalance & Budget deficit result in harmful consequences like mounting inflation, deficit in balance of Payment, etc. It has also adversely affected the growth of the economy. The Government must introduce fiscal correction policies to overcome the deficit Budget and fiscal crisis. 17

18 1.4 Objective and Scope of the Report Objective o Identify strategies to be followed by the Central Government to minimize the negative GAP between the Assets and Liabilities. o Finding the reasons for less growth rate of Capital Expenditures Scope o o Capital Planning Growth projection. 18

19 2.1 Revenue and Capital Receipts of Central Government 19

20 20

21 2.1.1 Receipts Total Receipts had slight growth from the year then after the value of total Receipts has a growth at a rapid speed till 2011,which ended up with total Receipts of 12,31,576 crore rupees. The Revenue Receipts of the central Government have almost a uniform growth from the year , and there was a slight decrease of Revenue Receipts. Then it recovered and the growth rate of Revenue Receipts was very huge from the year The Capital Receipts from the year 2001 had a growth rate till From 2004 the growth rate of Capital Receipts has fallen down i.e. the Capital Receipts have fallen down till Then from the year 2007 till the year 2010 it has shown a good growth rate. And, recently the growth rate of Capital Receipts has come down till the year Least Capital Receipts were received in the year Revenue and Capital Expenditure of Central Government 21

22 2.2.1 Expenditures 22

23 There was a rapid increase in the total Expenditure from the year to the year In this total Expenditure the most of the Expenditure is due to the Revenue Expenditure. There was a very little contribution towards the Capital Expenditures. And the rate of growth of Capital Expenditure is very low when compared with the growth rate of Revenue Expenditures from the financial year to the year Central Government concentration is more on the Revenue Expenditure than on Capital Expenditures. The least Capital Expenditure was in the year which was 66,362 crores 2.3 Deficits 23

24 24

25 2.4 Analysis on Receipts and Expenditures Capital Budget Revenue Budget 25

26 2.4.3 Capital and Revenue Budget Deficits 26

27 2.4.5 Observations After observing all the above graphs, we could say that There is very less contribution in Capital Expenditure Revenue Expenditure was rapidly growing that that of Capital Expenditure. Most of the total Receipts are contributed towards the Revenue Expenditures. The ratio of Capital Expenditure and Capital Receipts are almost same till the year Then after the ratio decreased. In the year the Capital Expenditure decreased than that of while the Capital Receipts had a huge growth. Thee after the its almost the same situation the Capital Expenditure raised slightly even when the Capital Receipts were growing rapidly. In the year to the growth rate of Revenue Receipts came down, where as the Capital Receipts have show a rapid increase. The Revenue Expenditure was rising with the rising growth rate. So, in order to satisfy the Revenue Expenditures the Capital Receipts are also directed towards the Revenue Expenditure side, which resulted in decrease of Capital Expenditures. The deficits were in a controllable state till But, in the year there was a huge rise in all the three deficits Fiscal, Revenue and primary.and the next year 2011 the Deficits came down. The primary Deficit has changed its sign in the year The increase in Deficits is not advisable for an economy. So, certain measures have to be taken to minimize these deficits. The main cause of the less growth rate of Capital Expenditure is Rapid Growth of Revenue Expenditures 27

28 2.5 Causes for Increase In Government Expenditure 1. Population Growth During the past 50 years of planning, the population of India has increased a lot. The growth in population requires massive investment in health and education, law and social order, etc. A young population requires increasing Expenditure on education & youth services, whereas the aging population requires transfer Payments like old age pension, social security & health facilities. 2. Defence Expenditure There has been enormous increase in defence Expenditure in India. The defence Expenditure has increased tremendously due to modernization of defence equipment used by army, navy and air force. India cannot postpone modernization in defence especially when its neighboring countries are buying the latest defence equipments from developed countries of the world. 3. Increase in National Income The increase in national Income also resulted in more Income to the Government by way of tax Revenue and other Income. As a result of which the Government Expenditure also increased because under the circumstances, the Government is not only expected to expand its traditional activities but it also undertakes new activities. 4. Government Subsidies The Government of India has been providing subsidies on a number of items such as food, fertilizers, interest to priority sector, exports, education, etc. Because of the massive amounts of subsidies, the public Expenditure has increased. 5. Debt Servicing The internal debt as well as external debt is on the increase. The Government has been borrowing heavily both from the domestic market and from foreign sources, to meet its Expenditure. As a result of which, the Government has to make huge amounts of money towards interest Payments. The interest Payment of the central Government has increased significantly. 28

29 6. Expansion of Administrative Machinery There has been an increase in the administrative machinery in the country with the rapid growth of population and also economic development. Heavy Expenditure is to be incurred on administrative machinery in respect of police, tax administration, administration of public sector enterprises, etc. 7. Development Projects The Government has been undertaking various development projects such as irrigation, iron and steel, heavy machinery, power, telecommunications, etc. The development projects require lot of Capital and Revenue Expenditure. 8. Urbanization There has been an increase in urbanization. Now days the urban population has increased a lot. There are many cities above one million populations. The increase in urbanization requires heavy Expenditure on law and order, education, civil amenities like drinking water housing, electricity, etc. 9. Industrialization Setting up key and basic industries requires a huge Capital and profit may arise only in the long run. It is the Government which starts such industries in a planned economy. India needs a strong network of infrastructure including transport, communication, power, fuel, etc. The public sector has created a strong infrastructure as a support base for our industrial sector by investing huge Capital. The Government has not only improved the rail, air and sea transport but has also expanded them manifold. 10. Economic Incentives Economic incentives such as subsidies, cheap credit, tax concession, cheap electricity, etc. given by the Government to the agriculturists and industrialists have caused monetary burden on the Government whereas recoveries in respect of both economic and social services have been insignificant. 29

30 11. Increase in grant in aid to state and union territories There has been tremendous increase in grant in aid to state and union territories during planning period. The grant in aid to states and union territories has increased significantly both for developmental purposes like construction of roads, railways, etc. and for non-developmental purposes like police administration, tackling terrorism etc. 12. Education Education not only contributes to mental development of man but also raises productivity. Moreover mass education is necessary condition for the success of democracy. The state has made attempts to create various types of educational facilities. In order to meet growing demand for skilled labors. Government has also set up specialized institutes for medical & technical education which involves heavy Expenditure. Conclusion There is a tremendous rise in total public Expenditure in India without adequate increase in Revenues. This has resulted in huge deficit in Budget in India. Hence there is a need to manage public Expenditure in India to control and reduce fiscal deficit during future period of time. 30

31 3. Asset and liabilities with Respect to GDP 3.1 Details of Assets and Liabilities of Central Government 31

32 3.2 Analysis on Assets, Liabilities and GDP 32

33 3.2.1 Values of Assets, Liabilities and GDP from The GDP factor cost at current prices, Assets and Liabilities are growing significantly year by year. But the ratio of their growth is different for all three of them. When comparing over all data the assets in the year 2011 are around three times of that in Here as the liabilities in the year 2011 are more than 4 times that of the liabilities in the year The rate of growth of Assets is low when compared to the rate of growth of Liabilities. 33

34 3.2.2 Contribution of Liabilities GDP and Ratio of Assets on Liabilities The percentage of liabilities in GDP has risen from year then after the percentage has been falling down significantly. The percentage of Liabilities in GDP was high in the year 2003 and was least in the year Down falling of the percentage of Liabilities in GDP is good. But, the ratio of Assets over Liabilities is very low, the ratio showed many variations in all the years. But relatively the ratio has come down, which is not advisable. The ratio of Assets over Liabilities was high in the year 2001 and was least in the year It will be a good sign if Ratio of assets over liabilities is 1. And it will be an ideal situation if the ratio is (>1) greater than one. 34

35 3.3 Conclusion In the current situation the Liabilities are dominating the assets. The value of Liabilities are much more than that of Assets (Liabilities > Assets). So, there arises a negative GAP. Gap analysis GAP= Assets - Liabilities GAP Ratio= Asset Value / Liability value GAP >0, G.R. >1, Positive Gap GAP <0, G.R. <1, Negative Gap GAP =0, G.R. =1, Matched Position In order to solve this problem certain steps have to be followed and Government should choose the one through better yield could be made, and should withdraw from all those in which makes Central Government to pay high interests and returns. In the current situation the following steps have to be followed Increase its rate sensitive assets through which the value and return yield of those assets increase in future. Decrease Rate sensitive liabilities in which Government is made to pay more interests. Increase the investments in securities. Increase fixed rate long term debt; such that in future even if the interest rates increase that s shows no impact on the central Government returns Payments. Careful steps and measures have to be followed in choosing how much debt has to be taken and at what time and period those have to be taken. Increase floating rate lending, such that we can lend huge amounts when the interest rates are high and can lend less amount when the interest rates are low.. 35

36 References stat.com/