CAPITAL FUND - An Important short notes/Essay type question

CAPITAL FUND

1995 (with Books)   1997 (without Books)                                          5 Marks  - short notes question   

        Ü  Created w.e.f 1992-93 in pursuance of the recommendation of RCC 1991.

        Ü  Operated as a Minor Head under Major Head 8118.

        Ü  Credits to the Fund are:

A)     Appropriation of the Revenue Surplus after meeting obligations of

§  Payment of Principal as well as Interest on Loan to  D.F.

§  Appropriation of current year D.F.

§  Payment of deferred dividend.

B)      Interest on Capital Fund ( at the rate decided by the RCC)

        Ü  Debits to the Fund are:

 A)     This Fund is utilized to finance expenditure until now charged to Loan Capital , to the extent of balance available under this Head

B)      No separate rules existing for utilizing this Fund usually charged to all Plan Heads (except Plan Heads 11 & 51).

 RATIONALE OF CREATING CAPITAL FUND:

        Ü  To reduce the borrowings from General Revenues (i.e., Loan Capital or Gross Budgetary Support (GBS) from Government).  Because the loan capital  is non -refundable and interest bearing loan.  The Interest is paid in the form of Dividend to General Revenues.  Since Loan Capital is non – refundable, the payment of dividend also perpetual. 

        Ü  Year by year, the GBS (Gross Budgetary Support to Railways is declining. During 1975-76, the GBS is around 75 %.  Now in the year 2011-12, it came down to 34%.

        Ü  Plan Size of the Railways cannot be reduced, since capacity restrictions would endanger the economic progress of the country.   The gap between the requirements and the availability is to be bridged.  The only way is to increase internal resources, that’s why the creation of Capital Fund.

        Ü  No dividend will be paid on the expenditure met from the Capital Fund, as the same is generated from internal resources ( not borrowing from General Revenues).  On the other hand, Interest is credited to the Capital Fund on the balance of the Fund at the end of financial year.  (Rate of interest is equal to the Dividend rate and recommended by RCC from time to time)

        Ü  Total Investments made from Capital Fund till 2010-11 were Rs.38676 crores. That means every year, actual saving of Rs.2320 crores by avoiding dividend payment, since these investments are met from Capital Fund, not Capital. (if assumes dividend rate is 6%).

####