Which of the following is/are included in the capital budget of the Government of India? 1. Expenditure on acquisition of assets like roads, buildings, machinery, etc. 2. Loans received from foreign governments 3. Loans and advances granted to the States and Union Territories Select the correct answer using the code given below.
Contents12
- A1 only
- B2 and 3 only
- C1 and 3 only
- D1, 2 and 3
Show answer
Answer: (D) 1, 2 and 3
Answer: (d) 1, 2 and 3
All three are part of the Capital Budget.
Understand the difference:
Revenue Budget = day-to-day income/expenses;
Capital Budget = asset creation, long-term investments, and borrowings.
Statement 1 (CORRECT - Capital Expenditure): Acquiring assets like roads, buildings, machinery creates physical assets.
Statement 2 (CORRECT - Capital Receipts): Loans from foreign governments are capital receipts because borrowing creates a liability to be repaid.
Statement 3 (CORRECT - Capital Expenditure): Loans to States/UTs create financial assets (right to receive repayment).
Capital Receipts = Loans/borrowings + Disinvestment + Recovery of loans.
Capital Expenditure = Asset acquisition + Loans to states + Investment in shares.
Revenue Receipts = Tax + Non-tax revenue.
Revenue Expenditure = Salaries + Interest + Subsidies + Grants.
Source: NCERT Class XII Economics, Chapter 5.
Capital budget covers all government transactions that create assets or liabilities, while revenue budget covers day-to-day income and expenses.
UPSC tests whether students can distinguish between capital and revenue items by mixing physical assets (roads), borrowings (foreign loans), and financial assets (loans to states) in one question.
Capital vs Revenue Budget
Indian Economy capital budget revenue budget
Capital vs Revenue Budget: Classification & Key Differences
Capital Budget deals with asset creation and borrowings
Revenue Budget covers day-to-day income and expenses
Capital receipts create liability or reduce assets
Capital expenditure creates physical or financial assets
The Government Budget is divided into two parts based on the nature of transactions. Capital transactions involve asset creation or borrowing, while revenue transactions cover regular operations.
Capital vs Revenue Budget
Aspect | Capital Budget | Revenue Budget |
|---|---|---|
Purpose | Asset creation & long-term finance | Day-to-day operations |
Time Horizon | Long-term impact | Current year |
Receipts Example | Loans, disinvestment | Taxes, fees |
Expenditure Example | Roads, loans to states | Salaries, subsidies |
Balance Sheet Impact | Changes assets/liabilities | No balance sheet change |
Capital Receipts Components
Borrowings: Loans from domestic/foreign sources create liability
Disinvestment: Sale of government shares reduces assets
Recovery of loans: Repayment by states/PSUs reduces financial assets
Small savings: NSC, PPF collections create government liability
Capital Expenditure Components
Asset acquisition: Roads, buildings, machinery create physical assets
Loans to states/UTs: Creates financial assets (repayment rights)
Investment in shares: Equity in PSUs creates financial assets
Debt repayment: Reduces government liabilities
Question Connection
This question tested all three statements as correct capital budget items: asset acquisition (capital expenditure), foreign loans (capital receipts), and state loans (capital expenditure creating financial assets).
Trap: Confusing loans received (capital receipts) with loans given (capital expenditure)
Trap: Thinking only physical assets count - financial assets like loans to states are also capital items
Trap: Revenue vs Capital depends on nature of transaction, not the amount involved
Capital Receipts Classification
Indian Economy loans received foreign governments
Capital Receipts: Sources & Classification for UPSC
Capital receipts either create liability or reduce assets
Borrowings are the largest component of capital receipts
Test: Does it need to be repaid? If yes, it's capital receipt
Capital receipts are non-recurring money flows that either create liabilities for the government or reduce its assets. They fund capital expenditure and bridge fiscal deficits.
Capital Receipts Sources
# Capital Receipts
## Borrowings
- Market loans
- Foreign loans
- Ways & Means Advances
- Treasury Bills
## Disinvestment
- PSU stake sale
- Strategic disinvestment
- IPOs of PSUs
## Recovery of Loans
- State loan repayments
- PSU loan returns
- Foreign loan recoveries
## Small Savings
- NSC collections
- PPF deposits
- KVP salesBorrowing Sources for Government
Source | Examples | Key Feature | UPSC Relevance |
|---|---|---|---|
Domestic Market | Government securities, T-Bills | No exchange rate risk | RBI as debt manager |
Foreign Governments | Bilateral loans, soft loans | Concessional rates | External debt component |
Multilateral Agencies | World Bank, ADB loans | Project-specific | Conditional lending |
Commercial Sources | Euro bonds, commercial borrowings | Market rates | External commercial borrowings |
Trap: Interest payments on loans are revenue expenditure, not capital
Trap: Grants received are revenue receipts - no repayment liability created
Trap: Loan recoveries reduce assets, so they're capital receipts despite money coming in
Capital Expenditure Types
Indian Economy acquisition of assets loans and advances granted
Capital Expenditure: Physical & Financial Asset Creation
Capital expenditure creates physical assets (buildings) or financial assets (loans)
Loans to states create financial assets with repayment rights
Creates assets that provide benefits beyond current financial year
Capital expenditure involves spending that creates lasting assets - either physical infrastructure or financial claims. Unlike revenue expenditure, it builds the government's asset base.
Types of Capital Expenditure
Type | Examples | Asset Created | UPSC Examples |
|---|---|---|---|
Physical Assets | Roads, buildings, machinery | Tangible infrastructure | Golden Quadrilateral, airports |
Financial Assets | Loans to states, PSU equity | Claims/ownership rights | State disaster loans, CPSE investments |
Debt Repayment | Principal repayment of loans | Reduces liabilities | External debt servicing |
Advances | Non-plan advances to states | Recoverable payments | Natural calamity advances |
Loans & Advances to States
Constitutional basis: Article 293 allows Centre to lend to states
Plan loans: For state plan schemes, often converted to grants later
Non-plan loans: For natural disasters, ways & means advances
Interest bearing: States pay interest, making it a financial asset for Centre
Capital vs Revenue Test
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Government Spending**
Any expenditure by government`"]
s2["`**Does it create assets?**
Physical assets (roads) or financial assets (loans)`"]
s3["`**If YES → Capital Expenditure**
Goes to capital budget`"]
s4["`**If NO → Revenue Expenditure**
Day-to-day operations, goes to revenue budget`"]
s1 --> s2
s2 --> s3
s3 --> s4Trap: Grants to states are revenue expenditure - no asset created for Centre
Trap: Maintenance of roads is revenue expenditure - construction is capital
Trap: Interest on loans to states is revenue receipt, principal repayment is capital receipt