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Question

Difficulty: MediumEconomic Developments, Union & State Budgets, and Economic Surveys

Which of the following statements regarding the revenue and capital accounting framework of the Union Budget in India are correct?

  1. Grants-in-aid provided by the Central Government to States for the creation of capital assets are classified under Revenue Expenditure.Answer
  2. B
    Proceeds realized from the disinvestment of government equity in Public Sector Undertakings (PSUs) are accounted for as Non-Tax Revenue Receipts.
  3. Interest payments made by the Central Government on past debt obligations form a part of Revenue Expenditure.Answer
  4. D
    Loans and advances extended by the Union Government to State Governments and Union Territories are categorized under Revenue Expenditure.

Answer

The correct statements are that grants-in-aid provided to States for capital asset creation are categorized under Revenue Expenditure, and interest payments on government debt are classified under Revenue Expenditure.
Grants-in-aid to states (even if intended for capital asset creation) are treated as revenue expenditure because the central government does not hold ownership of the resulting asset. Interest payments represent recurring debt maintenance outlays without changing total principal debt liabilities, making them revenue expenditure.

Step-by-Step Solution

1
Evaluate the accounting treatment of Grants-in-aid to States.
Under Indian budget accounting, grants-in-aid to states do not directly create assets owned by the central government, so they are classified under Revenue Expenditure.
According to fiscal rules, asset creation by end recipients does not alter the accounting classification at the central transfer stage, which remains a revenue outlay.
2
Examine the classification of Disinvestment Proceeds.
Disinvestment involves liquidating equity holdings, so proceeds are non-debt capital receipts.
Receipts that reduce financial assets or create liabilities fall under Capital Receipts.
3
Determine the expenditure class for Interest Payments.
Interest servicing is a regular debt servicing outlay that does not reduce principal liability or create assets.
Recurring operational liabilities without asset creation are classified as Revenue Expenditure.
4
Analyze Loans and Advances disbursed to States.
Loans disbursed yield future repayments, creating a financial asset for the Union Government.
Transactions leading to asset creation or financial claims are classified as Capital Expenditure.

Key Concept

Revenue versus Capital Accounts in the Union Budget
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Topics

Economic Developments, Union & State Budgets, and Economic Surveys

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