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Question

Difficulty: MediumFiscal Policy, Union/State Budgeting, Public Finance, and Taxation Structure

Consider the following statements regarding the concept of 'Effective Revenue Deficit' in Indian Public Finance:

1. It is defined as the quantitative difference between Revenue Deficit and Grants given for Creation of Capital Assets.
2. Grants-in-aid provided by the Union Government to State Governments for the creation of capital assets are recorded under Capital Expenditure in the Union Budget.

Which of the statements given above is/are correct?

  1. 1 onlyAnswer
  2. B
    2 only
  3. C
    Both 1 and 2
  4. D
    Neither 1 nor 2

Answer

The statement stating '1 only' is correct.
The correct response recognizes that statement 1 alone is accurate. Effective Revenue Deficit measures the actual consumption deficit of the central government by subtracting grants meant for capital asset creation from the total revenue deficit. Statement 2 is false because all grants to states are classified under Revenue Expenditure in the Union Budget, even when intended for capital asset formation.

Step-by-Step Solution

1
Evaluate Statement 1 regarding the formal definition of Effective Revenue Deficit.
Statement 1 is correct. Effective Revenue Deficit = Revenue Deficit - Grants for Creation of Capital Assets.
This metric isolates consumption-oriented revenue expenditure by excluding central grants that lead to physical asset creation at the state level.
2
Evaluate Statement 2 regarding the Union budgetary accounting classification of intergovernmental grants.
Statement 2 is incorrect. Under Indian public accounting standards, all grants-in-aid transferred from the Centre to States or UTs are accounted for as Revenue Expenditure of the Union Government.
Because the resulting capital assets belong to the State Government and not the Union Government, the Central Government cannot classify these grant transfers under its own Capital Expenditure.

Key Concept

Effective Revenue Deficit and the Accounting Classification of Intergovernmental Grants in India
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Topics

Fiscal Policy, Union/State Budgeting, Public Finance, and Taxation Structure