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Question

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

Government expenditure in the Union Budget of India is categorized into Revenue Expenditure and Capital Expenditure based on whether it creates assets or reduces liabilities. Which of the following is classified as Revenue Expenditure of the Central Government?

  1. Payment of interest on past public borrowingsAnswer
  2. B
    Loans and advances extended to State Governments for developmental projects
  3. C
    Capital outlay for the construction of national highways and expressways
  4. D
    Acquisition of new machinery and heavy equipment for defense manufacturing units

Answer

Payment of interest on past public borrowings
Payment of interest on past public debt is a routine operational expenditure. It is incurred for servicing debt and does not lead to asset creation or reduction of the principal loan liability, so it is classified under Revenue Expenditure.

Step-by-Step Solution

1
Understand the criteria for Revenue Expenditure versus Capital Expenditure.
Revenue Expenditure covers operational, non-asset-creating expenses that do not reduce liabilities, whereas Capital Expenditure creates assets or reduces liabilities.
Public finance guidelines define revenue outlay as maintenance and servicing costs.
2
Evaluate the option regarding interest payments on public borrowings.
Servicing interest on existing debt is a contractual, recurring expenditure that does not reduce the principal debt liability nor build assets.
Hence, interest payment is strictly categorized as Revenue Expenditure.

Key Concept

Classification of Government Expenditure (Revenue vs. Capital)
Estimated Time:45s
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Topics

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