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

With reference to the structure of the Union Budget in India, consider the following statements regarding government receipts:

1. Proceeds generated from the disinvestment of Central Public Sector Enterprises (CPSEs) are accounted for as Non-Tax Revenue Receipts.
2. Market borrowings and loans raised by the Union Government from the domestic public create a future debt liability and are classified as Capital Receipts.
3. Grants-in-aid received by the Government of India from foreign governments or international organizations are categorized as Capital Receipts because they originate from external sources.

Which of the statements given above is/are correct?

  1. 2 onlyAnswer
  2. B
    1 and 2 only
  3. C
    2 and 3 only
  4. D
    1, 2 and 3

Answer

Statement 2 only is correct.
The option stating '2 only' is correct. In Indian public finance budgeting, Capital Receipts are defined as those budget receipts that either create a liability (e.g., market borrowings, loans from RBI) or reduce financial/physical assets (e.g., recovery of loans, disinvestment proceeds). Market borrowings create a repayment obligation and are therefore Capital Receipts. Conversely, disinvestment reduces assets (Non-Debt Capital Receipt), and foreign grants-in-aid neither create liabilities nor decrease assets (Non-Tax Revenue Receipt).

Step-by-Step Solution

1
Analyze Statement 1 regarding disinvestment proceeds.
Disinvestment proceeds involve the liquidation/sale of government equity in CPSEs, which leads to a reduction of financial assets. Receipts that reduce assets are classified as Non-Debt Capital Receipts, not Revenue Receipts.
By definition, Revenue Receipts neither create a liability nor reduce assets.
2
Analyze Statement 2 regarding market borrowings.
Market borrowings incur an obligation of future repayment of principal and interest, thus creating financial liabilities. Receipts that create liabilities are classified as Capital Receipts.
Any financial transaction that increases the financial debt/liability of the government forms part of Capital Receipts.
3
Analyze Statement 3 regarding foreign grants-in-aid.
Grants-in-aid received from external governments or international agencies do not need to be repaid (no liability created) and do not involve selling state assets. Therefore, they fall under Non-Tax Revenue Receipts.
Unilateral transfers/grants without repayment obligations are explicitly non-tax revenue components of the Revenue Budget.

Key Concept

Classification of Government Receipts (Capital vs Revenue Receipts)
Estimated Time:1m 30s
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Topics

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