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

Consider the following statements regarding accounting classifications and deficit indicators in the Union Budget of India:

1. 'Effective Revenue Deficit' is derived by deducting grants-in-aid given to States for the creation of capital assets from the Revenue Deficit.
2. Interest receipts on loans extended by the Central Government and dividends from Public Sector Undertakings (PSUs) are classified under Capital Receipts.
3. Fiscal Deficit reflects the total gross borrowing requirements of the Government of India during a financial year.

Which of the statements given above is/are correct?

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

Answer

Statements 1 and 3 are correct (1 and 3 only).
Effective Revenue Deficit was introduced to adjust Revenue Deficit by removing grants-in-aid meant for capital asset creation in states. Fiscal Deficit equals the total borrowing requirement of the government. Statement 2 is false because interest receipts and dividends are categorized as non-tax Revenue Receipts rather than Capital Receipts.

Step-by-Step Solution

1
Analyze Statement 1 regarding Effective Revenue Deficit.
Effective Revenue Deficit = Revenue Deficit - Grants-in-aid for creation of capital assets. The statement is correct.
Grants given to states for capital formation do not directly create assets for the Central Government, but they do build capital assets for the nation, hence they are excluded to calculate Effective Revenue Deficit.
2
Analyze Statement 2 regarding Budget Receipt classification.
Interest receipts and dividends from PSUs are non-tax Revenue Receipts, not Capital Receipts. The statement is incorrect.
Capital Receipts either create a liability (borrowings) or reduce financial assets (disinvestment, loan recovery). Interest and dividends do neither.
3
Analyze Statement 3 regarding Fiscal Deficit definition.
Fiscal Deficit = Total Expenditure - Total Receipts excluding borrowings. The statement is correct.
Fiscal Deficit measures the gap financed entirely through borrowings, reflecting the gross borrowing needs of the government.

Key Concept

Union Budget Receipt Classification and Deficit Metrics
Estimated Time:1m 30s
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Topics

Economic Developments, Union & State Budgets, and Economic Surveys

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