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

Regarding the classification of government expenditure in the Union Budget of India, which of the following statements are correct?

  1. Expenditure incurred on building infrastructure such as highways, railways, and public hospitals is categorized as capital expenditure.Answer
  2. Interest payments on past government borrowing and salary payments to central civil servants are categorized as revenue expenditure.Answer
  3. C
    Grants-in-aid provided by the Central Government to States for creating capital assets are classified directly as capital expenditure in Union Budget accounting.
  4. D
    Government subsidies provided on food grains, fertilizers, and fuel lead directly to an increase in physical capital assets.

Answer

The statements confirming that infrastructure development is capital expenditure and that interest payments and salaries are revenue expenditure are correct.
The correct options accurately apply fiscal definitions: capital expenditure generates long-term physical infrastructure, whereas revenue expenditure includes recurring operational costs like salaries and interest payments that do not build assets.

Step-by-Step Solution

1
Identify the criteria for Capital Expenditure
Capital expenditure creates long-term physical assets (roads, railways) or reduces liabilities.
This verifies that infrastructure construction is capital expenditure.
2
Identify the criteria for Revenue Expenditure
Revenue expenditure covers routine operational expenses (interest payments, salaries, subsidies) without asset creation.
This verifies that routine administration costs and interest servicing belong to revenue expenditure.
3
Evaluate accounting rules for central grants to states
Grants-in-aid are legally accounted as revenue expenditure in Union financial accounts, regardless of their ultimate usage.
This confirms that classifying grants-in-aid as capital expenditure in budget balance sheets is incorrect.

Key Concept

Classification of Government Expenditure (Capital vs Revenue Expenditure)
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Topics

Economic Developments, Union & State Budgets, and Economic Surveys

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