UPSC Prelims 2016 Q12: Indian Economy – Fiscal Policy & Budget
Which of the following is/are included in the capital budget of the Government of India?
1. Expenditure on acquisition of assets like roads, buildings, machinery, etc.
2. Loans received from foreign governments
3. Loans and advances granted to the States and Union Territories
Select the correct answer
using the code given below.
- (a) 1 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (d) 1, 2 and 3
Explanation
Capital budget of the Government of India
The capital budget has two sides: capital receipts and capital expenditure.
These change the Government's assets or liabilities.
| Item | Included in the capital budget? | Side |
|---|---|---|
| 1. Expenditure on acquisition of assets like roads, buildings, machinery | Yes | Capital expenditure (creates assets) |
| 2. Loans received from foreign governments | Yes | Capital receipt (creates a liability) |
| 3. Loans and advances granted to the States and Union Territories | Yes | Capital expenditure (creates an asset) |
Revenue and capital budgets compared:
| Budget | Receipts | Expenditure |
|---|---|---|
| Revenue | Taxes, interest, dividends | Salaries, subsidies, interest payments |
| Capital | Borrowings, loan recoveries, disinvestment | Asset creation, loans granted |
Answer: (d) 1, 2 and 3.
Why each option is right or wrong
- (a) Incorrect. Loans received and loans granted are also part of the capital budget.
- (b) Incorrect. Spending on acquisition of assets is the main capital expenditure.
- (c) Incorrect. Loans from foreign governments are capital receipts, so item 2 counts.
- (d) CORRECT. Asset creation, loans received and loans granted all belong to the capital budget.
Key point
Capital budget = capital receipts (borrowings, loan recoveries, disinvestment) + capital expenditure (asset creation, loans and advances granted).
Remember
Capital budget = assets and liabilities, both sides.
Common mistakes
- Thinking the capital budget covers only expenditure and not receipts.
- Treating interest received on loans as a capital receipt; it is a revenue receipt.
- Treating loans to States as revenue expenditure; they create an asset.
Exam tip
If it changes assets or liabilities, it is capital. If not, it is revenue.
Sources
- NCERT Class XII — Introductory Macroeconomics, Ch 5 (Government Budget and the Economy)
- Ministry of Finance — Union Budget: Key to Budget Documents