UPSC Prelims 2025 Q10: Indian Economy – Fiscal Policy & Budget
- (a) I and II only
- (b) II and III only
- (c) I and III only
- (d) I, II and III
Answer: (a) I and II only
Explanation
Government Receipts Classification:
| Receipt Type | Example | Balance Sheet Effect | Classification |
|---|---|---|---|
| Borrowings | Govt takes loans | Creates LIABILITY | Capital Receipt |
| Disinvestment | Govt sells PSU shares | Reduces ASSETS | Capital Receipt |
| Interest Received | Govt earns interest on loans given | Income generation - no balance sheet change | REVENUE Receipt (NOT capital) |
| Taxes | Direct and indirect taxes | Income generation | Revenue Receipt |
Statement I: CORRECT. Capital receipts either create a liability (borrowings) or reduce assets (disinvestment) — both change balance sheet structure.
Statement II: CORRECT. Borrowings and disinvestment are capital receipts.
Statement III: INCORRECT. Interest RECEIVED is a REVENUE receipt — it is income, not a balance sheet transaction.
Answer: (a) I and II only.
Why each option is right or wrong
- (a) CORRECT. Statements I and II are correct. Capital receipts create liabilities or reduce assets (I). Borrowings and disinvestment are capital receipts (II). Interest received is revenue, NOT capital (III is wrong).
- (b) Incorrect. All three cannot be correct — Statement III is wrong. Interest received is a revenue receipt, not capital.
- (c) Incorrect. Statement II is correct — borrowings and disinvestment ARE capital receipts.
- (d) Incorrect. Statement III is definitively wrong — interest received is income (revenue), not a balance sheet item (capital).
Key point
Capital receipts = borrowings + disinvestment (change balance sheet). Revenue receipts = taxes + interest received (income). Interest received = REVENUE, never capital.
Remember
Interest received by govt = REVENUE receipt (not capital). Borrowings + disinvestment = CAPITAL receipts.
Common mistakes
- Classifying interest received as a capital receipt. Interest received is income earned — it is a revenue receipt, not a balance sheet transaction.
- Not knowing the key test: Capital receipt = changes balance sheet (creates liability or reduces asset). Revenue receipt = recurring income with no balance sheet change.
- Confusing interest PAID (expenditure) with interest RECEIVED (income). Interest received by govt = revenue receipt.
Exam tip
Capital vs Revenue test: Does it change the balance sheet? Yes = Capital. No = Revenue. Borrowings = capital (creates liability). Disinvestment = capital (reduces asset). Interest received = revenue (just income).
Sources
- NCERT Class XII - Economics (Government Budget and Fiscal Policy)
- Ministry of Finance - Union Budget Documentation and Budget Manual
- Government Accounting Standards Advisory Board (Comptroller and Auditor General of India) — Indian Government Accounting Standards (IGAS)