Consider the following statements: I. Capital receipts create a liability or cause a reduction in the assets of the Government. II. Borrowings and disinvestment are capital receipts. III. Interest received on loans creates a liability of the Government. Which of the statements given above are correct?
Contents9
- AI and II only
- BII and III only
- CI and III only
- DI, II and III
Show answer
Answer: (A) I and II only
(I) 'Capital receipts create a liability or cause a reduction in assets' — CORRECT.
This is the definition of capital receipts in government accounting.
Borrowings create a liability (the government must repay the loan).
Disinvestment (selling government-owned shares in PSUs) reduces the government's assets.
Recovery of loans given to states/entities also reduces assets (the outstanding loan amount goes down). ✓
(II) 'Borrowings and disinvestment are capital receipts' — CORRECT.
Government borrowings (through bonds, treasury bills) are capital receipts because they create a liability.
Disinvestment proceeds (selling PSU shares) are capital receipts because they reduce the government's asset base.
Both are classified as capital receipts in the Union Budget. ✓
(III) 'Interest received on loans creates a liability' — INCORRECT.
Interest received on loans given by the government is a REVENUE RECEIPT, not a capital receipt.
It does not create any liability, nor does it reduce any asset — it's simply income earned on an existing asset (the loan).
Revenue receipts are routine, recurring income that neither create liability nor reduce assets.
Interest, dividends, and tax collections are all revenue receipts. ✗
Statements I and II are correct. Answer is (a).
Capital receipts create government liability (borrowings) or reduce government assets (disinvestment), while revenue receipts like interest are regular income without creating liability.
The 2024-25 Union Budget emphasized disinvestment and borrowing targets, making the classification of capital versus revenue receipts a key exam topic.
Students must distinguish between receipts that affect the government's balance sheet (capital) versus those that represent regular income flow (revenue).
Capital Receipts in Government Budget
Indian Economy Capital receipts liability reduction in assets
Capital Receipts: Definition & UPSC Traps
Capital receipts create liability OR reduce assets of the government
Borrowings (bonds, T-bills) create liability - must be repaid
Disinvestment reduces assets - selling PSU shares
Recovery of loans reduces assets - outstanding loan amount decreases
Core Definition
Capital receipts are government funds that either create a liability (money that must be repaid) or reduce government assets. Unlike revenue receipts which are regular income, capital receipts involve the government's balance sheet - either adding debt or reducing what it owns.
Types of Capital Receipts
Type | Example | Effect | Budget Classification |
|---|---|---|---|
Borrowings | Government bonds, T-bills | Creates liability | Capital Receipt |
Disinvestment | Selling PSU shares | Reduces assets | Capital Receipt |
Recovery of Loans | States repaying Centre | Reduces assets | Capital Receipt |
External Assistance | World Bank loans | Creates liability | Capital Receipt |
Trap: Interest received on loans is a revenue receipt, not capital - it creates no liability
Trap: Disinvestment reduces assets but is still a capital receipt - don't confuse with revenue
Trap: Loan recovery reduces assets (outstanding amount falls) - not intuitive but correct
Revenue vs Capital Receipts
Indian Economy Interest received revenue receipts
Revenue vs Capital Receipts: The Key Distinction
Revenue receipts: Regular income, no liability, no asset reduction
Capital receipts: Create liability OR reduce assets
Interest received on loans = revenue receipt (income on existing asset)
Complete Classification
Receipt Type | Characteristics | Examples | Budget Impact |
|---|---|---|---|
Revenue Receipts | • Regular income | • Tax collections | Shows government's earning capacity |
Capital Receipts | • Creates liability | • Government borrowings | Shows financing of expenditure |
Why Statement III Failed
Interest received on loans is income earned on an existing government asset (the loan given to states/entities). It creates no new liability and reduces no asset - it's simply revenue from an investment the government already made.
Common Error: Thinking interest received creates liability - it's actually income
UPSC Trick: Mixing loan given (asset) with interest received (revenue)
Remember: Revenue = routine income; Capital = liability creation or asset reduction
Government Borrowings & Disinvestment
Indian Economy Borrowings disinvestment
Borrowings & Disinvestment as Capital Receipts
Government borrowings create liability - must be repaid with interest
Disinvestment reduces government ownership in PSUs
Both are capital receipts used to finance fiscal deficit
Government Borrowing Instruments
Instrument | Maturity | Purpose | Liability Created |
|---|---|---|---|
Treasury Bills | 91, 182, 364 days | Short-term funding | Must repay at face value |
Government Bonds | 2-40 years | Long-term funding | Interest + principal repayment |
Market Borrowings | Various | Deficit financing | Market interest rates |
External Borrowings | Long-term | Development projects | Foreign currency liability |
Disinvestment Process
Strategic disinvestment: Selling controlling stake (>51%) in PSUs to private entities
Minority stake sale: Selling <51% stake while retaining government control
IPO route: Listing PSU shares on stock exchanges for public subscription
Proceeds reduce government's asset base but provide immediate funds for expenditure
Key Point: Disinvestment reduces assets but is still classified as capital receipt
UPSC Focus: Both borrowing and disinvestment help finance fiscal deficit
Remember: Capital receipt ≠ good for finances - borrowing increases debt burden