Public Finance› Budget, Deficits & Fiscal Policy
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?
Answer a.
Answer (a) — statements I and II only. Capital receipts are defined as receipts that either create a liability or reduce the government's assets; interest received on loans given out is a non-tax revenue receipt and creates no liability at all. The government budget classifies receipts by their effect on the government's balance sheet. Capital receipts either create a liability (borrowings from the RBI, market loans, small savings, external loans) or reduce financial assets (disinvestment of PSU shares, recovery of loans), so statement I is the textbook definition and statement II gives its two standard examples. Interest received on loans the government has advanced to states, PSUs or others is income flowing in; it neither creates an obligation to repay nor runs down an asset, so it is a revenue receipt — specifically a non-tax revenue receipt, alongside dividends and profits from PSUs and fees for services. That makes statement III wrong, and only option (a) excludes it.
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