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Q12 (IAS/2016) Economy › Government Finance & Budget › Budget classification Official Key

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.

Result
Your answer: —  ·  Correct: D
Explanation

The correct answer is option D because all three statements are included in the capital budget of the Government of India.

Statement 1 is correct as capital expenditure results in creation of physical or financial assets, and includes expenditure on the acquisition of land, building, machinery, and equipment[1]. Statement 2 is correct because loans received from foreign governments are capital receipts, as they create liability for the government[2]. Statement 3 is correct since loans and advances by the central government to state and union territory governments are part of capital expenditure[1].

The capital budget comprises both capital receipts (which create liabilities or reduce assets) and capital expenditure (which create assets or reduce liabilities). All three components mentioned in the question fall under these categories and are therefore part of the capital budget.

Sources
  1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Capital Expenditure > p. 70
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
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Q. Which of the following is/are included in the capital budget of the Government of India? 1. Expenditure on acquisition of assets like ro…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10

This is a foundational 'Sitter' directly from NCERT Macroeconomics Class XII. It tests the core definition of the Capital Budget: does the transaction change the Asset or Liability status of the government? If you missed this, your static economy base is shaky.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Is expenditure on acquisition of assets such as roads, buildings, and machinery included in the capital budget of the Government of India?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Capital Expenditure > p. 70
Presence: 5/5
“There are expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities. This includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments, PSUs and other parties. Capital expenditure is also categorised as plan and non-plan in the budget documents. Plan capital expenditure, like its revenue counterpart, relates to central plan and central assistance for state and union territory plans. Non-plan capital expenditure covers various general, social and economic services provided by the government. The budget is not merely a statement of receipts and expenditures.”
Why this source?
  • Explicitly lists acquisition of land, building, machinery, equipment as part of capital expenditure.
  • Defines capital expenditure as creation of physical or financial assets or reduction in liabilities.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
Presence: 5/5
“It also includes small savings schemes (Post office savings accounts, National Savings Certificates etc.), Provident Funds and net receipts obtained from the sale of shares in PSUs (disinvestment). Capital Expenditure: Those expenses of the government which either creates assets (physical or financial) or reduces liabilities are called capital expenditures. Capital expenditures include acquisition of land, building, machinery, equipment, purchase of shares by the government and loans and advances by the central government to state and union territory governments, PSUs and other parties.”
Why this source?
  • Defines capital expenditures as those that create assets (physical or financial).
  • Specifically includes acquisition of land, building, machinery and equipment.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 2. Capital Expenditure > p. 108
Presence: 5/5
“Capital expenditure results in the acquisition of a tangible or intangible asset or payment of liabilities. Thus, it impacts the asset-liability status of the Government. Capital expenditures are focussed on GDP growth and thereby incurred on building durable assets like highways, multipurpose dams, irrigation projects, buying machinery and equipment. They are non-recurring type of expenditures also in the form of capital investments.”
Why this source?
  • States capital expenditure results in acquisition of tangible/intangible assets.
  • Gives examples such as highways, dams, irrigation projects, machinery — matching roads/buildings/machinery.
Statement 2
Are loans received from foreign governments included in the capital budget of the Government of India?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
Presence: 5/5
“expenses relate to the expenses incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the central government and grants given to the state government and local bodies. Capital Receipts: Those receipts of the government which either creates liability or reduces the assets (physical or financial) are called capital receipts. The main items of capital receipts are loans raised by the government from the public (market borrowings), borrowing by the government from the RBI, commercial banks and other financial institutions through the sale of government securities (treasury bills/dated securities), loans received from foreign governments and international organizations, and recovery of loans previously granted by the central government.”
Why this source?
  • Defines 'Capital Receipts' and explicitly lists 'loans received from foreign governments and international organizations' as a main item.
  • Directly links loans from foreign governments to the capital side of government receipts (i.e., capital budget/receipts).
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 1. Debt Creating Capital Receipts > p. 105
Presence: 5/5
“• Loan taken by the Central Government from foreign Governments (external debt), or public financial institutions, etc. are included under capital receipts.• Borrowings from the market by sale of Government securities (G-Secs) through RBI also results in capital receipts.• GOI under National Small Savings Fund (NSSF) raises money from the public through Ø small saving schemes like postal deposits, National Small Savings Certificate, Kisan Vikas Patra, etc.”
Why this source?
  • States that loans taken by the Central Government from foreign governments (external debt) are included under capital receipts.
  • Confirms that external/bilateral loans are treated as capital (debt-creating) items in government accounts.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 68
Presence: 4/5
“Cash grants-in-aid from foreign countries and international organisations are also included. The estimates of revenue receipts take into account the effects of tax proposals made in the Finance Bill2 . Capital Receipts: The government also receives money by way of loans or from the sale of its assets. Loans will have to be returned to the agencies from which they have been borrowed. Thus they create liability. Sale of government assets, like sale of shares in Public Sector Undertakings (PSUs) which is referred”
Why this source?
  • Explains that capital receipts include loans received by the government which create liability and must be repaid.
  • Reinforces the classification of loans (including those from abroad) as capital rather than revenue receipts.
Statement 3
Are loans and advances granted by the Government of India to States and Union Territories included in the capital budget of the Government of India?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Capital Expenditure > p. 70
Presence: 5/5
“There are expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities. This includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments, PSUs and other parties. Capital expenditure is also categorised as plan and non-plan in the budget documents. Plan capital expenditure, like its revenue counterpart, relates to central plan and central assistance for state and union territory plans. Non-plan capital expenditure covers various general, social and economic services provided by the government. The budget is not merely a statement of receipts and expenditures.”
Why this source?
  • Explicitly states capital expenditure includes 'loans and advances by the central government to state and union territory governments'.
  • Frames these loans/advances as expenditures that create financial assets, matching the definition of capital expenditure.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
Presence: 4/5
“expenses relate to the expenses incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the central government and grants given to the state government and local bodies. Capital Receipts: Those receipts of the government which either creates liability or reduces the assets (physical or financial) are called capital receipts. The main items of capital receipts are loans raised by the government from the public (market borrowings), borrowing by the government from the RBI, commercial banks and other financial institutions through the sale of government securities (treasury bills/dated securities), loans received from foreign governments and international organizations, and recovery of loans previously granted by the central government.”
Why this source?
  • Describes capital receipts and lists 'recovery of loans previously granted by the central government' as a capital transaction, implying the original loans are capital in nature.
  • Connects loans and their recoveries to the capital side of government budgeting.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 2. Non-Debt Creating Capital Receipts > p. 106
Presence: 4/5
“• Recovery of loans and advances The principal amount of loans which are repaid by State Governments, Public Sector Enterprises, other foreign Governments, etc. to Central Government is considered capital receipts, and it does not leave a burden of debt on the Central Government. • Disinvestment of GOI shareholding in various Central Public Sector Enterprises like Air India, NTPC, ONGC, etc. is also a non-debt creating capital receipt for the Central Government.”
Why this source?
  • Specifically identifies 'recovery of loans and advances' as a capital receipt, reinforcing that loans/advances are treated under capital accounts.
  • Indicates the principal repayment of such loans is accounted as capital, supporting their classification as capital transactions.
Pattern takeaway: UPSC consistently targets the 'grey areas' of budget classification (e.g., Grants vs. Loans, Recoveries vs. Interest). The pattern is strictly conceptual: they want to see if you understand the accounting logic, not just the numbers.
How you should have studied
  1. [THE VERDICT]: Sitter. Direct lift from NCERT Class XII Macroeconomics, Chapter 5 (Government Budget and the Economy).
  2. [THE CONCEPTUAL TRIGGER]: Public Finance > Budget Classification. The 'Litmus Test': Capital Budget items must either create/reduce assets or create/reduce liabilities. Revenue items do neither.
  3. [THE HORIZONTAL EXPANSION]: Memorize the tricky classifications: 1. Grants to States = Revenue Exp (even if for assets). 2. Loans to States = Capital Exp. 3. Interest Payments = Revenue Exp. 4. Recovery of Loans = Capital Receipt. 5. Disinvestment = Capital Receipt (Non-debt creating). 6. Market Borrowings = Capital Receipt (Debt creating).
  4. [THE STRATEGIC METACOGNITION]: Do not memorize lists blindly. Apply the 'Balance Sheet Logic' to every option. Ask: 'Did the government gain an asset or a debt?' If yes, it's Capital. If it's just maintenance or servicing, it's Revenue.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Definition of Capital Expenditure
💡 The insight

The question hinges on whether asset acquisition (roads, buildings, machinery) is classified as capital expenditure — several references define capital expenditure as creating/acquiring assets.

High-yield for budget-related UPSC questions: knowing the formal definition helps answer direct MCQs and explain budget classifications. Connects to public finance topics (budget structure, asset-liability impact). Master via NCERT and standard public finance texts and practice classification questions.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Capital Expenditure > p. 70
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
🔗 Anchor: "Is expenditure on acquisition of assets such as roads, buildings, and machinery ..."
📌 Adjacent topic to master
S1
👉 Revenue vs Capital Expenditure Distinction
💡 The insight

References contrast revenue expenditure (does not create assets) with capital expenditure (creates assets), which is the core distinction tested here.

Frequently tested concept in prelims and mains: useful for explaining budget outcomes, fiscal indicators (effective capital expenditure) and policy implications. Study definitions, examples, and implications on asset-liability status; practice by classifying sample expenditures.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Effective revenue deficit' and 'effective capital expenditure' > p. 153
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Revenue Expenditure > p. 69
🔗 Anchor: "Is expenditure on acquisition of assets such as roads, buildings, and machinery ..."
📌 Adjacent topic to master
S1
👉 Loans and Advances as Capital Transactions
💡 The insight

Sources note that loans and advances by the Centre (to states, PSUs) are treated as capital expenditure alongside asset acquisition.

Important nuance for UPSC: capital account covers both asset creation and financial transactions like loans; helps tackle multi-option questions and budget analysis. Learn by noting examples in budget documents and common exceptions.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Capital Expenditure > p. 70
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
🔗 Anchor: "Is expenditure on acquisition of assets such as roads, buildings, and machinery ..."
📌 Adjacent topic to master
S2
👉 Capital receipts — debt-creating vs non-debt-creating
💡 The insight

The statement hinges on whether foreign-government loans are treated as capital receipts (debt-creating); references explicitly classify such loans under capital receipts.

High-yield for UPSC budget and public finance questions: knowing the distinction helps answer questions on fiscal deficit financing, budget classification and implications for debt sustainability. It connects to topics like fiscal deficit, public debt and budgetary analysis. Prepare by memorising definitions, examples (market borrowings, foreign loans, recoveries, disinvestment) and practising classification-type MCQs.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 1. Debt Creating Capital Receipts > p. 105
🔗 Anchor: "Are loans received from foreign governments included in the capital budget of th..."
📌 Adjacent topic to master
S2
👉 Consolidated Fund of India — treatment of loans
💡 The insight

References state loans (including those from foreign governments/institutions) are credited to the Consolidated Fund, linking constitutional accounting to capital receipts.

Important for constitutional and budget-related questions (GS Paper 2/3). Knowing which receipts flow into the Consolidated Fund vs Public Account clarifies legal/administrative treatment of government funds and budget presentation. Study Articles on government accounts and sample budget documents to internalise flows.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.3 Government Accounts > p. 150
  • Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 12: The Union Legislature > p. 261
🔗 Anchor: "Are loans received from foreign governments included in the capital budget of th..."
📌 Adjacent topic to master
S2
👉 External debt classification (bilateral, multilateral, commercial)
💡 The insight

Loans from foreign governments are part of external/bilateral assistance; references describe multilateral and bilateral loan components of external debt.

Useful for questions on external debt composition, balance of payments and fiscal risk assessment. Knowing categories (bilateral, multilateral, commercial/ECB) helps analyse vulnerability and policy choices. Revise external debt categories, recent data trends and implications for exchange-rate and debt management.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 164
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
🔗 Anchor: "Are loans received from foreign governments included in the capital budget of th..."
📌 Adjacent topic to master
S3
👉 Capital expenditure includes loans and advances
💡 The insight

Directly addresses whether central government loans/advances to States/UTs are treated as capital outlays (supported by reference [2]).

High-yield for budget/accounting questions: UPSC often asks what constitutes capital vs revenue expenditure. Mastering this clarifies classification of inter-governmental transfers and aids answers on fiscal policy and public investment. Prepare by memorising formal definitions and practicing classification of typical transactions (loans, grants, recoveries).

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Capital Expenditure > p. 70
🔗 Anchor: "Are loans and advances granted by the Government of India to States and Union Te..."
🌑 The Hidden Trap

The 'Next Logical Question' is on 'Effective Revenue Deficit'. Since Grants to States are Revenue Expenditure but often create assets, the concept of Effective Revenue Deficit excludes these grants to show the 'real' consumption spending. Also, watch out for 'Small Savings (Post Office deposits)'—they are part of the Public Account, not the Consolidated Fund, but loans against them enter the Capital Budget logic.

⚡ Elimination Cheat Code

Use the 'Snapshot Test'. Imagine taking a photo of the government's wealth.
1. Building a road? The photo changes (New Asset). -> Capital.
2. Taking a loan? The photo changes (New Debt). -> Capital.
3. Giving a loan? The photo changes (New IOU held). -> Capital.
If the transaction is just 'paying the electricity bill' or 'paying interest', the wealth snapshot doesn't change structurally -> Revenue.

🔗 Mains Connection

Mains GS-3 (Investment Models & Budgeting): High Capital Expenditure (Capex) has a higher multiplier effect (approx 2.45x) on GDP compared to Revenue Expenditure (approx 0.9x). Citing this ratio justifies why the government pushes for 'Capex-led growth' despite high fiscal deficits.

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SIMILAR QUESTIONS

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Which one among the following items comprises the major portion of revenue expenditure of the Union Government of India? (a) Salaries (b) Interest Payments (c) Road Transport and Highways (d) Defence Services

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Which of the following are the methods of Parliamentary control over public finance in India? 1. Placing Annual Financial Statement before the Parliament 2. Withdrawal of moneys from Consolidated Fund of India 3. Provisions of supplementary grants and vote-on-account 4. A periodic or at least a mid-year review of programme of the Government against macroeconomic forecasts and expenditure by a Parliamentary Budget Office 5. Introduction Finance Bill in the Parliament Select the correct answer using the codes given below:

IAS · 1995 · Q31 Relevance score: -0.70

Which of the following are among the non-plan expenditures of the Government of India ? I. Defence expenditure II. Subsidies III. All expenditures linked with the previous plan periods IV. Interest payment Choose the correct answer from the codes given below : Codes :