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Q10 (IAS/2025) Economy › Government Finance & Budget › Budget classification Answer Verified

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?

Result
Your answer: —  ·  Correct: A
Explanation

Capital receipts are those receipts of the government which either create liability or reduce the assets (physical or financial)[2], making Statement I correct. The main items of capital receipts include 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[2], and disinvestment of GOI shareholding in various Central Public Sector Enterprises is also a non-debt creating capital receipt for the Central Government[3]. This confirms Statement II is correct.

However, Statement III is incorrect. Interest received on loans is actually a revenue receipt for the government, not a capital receipt. It does not create any liability; rather, it represents income earned by the government on loans it has previously granted to others. Revenue receipts neither create liabilities nor reduce assets—they are regular income for the government.

Therefore, only Statements I and II are correct, making option A the right answer.

Sources
  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
  3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 2. Non-Debt Creating Capital Receipts > p. 106
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Q. Consider the following statements : I. Capital receipts create a liability or cause a reduction in the assets of the Government. II. Borr…
At a glance
Origin: Mixed / unclear origin Fairness: Moderate fairness Books / CA: 6.7/10 · 0/10

This is a fundamental 'Concept Check' from NCERT Macroeconomics. It tests the core definitions of the Budget. If you understand the 'Asset-Liability Test' rather than rote memorizing lists, this is free marks. No current affairs required.

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
In government finance, do capital receipts create a liability or cause a reduction in the government's assets?
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?
  • Provides a textbook definition: capital receipts either create liability or reduce assets (physical or financial).
  • Lists typical capital receipt items (market borrowings, RBI borrowings, recovery of loans) that illustrate both liability-creating and asset-reducing cases.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 69
Presence: 5/5
“to as PSU disinvestment, reduce the total amount of financial assets of the government. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. When government takes fresh loans it will mean that in future these loans will have to be returned and interest will have to be paid on these loans. Similarly, when government sells an asset, then it means that in future its earnings from that asset, will disappear. Thus, these receipts can be debt creating or non-debt creating.”
Why this source?
  • States capital receipts create liability or reduce financial assets and distinguishes debt-creating vs non-debt-creating receipts.
  • Explains logic: loans must be repaid (liability); sale of assets removes future earnings (asset reduction).
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 loans received will have to be returned, explicitly linking such receipts to future liabilities.
  • Mentions sale of government assets as a capital receipt that reduces future asset-based earnings.
Statement 2
Are borrowings and disinvestment classified as capital receipts in government finance?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
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: 5/5
“• 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?
  • Explicitly describes disinvestment of GOI shareholding as a non-debt creating capital receipt.
  • Also groups recovery of loans as capital receipts, showing sale of assets and loan recoveries fall under capital receipts.
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 as those that create liability or reduce assets and lists loans raised by government and market borrowings as main items.
  • Specifically names borrowing from RBI, commercial banks and sale of government securities as capital 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?
  • Lists loans taken by the Central Government (external debt) and borrowings from the market by sale of government securities under capital receipts.
  • Provides concrete examples (G-Secs, NSSF) of borrowing instruments treated as capital receipts.
Statement 3
Does interest received on loans create a liability for the government in government finance?
Origin: Weak / unclear Fairness: Borderline / guessy
Indirect textbook clues
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 68
Strength: 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 relevant

Defines capital receipts as receipts that 'create liability' (loans raised) and states loans will have to be returned and interest paid, linking loans and future obligations.

How to extend

A student could apply the rule 'receipts that create liability are debt-creating' to ask whether interest receipts behave like loan principal (i.e., create or reduce liabilities).

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 69
Strength: 4/5
“to as PSU disinvestment, reduce the total amount of financial assets of the government. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. When government takes fresh loans it will mean that in future these loans will have to be returned and interest will have to be paid on these loans. Similarly, when government sells an asset, then it means that in future its earnings from that asset, will disappear. Thus, these receipts can be debt creating or non-debt creating.”
Why relevant

Explains that capital receipts either create liability or reduce financial assets, and explicitly notes that when government takes loans, interest will have to be paid on these loans.

How to extend

Use this definition to contrast treatment of interest paid (clearly a liability) with interest received (check whether it is treated as reducing net liabilities or as a separate receipt).

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad > p. 72
Strength: 5/5
“Primary Deficit: We must note that the borrowing requirement of the government includes interest obligations on accumulated debt. The goal of measuring primary deficit is to focus on present fiscal imbalances. To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the primary deficit. It is simply the fiscal deficit minus the interest payments Gross primary deficit = Gross fiscal deficit – Net interest liabilities Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.”
Why relevant

Gives the formula 'Gross primary deficit = Gross fiscal deficit – Net interest liabilities' and defines net interest liabilities as interest payments minus interest receipts by the government on net domestic lending.

How to extend

A student can extend this to infer that interest receipts offset interest payments (reduce net interest liabilities), suggesting interest receipts are treated as reducing liabilities rather than creating them.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > V. Primary Deficit > p. 111
Strength: 3/5
“• While fiscal deficit shows borrowing requirement of the Government inclusive of interest payment on past loans, primary deficit indicates borrowing requirement excluding interest payments on its debt.• This concept was introduced in the 1993-94 budget. \bullet The amount by which a Government's total expenditure exceeds its total revenue, d) excluding interest payments on its debt, is termed 'primary deficit'.”
Why relevant

Clarifies that primary deficit excludes interest payments on government debt, treating interest obligations as explicit liabilities to be separated out.

How to extend

Combine this with the idea that interest payments are liabilities to examine whether interest receipts are similarly classified (i.e., affect net interest liability calculations).

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 2: National Income Accounting > NNP ≡ GNP – Depreciation > p. 26
Strength: 2/5
“On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So, we have to deduct the net interests paid by the households to the firms and government. The households receive transfer payments from government and firms (pensions, scholarship, prizes, for example) which have to be added to calculate the Personal Income of the households. Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.”
Why relevant

Notes that households receive interest payments from the government on past loans advanced by them, providing an example where government pays interest on borrowings.

How to extend

Use this concrete example to reason that interest paid by government is a liability; then compare to the symmetric case of interest received by government when it lends to see whether it would create or reduce liabilities.

Pattern takeaway: UPSC consistently targets the 'definitions' in Macroeconomics. They specifically exploit the confusion between the 'Principal' (Capital) and the 'Service/Interest' (Revenue) of a loan.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable using NCERT Macroeconomics Class XII, Chapter 5 (Government Budget).
  2. [THE CONCEPTUAL TRIGGER]: The 'Budget Classification' framework: distinguishing Revenue vs. Capital based on the Asset/Liability impact.
  3. [THE HORIZONTAL EXPANSION]: Master the 4-Quadrant Matrix: 1) Revenue Receipt (Tax, Dividends, Grants); 2) Capital Receipt (Borrowing, Disinvestment, Loan Recovery); 3) Revenue Exp (Interest payments, Subsidies); 4) Capital Exp (Building roads, Repaying loans).
  4. [THE STRATEGIC METACOGNITION]: Stop memorizing lists. Apply the logic: Does this transaction change the Balance Sheet (Assets/Liabilities)? Yes = Capital. No = Revenue. Interest received is income (Revenue), Loan recovery is asset reduction (Capital).
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Debt-creating vs non-debt-creating capital receipts
💡 The insight

Capital receipts can either increase government liabilities (debt-creating) or reduce assets without adding debt (non-debt-creating).

High-yield for budget analysis questions: distinguishes how the government finances deficits and the fiscal implications of different receipts. Links to fiscal deficit financing, debt sustainability and policy choices (borrowing vs disinvestment). Useful for questions comparing sources of financing and their long-term effects.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 69
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 2. Non-Debt Creating Capital Receipts > p. 106
🔗 Anchor: "In government finance, do capital receipts create a liability or cause a reducti..."
📌 Adjacent topic to master
S1
👉 Revenue receipts vs Capital receipts
💡 The insight

Revenue receipts do not create liabilities or reduce assets, whereas capital receipts do one or the other.

Essential for constructing and interpreting the revenue and capital budgets; appears frequently in budget-related questions and essay parts. Connects to taxation, expenditure classification, and indicators like fiscal and primary deficits.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 151
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.4 Budget Classification > p. 152
🔗 Anchor: "In government finance, do capital receipts create a liability or cause a reducti..."
📌 Adjacent topic to master
S1
👉 Asset–liability impact of capital transactions
💡 The insight

Capital transactions (loan receipts, sale of assets, recovery of loans) directly alter the government's asset or liability position.

Important for assessing the balance-sheet effects of policy actions like disinvestment, borrowing and loan recoveries. Helps answer questions on public finance sustainability, impact of capital expenditure, and interpretation of government financial statements.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 2. Capital Expenditure > p. 108
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Capital Expenditure > p. 70
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 68
🔗 Anchor: "In government finance, do capital receipts create a liability or cause a reducti..."
📌 Adjacent topic to master
S2
👉 Debt-creating vs Non-debt-creating Capital Receipts
💡 The insight

Capital receipts split into those that create future liabilities (debt-creating) and those that do not (non-debt-creating).

High-yield for budget and fiscal policy questions: distinguishes borrowings (debt-creating) from asset sales/disinvestment (non-debt-creating). Connects to fiscal deficit financing, measures of deficit, and government balance-sheet implications. Enables answering classification and impact questions on receipts and deficit financing.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 69
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 2. Non-Debt Creating Capital Receipts > p. 106
🔗 Anchor: "Are borrowings and disinvestment classified as capital receipts in government fi..."
📌 Adjacent topic to master
S2
👉 Borrowings and Instruments Classified as Capital Receipts
💡 The insight

Government borrowings through market instruments, RBI, or foreign loans are recorded as capital receipts.

Essential for questions on how fiscal deficits are financed and the composition of capital receipts. Links to topics on government securities, public debt management, and fiscal sustainability. Useful for assessing policy measures like market borrowings and their macro impacts.

📚 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 borrowings and disinvestment classified as capital receipts in government fi..."
📌 Adjacent topic to master
S2
👉 Disinvestment as a Non-debt Capital Receipt
💡 The insight

Sale of government assets or PSU shareholding (disinvestment) reduces financial assets and is treated as a non-debt capital receipt.

Important for questions on revenue vs capital receipts, privatization/disinvestment policy, and strategies to finance deficits without raising debt. Helps analyze trade-offs between immediate receipts and loss of future asset income.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 2. Non-Debt Creating Capital Receipts > p. 106
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.1.2 Classification of Receipts > p. 68
🔗 Anchor: "Are borrowings and disinvestment classified as capital receipts in government fi..."
📌 Adjacent topic to master
S3
👉 Net interest liabilities = interest payments − interest receipts
💡 The insight

Interest receipts are subtracted from interest payments to compute net interest liabilities, so receipts reduce net liability rather than creating one.

High-yield for fiscal analysis: understanding how interest receipts alter the government's interest burden is essential for computing primary deficit and assessing debt sustainability. This concept links fiscal metrics (fiscal deficit, primary deficit) to government cash flows and is frequently tested in questions on budget arithmetic and fiscal policy.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad > p. 72
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > V. Primary Deficit > p. 111
🔗 Anchor: "Does interest received on loans create a liability for the government in governm..."
🌑 The Hidden Trap

The 'Grants Trap': Grants-in-aid from foreign governments are Revenue Receipts (no liability created), whereas 'Loans' from them are Capital Receipts. Also, 'Recovery of Loans' is a Capital Receipt, but 'Interest on those Loans' is a Revenue Receipt.

⚡ Elimination Cheat Code

Use the 'Future Obligation Test' on Statement III. If I receive interest, do I owe anyone anything in the future? No. Did I lose my asset? No. Therefore, it cannot create a liability. Statement III is absurd. Eliminate options B, C, and D. Answer is A.

🔗 Mains Connection

Mains GS3 (Fiscal Policy): A high Revenue Deficit means the government is using Capital Receipts (borrowing/selling assets) to fund Revenue Expenditure (consumption). This violates the 'Golden Rule' of public finance and creates intergenerational debt burdens.

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