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Q10 (IAS/2025) Economy â€ș Government Finance & Budget â€ș 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: —  Â·  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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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
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
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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.
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