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Question 12

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.

AOptions

A) 1 only

B) 2 and 3 only

C) 1 and 3 only

D) 1, 2 and 3

BSolution

The capital budget of the Government of India comprises capital receipts and capital expenditure. These deal with assets and liabilities of the government.

Expenditure on acquisition of assets like roads, buildings, machinery, etc.: This is a classic example of capital expenditure. Capital expenditure creates assets or reduces liabilities. Spending on infrastructure (roads, buildings) and machinery falls into this category as it leads to the creation of productive assets for the economy. This statement is correct.
Loans received from foreign governments: Loans received by the government, whether from foreign governments, international institutions, or domestic sources, lead to an increase in liabilities (debt) or a reduction in financial assets. Hence, they are considered capital receipts. This statement is correct.
Loans and advances granted to the States and Union Territories: When the central government grants loans and advances to states and UTs, it creates a financial asset for the central government (the states/UTs owe money to the centre). This outflow of funds for the purpose of creating assets (or reducing liabilities elsewhere) is categorized as capital expenditure. This statement is correct.

All three items are components of the capital budget, either as capital expenditure or capital receipts.

CStrategy

To tackle questions on government budgeting, clearly understand the distinction between 'revenue' and 'capital' components for both receipts and expenditures. Remember that capital items affect the assets or liabilities of the government, while revenue items are recurring and do not create assets or reduce liabilities.

DSyllabus Analysis

This question falls under the Indian Economy section, specifically focusing on public finance and government budgeting.

EQuestion Analysis

Medium. While the distinction between revenue and capital budgets is fundamental, correctly categorizing specific items like 'loans and advances granted' can be tricky without a clear understanding of the accounting principles involved.