Which of the following is a capital receipt of the government?

Proceeds from disinvestment in a public sector undertaking

Dividends received from public enterprises

Interest received on loans given earlier to state governments

Which of the following is revenue expenditure of the government?

Interest paid on past borrowings

Construction of a national highway

Interest paid on past borrowings

Repayment of a loan taken from the World Bank

A loan given to a state government

The fiscal deficit of a government is best described as:

The government's total borrowing need for the year

The excess of revenue expenditure over revenue receipts

The interest the government must pay in the year

The government's total borrowing need for the year

The difference between exports and imports

If the primary deficit of a government is zero, it means that:

It borrows only to pay interest on past debt

The government has no borrowing at all in the year

The revenue deficit must also be zero

The government has repaid all its past debt

Government Budget and the Economy — Receipts, Expenditure and the Three Deficits

The budget is the government's statement of its estimated receipts and expenditure for a financial year, which in India runs from 1 April to 31 March. Article 112 of the Constitution requires it to be laid before Parliament as the Annual Financial Statement. This chapter has one skill at its centre: deciding whether an item is revenue or capital, and whether it is a receipt or an expenditure. Once every item is in the right box, the three deficits — revenue, fiscal and primary — are subtraction, and the questions about them are as much about what each deficit means as about its value.

Why a Government Budgets — Allocation, Redistribution, Stabilisation

Allocation function — providing public goods such as national defence, roads, street lighting and public administration, which the market will not supply in adequate amounts.
Redistribution function — using taxes and transfers to bring the distribution of income closer to what society regards as fair: taxing the better-off more, and transferring to the poor.
Stabilisation function — offsetting swings in aggregate demand: spending more or taxing less when demand is deficient, and the reverse when there is excess demand and inflation.

A public good has two features. It is non-rival — one person's use does not reduce what is available to another, as with a lighthouse or national defence — and non-excludable — there is no practical way to stop someone who has not paid from benefiting. Because people can benefit without paying, each has a reason to let others pay; this is the free-rider problem, and it is why such goods are provided through the budget rather than sold.

Revenue Receipts and Capital Receipts

The test for a receipt is a question with two parts: does it create a liability, or reduce an asset? If either, it is a capital receipt. If neither, it is a revenue receipt. Revenue receipts are non-redeemable — the government never has to pay them back.

Where each receipt goes
Revenue receipts	Capital receipts
Tax revenue — direct taxes: income tax, corporation tax	Borrowings — from the market, from the RBI, from abroad (create a liability)
Tax revenue — indirect taxes: GST, customs duties	Recovery of loans given earlier (reduces an asset — the loan outstanding)
Non-tax revenue: interest received on loans, dividends and profits of public enterprises, fees, fines, grants received	Disinvestment — sale of shares in public sector undertakings (reduces an asset)

A direct tax falls on the person who pays it — the burden cannot be shifted — while an indirect tax is collected from a seller who can pass it on to buyers in the price. A tax is progressive when its rate rises with income, which is how the income tax serves the redistribution function.

⚠️ Interest received is revenue; a loan recovered is capital

A loan the government made earlier produces two receipts and they go in different boxes. The interest on it is income that leaves the asset intact — a revenue receipt. The repayment of the loan itself shrinks the asset the government holds — a capital receipt. Questions put both in one stem.

Revenue Expenditure and Capital Expenditure

The test mirrors the one for receipts: does the spending create an asset, or reduce a liability? If either, it is capital expenditure; if neither, revenue expenditure.

Where each expenditure goes
Revenue expenditure	Capital expenditure
Salaries and pensions of government employees	Building roads, bridges, hospitals, schools
Interest payments on past borrowing	Repayment of loans (reduces a liability)
Subsidies	Purchase of land, machinery, equipment
Grants given to state governments and other bodies	Loans given to states, public enterprises and others; investment in shares

⚠️ Grants to states are revenue expenditure, even if a state builds an asset with them

The asset test is applied from the spending government's books. When the Centre gives a grant, it owns no asset afterwards, so the grant is revenue expenditure for the Centre — even if the state uses it to build a school. A loan to a state is different: the Centre now holds a claim on the state, which is an asset, so the loan is capital expenditure.

The Three Deficits — and What Each One Tells You

Formula and meaning
Deficit	Formula	What it shows
Revenue deficit	Revenue expenditure − revenue receipts	The government is borrowing or selling assets to meet day-to-day, consumption-type spending
Fiscal deficit	Total expenditure − (revenue receipts + non-debt-creating capital receipts)	The government's total borrowing requirement for the year
Primary deficit	Fiscal deficit − interest payments	Borrowing needed for spending other than interest on past debt — the current year's own shortfall

Non-debt-creating capital receipts are the capital receipts that are not borrowing: recovery of loans and disinvestment proceeds. Worked, in ₹ crore: revenue receipts 800, revenue expenditure 1,000, capital expenditure 400, recovery of loans 50, disinvestment 30, interest payments 150. Revenue deficit = 1,000 − 800 = 200. Total expenditure = 1,000 + 400 = 1,400; receipts other than borrowing = 800 + 50 + 30 = 880; fiscal deficit = 1,400 − 880 = 520, which is exactly what must be borrowed. Primary deficit = 520 − 150 = 370.

🎯 Why deficits matter

Borrowing today means interest tomorrow, and interest is revenue expenditure — so a large fiscal deficit raises future revenue deficits and can feed on itself. Heavy government borrowing can also push up interest rates and leave less saving for private investment, which is called crowding out. A deficit is easier to defend when the borrowing finances capital expenditure that raises future output. To bind itself, the Centre enacted the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, committing it to reduce the fiscal deficit and eliminate the revenue deficit over time.

🧠 Read a zero primary deficit correctly

If the primary deficit is zero, the fiscal deficit equals interest payments: the government is borrowing only to pay interest on what it borrowed before. Its current spending on everything else is fully covered by its own receipts.

Key takeaways

The budget's three objectives are allocation (public goods), redistribution and stabilisation.
Public goods are non-rival and non-excludable, which creates the free-rider problem.
A capital receipt creates a liability or reduces an asset — borrowing, recovery of loans, disinvestment; everything else is a revenue receipt.
Capital expenditure creates an asset or reduces a liability; interest, salaries, subsidies and grants are revenue expenditure.
Revenue deficit = revenue expenditure − revenue receipts.
Fiscal deficit = total expenditure − revenue receipts − non-debt capital receipts = the borrowing requirement.
Primary deficit = fiscal deficit − interest payments; a zero primary deficit means borrowing only to pay interest.

Practice questions (8)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Which of the following is a capital receipt of the government?
1. Proceeds from disinvestment in a public sector undertaking
2. Income tax collected
3. Dividends received from public enterprises
4. Interest received on loans given earlier to state governments
Show answer
Answer: A — Proceeds from disinvestment in a public sector undertaking
Selling shares in a public enterprise reduces an asset the government owns, which is the test of a capital receipt. Income tax is tax revenue, while dividends and interest are non-tax revenue — income that leaves the government's assets intact, so all three are revenue receipts.
Which of the following is revenue expenditure of the government?
1. Construction of a national highway
2. Interest paid on past borrowings
3. Repayment of a loan taken from the World Bank
4. A loan given to a state government
Show answer
Answer: B — Interest paid on past borrowings
Paying interest neither creates an asset nor reduces the debt itself, so it is revenue expenditure. A highway creates an asset, repaying a loan reduces a liability, and a loan to a state gives the Centre a claim on the state — all three are capital expenditure.
Revenue expenditure is ₹900 crore and revenue receipts are ₹750 crore. The revenue deficit is:
1. ₹1,650 crore
2. ₹750 crore
3. ₹150 crore
4. ₹900 crore
Show answer
Answer: C — ₹150 crore
Revenue deficit = revenue expenditure − revenue receipts = 900 − 750 = ₹150 crore. ₹1,650 crore adds the two figures, and the other two simply repeat one side of the account without taking the difference.
The fiscal deficit of a government is ₹600 crore and its interest payments are ₹250 crore. Its primary deficit is:
1. ₹850 crore
2. ₹600 crore
3. ₹250 crore
4. ₹350 crore
Show answer
Answer: D — ₹350 crore
Primary deficit = fiscal deficit − interest payments = 600 − 250 = ₹350 crore: the borrowing needed for this year's spending other than interest on old debt. ₹850 crore adds interest instead of removing it, and the other two figures are simply the givens restated.
A good that is non-rival and non-excludable in consumption is called:
1. A merit good
2. A public good
3. An inferior good
4. An intermediate good
Show answer
Answer: B — A public good
Non-rivalry (one person's use does not reduce another's) and non-excludability (non-payers cannot be kept out) together define a public good, such as national defence, and they are why the budget rather than the market provides it. An inferior good is defined by how demand responds to income, and an intermediate good by its use in production — neither concept is about rivalry.
The fiscal deficit of a government is best described as:
1. The excess of revenue expenditure over revenue receipts
2. The interest the government must pay in the year
3. The government's total borrowing need for the year
4. The difference between exports and imports
Show answer
Answer: C — The government's total borrowing need for the year
Fiscal deficit is total expenditure less all receipts that are not borrowing, so it equals what the government must borrow to close the gap. The excess of revenue expenditure over revenue receipts is the revenue deficit, interest alone is the difference between the fiscal and primary deficits, and exports minus imports belongs to the balance of payments.
In ₹ crore: revenue receipts 800, revenue expenditure 1,000, capital expenditure 400, recovery of loans 50, disinvestment 30. The fiscal deficit is:
1. ₹600 crore
2. ₹200 crore
3. ₹680 crore
4. ₹520 crore
Show answer
Answer: D — ₹520 crore
Total expenditure = 1,000 + 400 = 1,400; non-borrowed receipts = 800 + 50 + 30 = 880; fiscal deficit = 1,400 − 880 = ₹520 crore. ₹600 crore leaves out the two non-debt capital receipts, ₹200 crore is the revenue deficit, and ₹680 crore adds those receipts to the gap (1,400 − 800 + 80) instead of subtracting them.
If the primary deficit of a government is zero, it means that:
1. It borrows only to pay interest on past debt
2. The government has no borrowing at all in the year
3. The revenue deficit must also be zero
4. The government has repaid all its past debt
Show answer
Answer: A — It borrows only to pay interest on past debt
Primary deficit = fiscal deficit − interest, so a zero primary deficit means the fiscal deficit equals interest payments: all of the year's borrowing goes to service old debt. Borrowing is not zero unless interest is also zero, the revenue deficit is a separate measure that can still be positive, and nothing has been repaid.