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Components of Budget: Revenue Budget and Capital Budget | UPSC Economy Notes

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Components of Budget: Revenue Budget and Capital Budget | UPSC Economy Notes

Components of Budget: Revenue Budget and Capital Budget

A government budget is an annual financial statement that shows the estimated receipts and expenditure of the government for a financial year. In India, the Union Budget is presented under Article 112 of the Constitution as the Annual Financial Statement.

The article 112 specifies that the budget must distinguish the expenditures on revenue account from other expenditures (capital account). Therefore, the budget comprises of the Revenue Budget and Capital Budget.

Revenue Budget

Revenue Receipts

Those receipts of the government which neither creates a liability for the government nor reduces the assets (physical or financial) of the government are called revenue receipts.
Revenue receipts are non-redeemable i.e., they cannot be reclaimed from the government.
Revenue receipts can be of two types.
- Tax Revenues consist of direct and indirect taxes of the central government.
- Non-Tax Revenue consists of interest receipts on account of loans given by the central government, dividend and profits on investments made by the central government (i.e., PSUs), fees and fines and other receipts for services rendered by the government like passport fees etc.
  - Grants-in-aid from foreign countries and international organisations are also part of the non-tax revenue.

Revenue Expenditure

Those expenses of the government which neither creates any asset (physical or financial) nor reduces any liabilities are called revenue expenditure.
Revenue 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 Budget

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.
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.

The government budget is an important instrument of fiscal policy because it shows how the government raises resources and spends them for administration, welfare and development. Its two major components, Revenue Budget and Capital Budget, help distinguish between routine income-expenditure and asset-liability related transactions.

Revenue receipts and revenue expenditure are linked with the regular functioning of the government, while capital receipts and capital expenditure are linked with borrowings, asset creation, loan recovery and liability reduction. Understanding these components is essential for analysing the quality of government spending, fiscal health and the developmental role of the budget

Sample Mains Question

Q1. Explain the major components of the government budget. How is the Revenue Budget different from the Capital Budget?
(150 words, 10 marks)

Q2. Distinguish between revenue receipts and capital receipts with suitable examples. Why is this classification important in government budgeting?
(150 words, 10 marks)

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