Which of the following is a part of the capital receipt of the Government of India? 1. Disinvestment receipts 2. Interest receipts 3. Small savings 4. Net market borrowing Select the answer using the code given below:

Correct — D, 1, 3 and 4 only. A receipt is a capital receipt if it creates a liability for the government or reduces its assets. Disinvestment proceeds reduce an asset, since the government parts with equity it held, so item 1 qualifies as a non-debt capital receipt. Small savings collected through the National Savings Certificate, the Public Provident Fund and similar instruments are money the government must repay, so they create a liability and are capital receipts routed through the Public Account. Net market borrowing is the largest capital receipt of all and is a liability by definition. Interest received on loans the government has advanced is the odd one out: it neither creates a liability nor reduces an asset, and it is classified as non-tax revenue.

• (a)1 and 3 only — It leaves out market borrowing, which is the single largest capital receipt in the Union budget and the most obvious liability-creating item on the list.
• (b)2 and 4 only — It admits interest receipts, which are revenue and not capital, and drops both disinvestment and small savings.
• (c)1, 2, 3 and 4 — It takes interest receipts along with the rest. Interest earned on loans given by the government is income, and income does not create a liability or shrink an asset.

Union receipts divide into revenue receipts and capital receipts. Revenue receipts are tax revenue plus non-tax revenue such as interest, dividends and fees, and they neither create a liability nor reduce an asset. Capital receipts do one or the other, and they split further into debt-creating receipts — market borrowing, small savings, provident funds, external assistance — and non-debt capital receipts, chiefly disinvestment proceeds and recovery of loans. The fiscal deficit is financed by the debt-creating half, which is why the distinction is not merely a matter of accounting labels.

The test is a single question applied four times, and it is faster than any list. Does this money have to be paid back, or does it come from selling something we owned? Disinvestment is a sale, small savings and borrowing are debts, and interest received is simply earnings on money already lent. Note also that the government's interest payments are revenue expenditure for the same reason that interest receipts are revenue receipts.

• A capital receipt either creates a liability or reduces an asset of the government.
• Disinvestment proceeds and recovery of loans are non-debt capital receipts.
• Small savings, provident funds, market borrowing and external assistance are debt-creating capital receipts.
• Interest received on loans given by the government is non-tax revenue receipt.
• The fiscal deficit equals total expenditure less revenue receipts and non-debt capital receipts.

• Classifying interest receipts as capital because they relate to loans.
• Forgetting that small savings flow through the Public Account and are still a liability.
• Treating recovery of loans as revenue; it reduces an asset and is a non-debt capital receipt.

A four-item classification question where one item is placed to see whether a candidate is applying the definition or recalling a list.

• practice — not a real PYQ

  Which one of the following is a non-debt capital receipt of the Government of India?

  • (a)Market borrowing
  • (b)Recovery of loans
  • (c)Small savings
  • (d)External assistance

  Answer(b) Recovery of loans — it reduces an asset without creating a liability.

• practice — not a real PYQ

  Interest payments made by the Government of India are classified as

  • (a)Capital expenditure
  • (b)Revenue expenditure
  • (c)A non-debt capital receipt
  • (d)A debt-creating capital receipt

  Answer(b) Revenue expenditure — and they form the largest single item of it.