Consider the following statements about Union Government's Expenditure on revenue account and effective capital expenditure: 1. Effective capital expenditure as percentage of GDP has increased from 2020 – 21 to 2023 – 24. 2. Expenditure on revenue account as percentage of GDP has increased from 2020 – 21 to 2023 – 24. Which of the statements given above is/are correct?

Correct — A, 1 only. Effective capital expenditure is a composite the Union Budget itself publishes — capital expenditure proper plus the grants-in-aid the Centre gives States and other bodies for the creation of capital assets — and Budget at a Glance prints it as a single numbered line. It came to ₹6,57,182 crore in 2020-21 and ₹12,53,111 crore in 2023-24, very nearly double. The denominators are fixed by the same two documents without any outside estimate: the 2020-21 fiscal deficit of ₹18,18,291 crore is printed as 9.2 per cent of GDP, which puts nominal GDP that year at about ₹197.6 lakh crore, and the 2023-24 fiscal deficit of ₹16,54,643 crore is printed as 5.6 per cent, which puts it at about ₹295.5 lakh crore. Effective capital expenditure therefore moved from roughly 3.3 per cent of GDP to roughly 4.2 per cent, and statement 1 stands. Statement 2 fails, and it fails in the way that makes this item worth solving rather than recalling. Expenditure on the revenue account did grow in rupees, from ₹30,83,519 crore to ₹34,94,252 crore. That is a rise of about 13 per cent set against a nominal GDP that grew by about half over the same three years, so as a share of GDP the revenue account shrank — from roughly 15.6 per cent to roughly 11.8 per cent.

• (b)2 only — Exactly inverts the paper's finding. Revenue account spending is the line that fell as a share of GDP, and effective capital expenditure is the one that climbed.
• (c)Both 1 and 2 — The tempting pick for anyone who reads both lines in rupee terms, where both did grow. Statement 2 is written as a share of GDP, and on that measure the revenue account went the other way.
• (d)Neither 1 nor 2 — Rejects statement 1, which is the well-documented capital-expenditure push of these years — the effective capital expenditure line nearly doubled in rupees while GDP grew by about half, so its share had to rise.

The Union Budget splits spending in two. Revenue expenditure neither creates an asset nor extinguishes a liability — salaries, pensions, interest payments, subsidies, and grants meant for running costs. Capital expenditure creates an asset or reduces a liability — highways, railway lines, defence equipment, loans to States. Effective capital expenditure was introduced as its own line from the Budget of 2021-22 to capture a third thing that neither category handles well: money the Centre hands over as a grant, which the accounting rules book as revenue expenditure, but which the recipient actually spends on building an asset. Adding those grants back to capital expenditure gives a fuller measure of asset creation financed by the Union Government.

Two habits of reading decide this item. The first is remembering that 2020-21 is the pandemic year, so any ratio taken to GDP for that year sits at an artificial peak — relief spending surged while nominal GDP shrank, and total Union expenditure that year was about 17.8 per cent of GDP against about 15.0 per cent in 2023-24. A candidate who pictures the revenue account as 'always rising' will be right about the rupees and wrong about the share. The second is that a statement written as a percentage of GDP is a statement about a ratio, so the denominator has to be carried through the reasoning. One honest caveat about the arithmetic: Budget at a Glance does not print these two lines as percentages of GDP, only the deficits, so the shares have to be computed. Backing the GDP out of the deficit percentages the same document prints keeps the whole calculation inside one primary source, which is why the figures here are given as 'about'. The direction of travel is not close in either case — a gap of nearly four percentage points on the revenue side and nearly one on the capital side.

• Effective capital expenditure = capital expenditure + grants-in-aid for the creation of capital assets. It became a separate line in Budget at a Glance from 2021-22.
• 2020-21 Actuals: expenditure on revenue account ₹30,83,519 crore, capital account ₹4,26,317 crore, grants for capital assets ₹2,30,865 crore, effective capital expenditure ₹6,57,182 crore.
• 2023-24 Actuals: expenditure on revenue account ₹34,94,252 crore, capital account ₹9,49,195 crore, grants for capital assets ₹3,03,916 crore, effective capital expenditure ₹12,53,111 crore.
• The fiscal deficit was 9.2 per cent of GDP in 2020-21 and 5.6 per cent in 2023-24; the revenue deficit fell from 7.3 per cent to 2.6 per cent over the same period.
• Interest payments alone were ₹10,63,872 crore in 2023-24, close to a third of the entire revenue account — which is why the revenue side is hard to compress quickly.

• Treating a rise in rupees as a rise in the share of GDP. Between 2020-21 and 2023-24 nominal GDP grew about 50 per cent, so a line had to grow faster than that to gain share.
• Using 2020-21 as an ordinary base year. Nominal GDP was depressed and relief spending inflated, so every expenditure ratio for that year reads high.
• Confusing effective capital expenditure with capital expenditure. The effective figure is the larger of the two because it adds back grants for asset creation.

Usually as a two-statement item on the direction of a budget aggregate measured against GDP, or as a definition item asking what is added to or subtracted from a particular deficit.

• practice — not a real PYQ

  In the Union Budget, 'effective capital expenditure' is arrived at by adding capital expenditure to which one of the following?

  • (a)Interest payments
  • (b)Grants-in-aid for creation of capital assets
  • (c)Recovery of loans
  • (d)Disinvestment receipts

  Answer(b) Grants-in-aid for creation of capital assets — these are booked as revenue expenditure by the accounting rules, but the recipient spends them on building assets, so the Budget adds them back.

• practice — not a real PYQ

  The Union Government's fiscal deficit stood at 9.2 per cent of GDP in 2020-21 and 5.6 per cent in 2023-24. Which one of the following best explains the sharp figure for 2020-21?

  • (a)Nominal GDP contracted while pandemic relief spending rose
  • (b)Interest payments were suspended for the year
  • (c)Tax rates were raised across the board
  • (d)The Centre stopped all capital expenditure

  Answer(a) Nominal GDP contracted while pandemic relief spending rose — the ratio was pushed up from both ends at once, which is why 2020-21 makes a misleading base year.