Q. Consider the following statements:
I. Capital receipts create a liability or cause a reduction in the assets of the Government.
II. Borrowings and disinvestment are capital receipts.
III. Interest received on loans creates a liability of the Government.
Which of the statements given above are correct?
(a) I and II only
(b) II and III only
(c) I and III only
(d) I, II and III
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Answer & Explanation:
✅Correct Answer: (a) I and II only
In public finance, government receipts are broadly classified into revenue receipts and capital receipts. This classification is essential for understanding the financial operations of the government and how it manages its income and liabilities.
Statement I: “Capital receipts create a liability or cause a reduction in the assets of the Government.”
✅ Correct.
This is the very definition of capital receipts. These are receipts that either:
- Create a liability (e.g., borrowings by the government), or
- Reduce the financial assets (e.g., disinvestment or recovery of loans).
Unlike revenue receipts (like tax revenues), capital receipts either increase the government’s obligations or reduce its asset holdings. Hence, this statement is accurate.
Statement II: “Borrowings and disinvestment are capital receipts.”
✅ Correct.
This statement provides examples of capital receipts:
- Borrowings (such as loans from RBI or foreign governments) create liabilities.
- Disinvestment (selling government stakes in public sector undertakings) reduces assets.
Since both examples match the definition of capital receipts, this statement is also correct.
Statement III: “Interest received on loans creates a liability of the Government.”
❌ Incorrect.
Interest received on loans is revenue receipt, not capital receipt.
Moreover, it does not create a liability; instead, it is an income for the government. For example, when the central government receives interest from states on loans it gave earlier, it’s a form of revenue inflow, not a liability. So, this statement is wrong.
✅ Correct Answer: (a) I and II only
Statement III is incorrect due to the misunderstanding of the nature of interest income. It neither reduces assets nor increases liabilities; hence, it doesn’t qualify as a capital receipt.