Revision summary
Revenue Budget covers tax and non-tax receipts and spending that does not create assets. Capital Budget covers borrowings, disinvestment, loan recoveries, and asset-creating outlays. Salaries, interest, and subsidies sit on the revenue side; roads, equity, and loans sit on the capital side. A revenue deficit means borrowing to consume, not only to invest. FRBM reading needs both splits, not a single deficit number.
Model answer
Copper italics in this answer — like this — are the key facts. Each one is unpacked in the Facts & figures rail.
Introduction
The Union Budget’s Annual Financial Statement splits government accounts into a Revenue Budget and a Capital Budget. The first is the cost of running the year. The second is borrowing, assets, and loans that change the government’s balance sheet.
Body
The distinction
- The Revenue Budget records receipts that do not create a liability or reduce an asset, and spending that does not create an asset or reduce a liability.
- The Capital Budget records receipts that create a liability or reduce an asset, and spending that creates an asset or reduces a liability.
- A salary or subsidy is revenue expenditure. A highway, a defence capital store, or a loan to a State is capital expenditure.
- Tax collected is a revenue receipt. A market borrowing or a disinvestment receipt is a capital receipt.
Revenue Budget components
- Revenue receipts are tax revenue (income tax, corporation tax, GST, Union excise, customs) and non-tax revenue (dividends, interest, fees, spectrum in some years, external grants).
- Revenue expenditure is interest, salaries, pensions, subsidies, grants to States that are not for capital assets, and the running cost of schemes such as food and fertiliser support.
- A revenue deficit means the government is borrowing to run the household, not only to build assets.
Capital Budget components
- Capital receipts include market borrowings, other debt, recovery of loans, and non-debt receipts such as disinvestment.
- Capital expenditure includes creation of infrastructure and defence capital, equity in public firms, and loans and advances to States, Union Territories, and public enterprises.
- The Fiscal Responsibility and Budget Management debate watches whether capital spending is protected when revenue spending is sticky.
Why the split matters
- Mixing the two hides whether the deficit is buying a road or paying yesterday’s interest.
- FRBM and Budget papers therefore print revenue deficit, fiscal deficit, and capital outlay as separate tests.
Flow diagram
flowchart TD B[Annual Financial Statement] --> R[Revenue Budget] B --> C[Capital Budget] R --> RR[Tax and non-tax receipts] R --> RE[Salaries interest subsidies] C --> CR[Borrowing disinvestment loan recovery] C --> CE[Assets and loans given]
Conclusion
The Revenue Budget is recurring income and running cost. The Capital Budget is debt, disinvestment, assets, and loans. Good public finance keeps the first from eating the second.
Quick related
Students also ask
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Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?
Next question on this syllabus topic (2020 · Q12). View answer →
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Is every grant to a State revenue expenditure?
Grants for current use are. Grants tied to State capital assets can be treated as capital. The Budget documents specify the head.
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Are borrowings revenue?
No. Market borrowing is a capital receipt because it creates a repayment liability.
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