Previous Year Question
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?
I and II only
II and III only
I and III only
I, II and III
Correct Answer: A
Detailed Solution
Statement I is correct. Capital receipts are receipts that either increase the government’s liabilities or reduce its assets.
Capital receipts can be divided into two categories:
Debt-creating capital receipts: These create a new liability for the government. Market borrowings, Treasury Bills and other loans are examples.
Non-debt capital receipts: These do not create a new liability but reduce government assets. Recovery of loans and disinvestment are the principal examples.
Statement II is correct. Government borrowings are capital receipts because they create an obligation to repay the principal in the future.
Disinvestment is also a capital receipt. The government sells a part of its equity holding in a public-sector enterprise. This does not create a new debt liability, but it reduces the government’s financial asset or ownership interest. It is therefore a non-debt capital receipt.
Statement III is incorrect. Interest received by the government on loans is a revenue receipt. It does not create a liability for the government; rather, it constitutes government income.
A distinction must be made between interest received on loans and recovery of the principal amount. Interest received is a revenue receipt, whereas recovery of the principal is a capital receipt because it reduces the government’s outstanding loan asset.