Revenue and Capital Expenditure

Revenue expenditure finances the government’s current operations, services and transfers without creating a corresponding asset or reducing a liability. Capital expenditure creates or acquires physical or financial assets, or reduces existing liabilities. The classification depends on the expenditure’s accounting effect, not simply on its size, frequency or economic importance.

Constitutional and accounting basis

Article 112 requires the Union’s Annual Financial Statement to distinguish expenditure on the revenue account from other expenditure; Article 202 makes the corresponding provision for states. Government accounts therefore separate revenue expenditure from capital expenditure when presenting budgets.

How the two are classified

• Revenue expenditure includes salaries, pensions, subsidies, interest payments, maintenance expenses and grants-in-aid, because these meet current obligations or support ongoing services.
• Capital expenditure includes spending on land, buildings, machinery and infrastructure, because it creates or acquires durable physical assets.
• Government investment in shares and the extension of loans and advances create financial assets and are treated as capital expenditure.
• Repayment of borrowings is capital expenditure because it reduces a financial liability.

Fiscal significance and an accounting exception

Revenue expenditure exceeding revenue receipts produces a revenue deficit, indicating that current receipts are insufficient for current expenditure. Capital expenditure generally expands public assets or improves the balance sheet and can support future productive capacity.

• All grants-in-aid are recorded as revenue expenditure, even when the recipient uses them to create assets.
• Budget documents use effective capital expenditure to combine direct capital expenditure with grants-in-aid given for creating capital assets.
• A recurring payment is not automatically revenue expenditure, and a one-time payment is not automatically capital expenditure; the accounting effect is decisive.

How UPSC asks this