Q. Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets.

Model Answer: 

Capital Budget vs Revenue Budget: Components and Distinctions

Capital Budget and Revenue Budget are two fundamental components of the government’s annual financial statement, each serving distinct purposes in fiscal management.

Capital Budget:

• Definition: Focuses on long-term financial planning and asset creation
• Components:
1. Capital Receipts:
– Borrowings (e.g., government bonds)
– Recovery of loans
– Disinvestments (e.g., PSU stake sales)
2. Capital Expenditure:
– Acquisition of long-term assets (e.g., land, buildings)
– Infrastructure development (e.g., highways, ports)
– Investments in projects (e.g., power plants)

Revenue Budget:

• Definition: Deals with day-to-day operations and short-term financial needs
• Components:
1. Revenue Receipts:
– Tax revenue (e.g., income tax, GST)
– Non-tax revenue (e.g., dividends, fees)
– Grants from external sources
2. Revenue Expenditure:
– Salaries and pensions
– Subsidies (e.g., food, fertilizer)
– Interest payments on borrowings
– Maintenance of existing assets

Key Distinctions:
1. Time Horizon: Capital Budget is long-term, while Revenue Budget is annual
2. Nature of Transactions: Capital Budget involves asset creation or liability reduction; Revenue Budget covers recurring income and expenses
3. Economic Impact: Capital Budget influences long-term growth; Revenue Budget affects current consumption and services

Conclusion:
Both budgets are crucial for balanced fiscal management, ensuring immediate needs and future development are addressed effectively.