Union Budget 2020: Capital Expenditure and Capital Receipts, explained

The Union Budget is a statement of the government's expenditure and receipts — where the government is getting its money from, and what it's spending its money on. Expenditure and receipts, however, can be of two types — revenue and capital.

To be classified as capital expenditure, money spent by the government must meet one of two conditions — create an asset or reduce liability.

If the government is building a metro line or a flyover, the money being spent is creating a tangible asset. This would hence count as capital expenditure. However, money being spent to service that metro line or flyover would not count as capital expenditure as it is not creating an asset.

Similarly, the government repaying loans counts as capital expenditure since it is reducing its liabilities — in this case, its borrowings. Money spent on paying the salaries of government employees, however, doesn't count as capital expenditure because it is not reducing any liability.

The conditions to be met for government income to be classified as capital receipts are the exact opposite — this money needs to either reduce an asset or increase liability.

An example of the first instance is when the government sells part of its stake in Public Sector Units. If the government is selling 1 percent of its stake in LIC for Rs 100 crore, for example, this is money coming into the government's kitty, but the value of its assets held is going down by Rs 100 crore. This would count as a capital receipt.

Similarly, if the government is borrowing money from the RBI or other countries, since it has to pay this money back, that creates a liability. Hence, borrowings also count as capital receipts.

Money spent or earned by activities that do not meet the conditions mentioned above are classified as revenue expenditure and revenue receipts.