Debt-creating capital receipts

Indian Economy glossary

Also called: Borrowings and other liabilities · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"

Meaning

Debt-creating capital receipts are money the government receives by taking on a liability. A liability is a debt it must repay later, usually with interest. Examples are market borrowings, small savings and external loans. In the Budget they appear as "Borrowings and other liabilities".

They matter because their yearly total is the fiscal deficit, the gap the government fills by borrowing. Every rupee borrowed today also adds to future interest bills.

Formula: Fiscal deficit = Total expenditure − (Revenue receipts + Non-debt capital receipts) = Borrowings and other liabilities

Explanation

How a receipt becomes "debt-creating"

  • Two questions decide whether any receipt is a capital receipt: 1. Does it create a liability? That is, must the government repay it later? 2. Does it reduce an asset? That is, does the government sell or give up something it owns?

  • If either answer is yes, it is a capital receipt.

  • A receipt is debt-creating when the answer to Q1 is yes.

  • Example: selling G-secs brings in cash. It creates a liability and reduces no asset. So it is a capital (debt) receipt.

  • These are the opposite of revenue receipts, which are non-redeemable. The government never pays revenue receipts back.

Types (components)

  • Market borrowings:
  • G-secs (dated government securities): long-term bonds that the government sells to investors.

  • T-bills (Treasury Bills): short-term borrowing for up to one year.

  • Small savings: people's deposits in schemes such as Post Office deposits and PPF. This money reaches the Centre through the NSSF (National Small Savings Fund). The depositor can claim it back, so it is a liability.

  • External loans: loans from foreign governments and multilateral bodies, i.e. international lenders such as development banks.
  • Other liabilities: that is why the Budget label reads "borrowings and other liabilities". It covers every obligation to repay, not only formal loans.

What makes it rise or fall

  • Borrowing is the balancing item. It fills whatever gap is left after revenue and non-debt receipts are counted.
  • It rises when:
  • Spending goes up while receipts stay the same.
  • Tax revenue falls short.

  • Non-debt receipts fall short, e.g. disinvestment misses its target.

  • It falls when:

  • Tax collections are strong.
  • Non-tax windfalls come in, such as a large RBI surplus transfer.

  • Disinvestment or asset monetisation brings in more money.

  • The chain from a shortfall:

  • Disinvestment falls ₹20,000 crore short and spending does not change.
  • → Non-debt capital receipts fall by ₹20,000 crore.
  • → Borrowing must rise by ₹20,000 crore.
  • → The fiscal deficit rises by the same ₹20,000 crore.

Worked example (2026-27 BE) [2]

Item ₹ crore
Total expenditure 53,47,315
Revenue receipts 35,33,150
Non-debt capital receipts 1,18,397
Receipts excluding borrowings (35,33,150 + 1,18,397) 36,51,547
Borrowings = 53,47,315 − 36,51,547 16,95,768
  • Budgeted borrowing is exactly ₹16,95,768 crore, the same as the fiscal deficit. This equals 4.3% of GDP (2025-26 RE: 4.4%) [2].

In India

  • Where it appears: the Budget is the Annual Financial Statement under Art. 112. Borrowings are shown in its capital budget, the part that records changes in the government's assets and liabilities.
  • Law behind it: the FRBM Act, 2003 (Fiscal Responsibility and Budget Management Act) limits how much the government may borrow. It does this by setting targets for the fiscal deficit.
  • Who manages it:
  • The RBI manages the Centre's market borrowing by issuing G-secs and T-bills for it.

  • Small savings flow in through the NSSF.

  • Latest size: borrowings are ₹16,95,768 crore (2026-27 BE), i.e. a fiscal deficit of 4.3% of GDP [2].

  • Cost of past debt: interest payments take about 40% of revenue receipts (2026-27 BE) [2]. Roughly ₹40 of every ₹100 the government earns goes to interest on old borrowing.
  • Path ahead: the 16th Finance Commission recommends that the Centre bring its fiscal deficit down to 3.5% of GDP by 2030-31 [2].
  • Why borrowing can overshoot: the government expected to meet only 71.9% of its disinvestment target (2025-26 RE) [2]. The 2026-27 target is ₹80,000 crore [2]. Each shortfall has to be covered by extra borrowing.

Don't confuse with

  • Non-debt capital receipts (recovery of loans, disinvestment, asset monetisation): these reduce an asset, not create a liability. They lower the fiscal deficit. Debt receipts are how the fiscal deficit is financed.
  • Recovery of loans vs interest received: when a state repays the principal of a loan to the Centre, it is a non-debt capital receipt. The interest the Centre earns on that loan is non-tax revenue. Neither one is a debt-creating receipt.
  • Revenue receipts (taxes, dividends, fees): non-redeemable, meaning nobody gets a claim on the government. Debt receipts are redeemable, so they must be paid back.
  • Interest payment vs repayment of principal (the spending side): interest paid on borrowing is revenue expenditure. Repaying the principal is capital expenditure, because it reduces a liability.

Prelims Hooks

  • Debt-creating capital receipts = receipts that create a liability. Budget label: "Borrowings and other liabilities".
  • Small savings (NSSF), T-bills (up to one year), G-secs and external loans are all debt-creating.
  • Disinvestment, recovery of loans and asset monetisation are non-debt receipts. They are a common "which of the following" trap.
  • Fiscal deficit = Total expenditure − (Revenue receipts + Non-debt capital receipts) = Borrowings and other liabilities.
  • Budgeted borrowing is ₹16,95,768 crore = fiscal deficit of 4.3% of GDP (2026-27 BE) [2].
  • The RBI's surplus transfer is non-tax revenue (Section 47, RBI Act 1934), not a borrowing [3].

Mains Points

  • The debt–interest trap:
  • Borrowing today → larger debt stock → higher interest bills tomorrow.
  • Interest already takes about 40% of revenue receipts (2026-27 BE) [2], which leaves less for health, education and capital spending.

  • Steady deficit reduction toward the 16th FC's 3.5% of GDP by 2030-31 [2] needs tax buoyancy (tax revenue growing faster than GDP) and more non-debt receipts.

  • What the borrowing pays for:

  • Borrowing to build roads or ports creates assets that can raise future income and help repay the debt.
  • Borrowing to pay salaries, subsidies or interest adds debt without adding any asset.

  • So the use of borrowed money matters as much as its size. This links to FRBM's focus on the quality of spending.

  • Windfalls hide the real need to borrow:

  • Non-tax revenue was 14.3% above budget while net tax revenue was 5.7% below budget (2025-26 RE) [2].
  • A large RBI dividend can hide a tax shortfall. If it does not repeat, or if disinvestment misses its target (71.9% achieved, 2025-26 RE [2]), borrowing rises at once.
  • Heavy government borrowing can also push up bond interest rates. Private firms then find it costlier to borrow and invest. This is called crowding out.

Related concepts

Read more

Sources

  1. 1Class 12, Ch 5 "Government Budget and the Economy" (primary)
  2. 2PRS Legislative Research, Union Budget 2026-27 Analysisprsindia.org · tier 1
  3. 3PIB, Transfer of excess funds from RBI to Governmentpib.gov.in · tier 1