Q.Distinguish between revenue expenditure and capital expenditure.

The distinction turns on whether the spending creates a lasting asset (or reduces a liability) for the government or is simply consumed in the current year.

Revenue expenditure is spending incurred for the normal, recurring functioning of the government that does not create any physical or financial asset and does not reduce any liability. Examples include salaries and pensions of government employees, interest payments on public debt, subsidies, and grants for current purposes.

Capital expenditure, by contrast, either creates a durable asset (e.g. construction of roads, dams, schools, hospitals; purchase of machinery for a public sector undertaking) or reduces a liability (e.g. repayment of a loan previously raised). Because it adds to the productive or physical capacity of the economy (or improves the government's financial position), capital expenditure is generally regarded …

A common confusion is classifying a subsidy meant for creating productive capacity (like a capital subsidy to an industry) as capital expenditure by default — the correct test is always whether the government's own spend …