As per the Article 112 of the Indian constitution, the Annual Budget has to create a distinction between the expenditure of the government on the revenue account through other expenditures. To solve this the annual Budget consists of Revenue Budget and Capital Budget.
Capital Budget comprises of:
- Capital Receipts: These are the loans which are taken by the government form the Reserve Bank of India(RBI), public (market loans), through the sale of treasury bills, loans from foreign countries or banks etc
- Capital Payments: All the expenditure for acquiring various assets like machinery, land, technology, investment is share market and the loans acquired by the state government from the centre are called capital payments.
Objectives of Capital Budget
- Assessment of the source of capital expenditure
- Find the amount of capital required for capital expenditure
- Assessment of the profitability of capital expenditure
- Selection of projects/ schemes for capital investment
- Check the merits and demerits of all the proposals and choose the best among them.
Limitations of Capital Budgeting
The following are the limitations of capital budgeting.
- The estimation of a requirement of capital budget may increase and decrease due to factors which cannot be controlled by anyone. So, the economics of the investment may also change accordingly.
- Many factors which aren’t related to financial capabilities may play a game-changing role in the success of the implementation of a certain scheme or project or investment of the government.