Grants for creation of capital assets
Grants for Creation of Capital Assets refer to the financial assistance provided by the Central or State Government to various agencies, institutions, or local bodies for the specific purpose of acquiring, constructing, or developing fixed assets that contribute to long-term economic and social development. Such grants are an important component of public expenditure in India and are classified under Plan (or Capital) Expenditure in the government’s budget.
These grants enable the creation of durable infrastructure, such as schools, hospitals, roads, irrigation systems, and industrial facilities, thereby generating public wealth and supporting sustainable growth.
Concept and Definition
In simple terms, a grant for creation of capital assets means a non-repayable financial transfer from the government that results in the formation or enhancement of a capital asset — a tangible or intangible property that has future economic value.
According to the Indian Government Accounting Standards (IGAS-2) and the General Financial Rules (GFR), 2017, such grants are defined as:
“Grants-in-aid given for the specific purpose of creation of capital assets, which shall include expenditure incurred on acquisition, construction, or development of physical assets such as buildings, roads, irrigation, machinery, or other productive assets.”
Nature and Classification
Grants for creation of capital assets differ from ordinary grants-in-aid (revenue grants) because they are meant for asset formation rather than meeting day-to-day operational expenses.
1. Capital vs Revenue Grants
| Basis | Capital Grants | Revenue Grants |
|---|---|---|
| Purpose | To create or acquire capital assets (infrastructure, equipment) | To meet recurring or operational expenditure (salaries, maintenance, subsidies) |
| Outcome | Results in formation of durable assets | No asset creation |
| Budget Head | Classified as Capital Expenditure | Classified as Revenue Expenditure |
| Example | Grant for building a hospital or purchasing machinery | Grant for running a hospital or paying staff salaries |
2. Plan and Non-Plan Context
Before 2017, such grants were categorised under Plan Expenditure to support development programmes during Five-Year Plans. Post-2017, with the discontinuation of the plan–non-plan distinction, they are now classified under Capital Expenditure in the Outcome-Based Budgeting framework.
Objectives of Grants for Creation of Capital Assets
- Infrastructure Development:To promote construction of public infrastructure such as roads, bridges, schools, and hospitals.
- Balanced Regional Growth:To support the development of backward or underdeveloped regions by funding local projects.
- Support to Local Bodies:To empower Panchayati Raj Institutions (PRIs), Urban Local Bodies (ULBs), and municipal corporations to develop public facilities.
- Promotion of Productive Capacity:To assist public sector enterprises, cooperatives, and development agencies in creating productive assets that generate long-term income.
- Socio-Economic Development:To create capital assets that improve quality of life, such as rural electrification, water supply, sanitation, and housing.
Examples of Grants for Creation of Capital Assets
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Infrastructure Grants:
- Grants to States for construction of roads, bridges, and public transport facilities under Pradhan Mantri Gram Sadak Yojana (PMGSY).
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Health and Education:
- Funds for building hospitals, health centres, and schools under National Health Mission (NHM) or Samagra Shiksha Abhiyan.
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Rural and Urban Development:
- Grants to Panchayats and municipalities for asset creation under 14th and 15th Finance Commission recommendations.
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Agriculture and Irrigation:
- Assistance for creation of irrigation canals, cold storage facilities, and agricultural research centres.
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Industrial and Energy Projects:
- Grants for setting up renewable energy projects, industrial parks, or technology centres.
Accounting and Budgetary Treatment
The Government of India’s accounting system classifies grants for capital asset creation under Capital Expenditure in the Consolidated Fund of India.
1. Recording in Accounts:
- The expenditure is booked under a separate Capital Outlay head.
- Grants are released in instalments based on utilisation certificates from the recipient agencies.
2. Conditions of Utilisation:
- The recipient must use the grant strictly for the purpose of creating the asset.
- The asset created should remain in public ownership and be used for the intended public purpose.
- Any diversion of funds is treated as financial irregularity and subject to audit objection.
3. Audit and Monitoring:
- The Comptroller and Auditor General of India (CAG) audits such grants to ensure accountability and proper utilisation.
- Ministries are required to submit Physical and Financial Progress Reports (PFPRs) and Outcome Statements annually.
Grants under Finance Commission Recommendations
The Finance Commissions of India have played a key role in recommending grants for creation of capital assets to states and local bodies.
14th Finance Commission (2015–2020):
- Recommended basic and performance grants to local bodies, with emphasis on asset creation and maintenance.
- Focused on strengthening rural infrastructure and urban amenities.
15th Finance Commission (2021–2026):
- Continued support through Grants for Health, Education, and Infrastructure.
- Mandated that at least 50% of grants to local bodies should be used for the creation and maintenance of capital assets.
Importance of Grants for Creation of Capital Assets
- Promotes Capital Formation:Contributes to the nation’s physical and social infrastructure, leading to economic growth.
- Enhances Productivity:Durable assets improve productivity in agriculture, industry, and services.
- Ensures Sustainable Development:Investments in health, education, and energy sectors support long-term human development.
- Empowers Local Governance:Provides Panchayats and municipalities with resources for developmental works.
- Improves Public Service Delivery:Facilities like roads, hospitals, and sanitation systems improve citizens’ quality of life.
- Fiscal Responsibility and Efficiency:Ensures that public funds are utilised for productive, non-recurring expenditures rather than consumptive spending.
Challenges and Issues
Despite their importance, several challenges hinder the effective utilisation of these grants:
- Delayed Release and Utilisation:Bureaucratic delays in fund transfer affect timely implementation of projects.
- Diversion of Funds:In some cases, funds meant for asset creation are used for revenue expenditure.
- Weak Monitoring Mechanisms:Lack of proper tracking of physical assets created leads to inefficiencies.
- Incomplete Projects:Delays in project execution often result in partially completed or unused assets.
- Maintenance Deficiency:Created assets often suffer from poor maintenance due to lack of dedicated maintenance funds.
- Lack of Transparency:Inadequate public disclosure and performance evaluation reduce accountability.
Measures for Effective Implementation
To improve the effectiveness of such grants, the following steps have been recommended:
- Strict adherence to Public Financial Management System (PFMS) for tracking fund flow.
- Preparation of detailed Asset Registers by all implementing agencies.
- Linking disbursements to measurable outcomes and performance indicators.
- Strengthening local-level audit and monitoring systems.
- Encouraging participatory planning involving local communities to ensure asset relevance and sustainability.
Illustrative Example
Suppose the Central Government releases a grant of ₹50 crore to a State Government for constructing primary healthcare centres under the National Health Mission. The expenditure on land, building construction, and medical infrastructure constitutes capital expenditure, as it results in the creation of durable public assets. The maintenance and operation costs incurred later would, however, fall under revenue expenditure.
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