The correct answer is 1 only. Explanation & Key Takeaways: Capital expenditure • It is the expenditure by the government for the development of fixed assets. • If an item has a useful life of more than one year, it is capitalized (i.e., can be considered CapEx). Capital expenditure is a payment for goods or services recorded - or capitalized - on the balance sheet. • Capital expenditure is used to create assets or to reduce liabilities. • It consists of: Long-term investments by the government in creating assets such as roads and hospitals, and • The money was given by the government in the form of loans to states or repayment of its borrowings. • Therefore, Acquiring new technology is considered a capital expenditure as it will generate profit in the future time and helps in the creation of new assets. Hence, Statement 1 is correct. • Debt Financing and equity financing are considered under capital expenditure. Hence, Statement 2 is not correct. Important Notes: 1. Capital Expenditure (CapEx) • Definition: Expenses incurred to acquire, enhance, or extend the life of physical assets, which provide benefits over a long period. Examples include land, buildings, machinery, and infrastructure. • Purpose: To increase the future earning capacity of the government or business and develop its capital stock. • Characteristics: • Long-Term Benefits: CapEx leads to the creation of assets that provide utility over several years. • Non-Recurring: Typically involves a large, infrequent outlay of funds. • Capitalization: Recorded as an asset on the balance sheet; its value is depreciated or amortized over its useful life. • Examples: • Construction of roads, bridges, and schools. • Purchase of machinery, equipment, or land. • Investments in public sector undertakings (PSUs). • Impact on Government Finance: • Leads to asset creation and economic growth. • Helps in infrastructure development and public welfare. • Initial increase in government debt if financed by borrowing, but potential future revenue can offset this. 2. Revenue Expenditure (RevEx) • Definition: Short-term expenses that are necessary for the daily operations and maintenance of government services. These do not create assets nor provide benefits beyond the current fiscal year. • Purpose: To meet the current administrative and operational expenses, maintain existing assets, and provide public services. • Characteristics: • Short-Term Benefits: Expenditure benefits are realized within the fiscal year. • Recurring Nature: Often involves routine payments like salaries, subsidies, pensions, and maintenance costs. • Expense Recognition: Directly recorded in the income statement, reducing the surplus or increasing the deficit. • Examples: • Salaries of government employees. • Interest payments on government loans. • Subsidies (like food and fuel subsidies) and pensions. • Maintenance of government buildings and infrastructure. • Impact on Government Finance: • Does not lead to asset creation but is crucial for providing essential public services. • Excessive revenue expenditure can lead to higher fiscal deficits if not managed efficiently.