Para 4.12 — MSO (A&E)
Original Rule Text
4.12 It must be remembered of course that although it may seem to be sound and prudent finance to meet any expenditure whether of a capital nature or otherwise from Revenue it must be a corollary of this action that the revenue derived from taxation and other revenue sources is sufficient to cover the expenditure debitable to it otherwise the debit to borrowed funds is merely disguised since in normal circumstances, revenue deficits must be financed from borrowings.
What This Means
Even though it may seem financially prudent to fund capital expenditure from revenue rather than borrowings, this only works if the government's revenue is actually sufficient to cover all charges. If revenue falls short, then any capital expenditure charged to revenue effectively disguises borrowing, because the resulting revenue deficit will ultimately need to be financed through borrowed funds anyway.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Meeting capital expenditure from revenue is sound only if revenue is sufficient to cover it
- 2If revenue is inadequate, charging capital expenditure to revenue merely disguises borrowing
- 3Revenue deficits must normally be financed from borrowings
- 4The true financial impact depends on whether revenue sources can sustain the additional burden
- 5This is a caution against superficial accounting practices that mask the real fiscal position
Practical Example
A state government with revenue of Rs. 80,000 crore and committed revenue expenditure of Rs. 78,000 crore decides to fund a Rs. 5,000 crore highway from revenue to avoid showing it as borrowed funds. This creates a revenue deficit of Rs. 3,000 crore, which the state must cover through borrowing. So the highway is effectively still funded by borrowings — the accounting just disguises this fact. The AG should point out this fiscal reality.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
Why is disguised borrowing a problem?▼
How should the AG handle such situations?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.