Solution

● Statement 1 is Incorrect: Revenue Deficit is the difference between the government's revenue expenditure and revenue receipts. Revenue deficit neither creates assets nor reduces liabilities. Revenue Deficit implies that the government's current expenses are more than its current revenues and will have to use up the savings of other sectors of the economy to finance its consumption expenditure. ● Statement 2 is Correct: Those expenses of the government which either creates assets (physical or financial) or reduces liabilities are called capital expenditures. Capital expenditures include acquisition of land, building, machinery, equipment, purchase of shares by the government and loans and advances by the central government to state and union territory governments, PSUs and other parties. ● Statement 3 is Correct: There are several grants given by the Central Government to the States / UTs which come under revenue expenditure for the central government but some of these grants create assets, which are owned by the State government and not by the Central government. Hence, for the Central Government it is basically revenue expenditure but ultimately it is creating assets for the State government. Hence, “effective revenue deficit" is calculated which excludes such grants which are used for creation of assets.