Consider the following statements: [Fiscal Policy]

I. Capital receipts create a liability or cause a reduction in the assets of the Government.

II. Borrowings and disinvestment are capital receipts.

III. Interest received on loans creates a liability of the Government.

Which of the statements given above are correct?

The correct option is I and II only.

Let us analyze each statement step-by-step to understand why this is the correct answer:

1. Analysis of Statement I:
Capital receipts refer to government receipts that either create a liability or cause a reduction in the financial assets of the government. For example, when the government borrows money, it creates a liability to pay it back. Similarly, when the government sells its shares in a public sector undertaking (disinvestment), it reduces its assets. Therefore, Statement I is correct.

2. Analysis of Statement II:
Borrowings create a future liability for the government to repay the debt, and disinvestment (selling off public sector assets) leads to a reduction in government assets. Since both meet the criteria of either creating a liability or reducing assets, they are classified as capital receipts. Therefore, Statement II is correct.

3. Analysis of Statement III:
Interest received on loans granted by the government to states or other entities does not create any liability for the government, nor does it reduce the government's assets. Instead, it is a regular, recurring source of income categorized under non-tax revenue receipts (revenue receipts). Therefore, Statement III is incorrect.

Since Statements I and II are correct and Statement III is incorrect, the correct option is "I and II only".