Public expenditure can be classified as Revenue Expenditure and Capital Expender. Revenue Expenditure is ordinary routine type of expenditure incurred in running the administration.
It is current expenditure and includes the expenditure incurred in running the administration or in supplying routine services or in the collection of taxes, duties, fees, assessments, etc. as well as interest on public debt.
For instance, the revenue expenditure of the Government of India includes expenditure on civil administration, defence services, debt services, pensions, social and development services and other miscellaneous expenditure.
Similarly, the revenue expenditure of the States in India includes social and development expenditure on education, medical and public health, agriculture, veterinary and co-operation, expenditure on irrigation, electricity schemes, rural and community development, civil works, industries and supplies and other departmental expenditure. It also includes non-developmental expenditure as on collection of taxes, debt services, civil administration, famine, etc.
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Capital Expenditure, on the other hand, is of extraordinary nature. Maintenance of an asset for instance would be revenue expenditure, whereas acquisition or creation of an asset or addition thereto would come under capital expenditure.
Maintaining the existing irrigation works, therefore, is revenue expenditure but undertaking new multipurpose projects would be a capital expenditure. To maintain internal law and order and security from external aggression is revenue expenditure, but to fight a war is capital expenditure. The capital expenditure represents capital outlay both developmental and non- developmental.
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The Government of India for instance incurs some capital expenditure on defence, payment of commuted value of pensions, State trading schemes, railway construction, extension and improvement of post and telegraph facilities, civil aviation, irrigation and discharge of permanent debt, advances to States and other loans and advances.
Similarly, in the case of State Governments, capital expenditure includes capital outlay on multipurpose river valley schemes, irrigation and navigation, schemes of agricultural improvement and research, electricity schemes, road transport, buildings, roads and water works, industrial development. This is developmental capital expenditure.
But there is also non-development capital expenditure as on State trading, compensation to land owners consequent on abolition of zamindari and other miscellaneous financial transactions. Other items are discharge of permanent debt; repayment of loans to the Centre and of other loans as well as loans and advances by the State Governments.