Public Expenditure and Economic Growth in India

PUBLIC EXPENDITURE AND ECONOMIC GROWTH WHAT IS PUBLIC EXPENDITURE? MEANING: Public expenditure refers to Government expenditure i. e. Government spending. It is incurred by Central, State and Local governments of a country. Spending by government , municipality, or any local authority. It covers things such as health, education or social services and is funded by tax revenue. It is one of the element that make up aggregate expenditure. Government spending or government expenditure is classified by economists into three main types.
Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (gross fixed capital formation), which usually is the largest part of the government gross capital formation.
Acquisition of goods and services is made through own production by the government (using the government’s labor force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. Government expenditures that are not acquisition of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments. Government spending can be financed by seignior age, taxes, or government borrowing.

DEFINITION: Public expenditure can be defined as, “The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure. ” Throughout the 19th Century, most governments followed laissez faire economic policies & their functions were only restricted to defending aggression & maintaining law & order. The size of public expenditure was very small. But now the expenditure of governments all over has significantly increased.
In the early 20th Century, John Maynard Keynes advocated the role of public expenditure in determination of level of income and its distribution. In developing countries, public expenditure policy not only accelerates economic growth & promotes employment opportunities but also plays a useful role in reducing poverty and inequalities in income distribution. ECONOMIC GROWTH Economic development is a broad term that generally refers to the sustained, concerted effort of policymakers and community to promote the standard of living and economic health in a specific area.
Such effort can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other initiatives. It should be noted that economic development differs from economic growth. Whereas economic development is a policy intervention endeavor with aims of economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP. An increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country’s economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries. A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces.
By Economic Growth we simply mean increase in per capita income or increase in GNP. In recent literature, the term economic growth refers to sustained increase in a country’s output of goods and services, or more precisely product per capita. Output is generally measured in terms of GNP. THEORIES RELATED TO PUBLIC EXPENDITURE AND ECONOMIC GROWTH Adam Smith wrote in the ‘Wealth of Nations’ that the government should restrict their activities to; 1. Defense against foreign aggression. 2. Maintenance of internal peace and order. 3.
Public development work. All other functions besides these were considered beyond the scope of the state & expenditure on them was treated as unjust & wasteful. But there had been a spectacular expansion in the functions of state & this resulted in phenomenal increase in public expenditure for this we shall take a look at contribution by Adolph Wagner & Peacock-Wiseman hypothesis. Adolph Wagner’s Law of Increasing State Activity Adolph Wagner, the German economist made an in depth study relating to rise in government expenditure in the late 19thcentury.
Based on his study, he propounded a law called “The Law of Increasing State Activity”. Wagner’s law states that “as the economy develops over time, the activities and functions of the government increase”. According to Adolph Wagner, “Comprehensive comparisons of different countries and different times show that among progressive peoples (societies), with which alone we are concerned; an increase regularly takes place in the activity of both the Central Government and Local Governments constantly undertake new functions while they perform both old and new functions more efficiently and more completely.
In this way economic needs of the people to an increasing extent and in a more satisfactory fashion, are satisfied by the Central and Local Governments. ” Wagner’s Statement Indicates Following Points 1. In Progressive societies, the activities of the central and local government increase on a regular basis. 2. The increase in government activities is both extensive and intensive. 3. The governments undertake new functions in the interest of the society. 4. The old and the new functions are performed more efficiently and completely than before. . The purpose of the government activities is to meet the economic needs of the people. 6. The expansion & intensification of government function & activities lead to increase in public expenditure. 7. Though Wagner studied the economic growth of Germany, it applies to other countries too both developed and developing. The Peacock-Wiseman Hypothesis Peacock and Wiseman conducted a new study based on Wagner’s Law. They studied the public expenditure from 1891 to 1955 in U. K. They found out that Wagner’s Law is still valid.
Peacock and Wiseman further stated that:- 1. “The rise in public expenditure greatly depends on revenue collection. Over the years, economic development results in substantial revenue to the governments, this enabled to increase public expenditure”. 2. There exists a big gap between the expectations of the people about public expenditure and the tolerance level of taxation. Therefore, governments cannot ignore the demands made by people regarding various services, especially, when the revenue collection is increasing at constant rate of taxation. 3.
They further stated that during the times of war, the government further increases the tax rates, and enlarges the tax structure to generate more funds to meet the increase in defense expenditure. After the war, the new tax rates and tax structures may remain the same, as people get used to them. Therefore, the increase in revenue results in rise in government expenditure. Conclusion on the State of Public Expenditure Wagner’s law and Peacock-Wiseman hypothesis emphasize on the fact that public expenditure has tendency to increase overtime. Welfare theory of Public Expenditure
The new welfare economics has highlighted the practical problems in knowing the true preferences’ of individuals and the interpersonal comparison of utility unless there is prior determination of optimum distribution of income of the community, there can be no hope for the determination of optimum level of public spending and the optimum distribution of tax burden. Neither the benefits approach nor the ability to pay approach, from this angle, has succeeded in providing a satisfactory solution for the determination of optimum public expenditure and the optimum distribution of tax burden.
Moreover, modern state does not inure public expenditure on providing ‘pure’ public goods alone but on innumerable the economic life of country. Under the policy of laissez-faire when the state was regarded as a police state, the role of public expenditure in the economic life of the people and community remained neglected. Its effect on production and distribution were ignored and it was also held that public expenditure should be kept at the minimum but today, with the change in the nature of state, the showing of pendulum has moved to the other side.
The theory of public expenditure has come into prominences a result of the failure of market mechanism to respond fully to the true needs of the society and conditions of full employment of human and natural resources. Production theory of Public Expenditure In economics, a public good is a good that is no rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability that no one can be effectively excluded from using the good.
In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful. For example, if one individual visits a doctor there is one fewer doctor’s visit for everyone else, and it is possible to exclude others from visiting the doctor. This makes doctor visits a rivaled and excludable private good. Conversely, breathing air does not significantly reduce the amount of air available to others, and people cannot be effectively excluded from using the air.
This makes air a public good, albeit one that is economically trivial, since air is a free good. A less straight-forward example is the exchange of MP3 music files on the internet: the use of these files by any one person does not restrict the use by anyone else and there is little effective control over the exchange of these music files and photo files. Non- rivalness and non-excludability may cause problems for the production of such goods. Specifically, most economists recognize that uncoordinated markets driven by parties working in their own self interest are unable to provide these goods in optimal quantities.
There is a good deal of debate and literature on how to measure the significance of public goods problems in an economy, and to identify the best remedies. These debates are highly relevant to political arguments about the role of markets in the economy. While it does not follow that because markets will not spontaneously provide pure public goods, the state should do so, it may well be that if some public agency does not provide them, they will simply not be provided at all, notwithstanding effective demand for them.
Public goods problems are also quite closely related to externalities since situations in which complex multilateral externalities are present; typically raise the same “free-rider” problem that occurs with non-rival, non-excludable goods and services. Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good. This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.
CAUSES OF RISE IN PUBLIC EXPENDITURE There are certain aspects which become the cause for rise in public expenditure in our nation. They are as follows: 1)Population growth: During the 50 years 1951-2001, passing through the 2nd stage of demographic transition, India has faced population explosion. In 1951 the population of India was 36 crore. Growth in population on this scale will certainly require an increase in public expenditure. For example, expenditure on police, education, health and medical facilities rises as the demand for these services increase with population. )Increase in GDP: A rise in GDP is invariably accompanied by an increase in public expenditure. In India, over a period of 59 years from 1950-51 to 2008-09 the GDP rose by about 15 times and per capita income about 4 ? times. Under the circumstances, the government is not only expected to expand its traditional activities, it is also put under pressure to undertake new activities. In this context, it is pertinent to mention that in a backward economy in the early period of its development, public expenditure rises at an increasing rate in response to a rise in per capita income. )Urbanization: Since independence, the percentage of urban population has increased in this country. Against 17. 3% population living in cities in 1951, around 27. 8% population inhabited urban areas in 2001. The process of urbanization in any country raises various government expenditures with more and more people migrated in cities. The police machinery has to be strengthened, transport system has to be improved and sometimes housing facilities have also to be provided. All these activities involve heavy expenditure. 4)Defence:
Considerable increase in defence expenditure is an important cause of overall rise in public expenditure in India. In the 3rd world countries, governments have shown increasing reliance on military in the past. His tendency is largely due to internal discontent caused by wide spread poverty and the rising and the rising consciousness. In most cases danger of foreign aggression is just an alibi to expand the military system. India is no exception to this case. The expenditure on defence in this country has risen from rs. 3600 crore in 1980-81 to rs. 14600 crores in 2008-09. The defence expenditure has increase tremendously due to modernisation of defence equipment used by army, navy and airforce. India cannot postpone modernisation in defence specially when its neighbouring countries are buying the latest defence equipments from developed countries of the world. 5)Expansion and administrative system: India has retained colonial bureaucratic system even after getting independence. This administrative system is quite expansive for an under developed country. Since independence, many new departments have been setup.
Most of them may be necessary in view of the requirement of an independent country, but the criticism that some departments have been setup merely for accommodating important persons is not altogether baseless. Excess recruitment in government departments has become a normal feature. Over the years due to revision of pay scales and annual increments, there has been an immense increase in the expenditure on administration. As the government relies heavily on its employees for the stability, it often gives them unnecessary concessions, which involve colossal waste of public funds. )Development projects: An important cause of rise in public expenditure is heavy investment in development projects. Though the government in this country has never been committed to build a socialist society, its policy towards development has always been quite unambiguous. The government wanted to transform the country’s underdeveloped economy into a developed one, and thus undertook the task of developing the infrastructure and large scale basic industries. These projects have required heavy investment over the years. In India every new Plan has been bigger in size than earlier ones.
The investment, both in financial and real terms, has been steadily increasing during the planning period and with it overall public expenditure has also recorded a sharp rise. 7)Debt finance: Debt finance is often necessary to accelerate the pace of development. It nevertheless carries the burden of interest payments. In India, considerable reliance on debt finance under the various Plans lead to continuous growth in the total outstanding debt. The public debt of central government registered a sharp increase in the 1980s—from 41. 6% of GDP in 1980-81 to 55. 2% in 1990-91.
Since then it has increased further to 61. 5% in 2007-08. As a result of steep rise in the public debt, there has been a dramatic increase in interest payments by government. 8)Subsidies: Over the years subsidies have increased steeply contributing to rapid growth of public expenditure. No doubt, a large class of publicly produced services, as defence, general administration and the maintenance of law and order are in the nature of pure public goods and thus cannot be priced. However, other publicly provided services can be priced and thus their cost can be recovered.
But in the consumption of some of these goods and services, there maybe some externalities. Therefore is they are provided by the government at user cost prices, the privately optimal level of their consumption may turn out to be socially sub-optimal consumption. The government may therefore give some subsidy to ensure socially optimal level of consumption. Subsidy may also be provided in respect of consumption of a merit good, like the primary education to the poor. In India however, there is a huge volume of subsidies involved in delivery of goods and services provided by the government.
Over the years, recovery rates in respect of both economic and social services have declined. As a result, the burden of subsidies have increased. IMPACT OF PUBLIC EXPENDITURE Public expenditure diverts economic resources into channels determined by the government in accordance with national objectives and public policy. As a consequence, the scale and direction of public expenditure may affect the pattern and levels of consumption of the community Areas affected are as follows: ?Volume of production ?Consumption ?Allocation of resources Distribution of incomes ?Economic stability ?Economic Growth These effects are discussed below: Effects on Production The effect of public expenditure on production can be examined with reference to its effects on ability & willingness to work, save & invest and on diversion of resources. 1. Ability to work, save and invest: Socially desirable public expenditure increases community’s productive capacity. Expenditure on education, health, communication, increases people’s productivity at work and therefore their incomes.
With rise in income savings also increase and this in turn has a beneficial effect on investment and capital formation. 2. Willingness to work, save and invest : Public expenditure, sometimes, brings adverse effects on people’s willingness to work and save. Government expenditure on social security facilities may bring such unfavorable effects. For e. g. Government spends a considerable portion of its income towards provision of social security benefits such as unemployment allowances, old age pension, insurance benefits, sickness benefit, medical benefit, etc.
Such benefits reduce the desire to work. In other words they act as disincentive to work. 3. Effect on allocation of resources among different industries & trade : Many a times the government expenditure proves to be an effective instrument to encourage investment on a particular industry. For e. g. If government decides to promote exports, it provides benefits like subsidies, tax benefits to attract investment towards such industry. Similarly government can also promote a particular region by providing various incentives for those who make investment in that region.
Effects on Consumption Public expenditure enhances the quality of life of people by providing recreational, cultural- educational and public health facilities, such as public parks, playgrounds, libraries, educational institutions, hospitals and dispensaries and scientific, cultural and commercial exhibitions. Consumption, after all, is the end objective of economic activity of individuals. By promoting the level of economic activity and a more equitable distribution of income, the state can bring about a greater sense of social and economic security in the lives of individuals.
T h e government enables them to live a fuller and richer life. Allocation of Resources Public expenditure allocates resources in accordance with national priorities. The Priorities may be defense, agricultural production and self-sufficiency in food, industrial development, generation of employment opportunities, an equitable distribution of income, balanced regional development, population control, a better ecological balance etc. Public expenditure in these areas is bound to raise the community’s productive power.
According to Dalton “increased public expenditure in many of these directions is desirable in order to bring about that distribution of the community’s resources between different uses, which will give the best results, balancing without bias the present and future”. Changes in national priorities, from time to time, will be reflected in the pattern of public expenditure. Again, resource allocation has to take into account the balance between present needs and future requirements.
Apart from imparting a sense of fairness as between generations, projects with long gestation periods can be undertaken only by the state. Hence allocation has to keep in view the fact that market economy cannot always take care of social needs. These can be taken care of only by the state. Distribution In Dalton’s words, “Other things being equal, that system of public expenditure are best, which has the strongest tendency to reduce the inequality of incomes. ” A system of grants and subsidies is equitable in the measure in which it is progressive.
This leads to maximum social benefit. An approximation to this principle would be provided by a system of grants which would bring all incomes below a certain level to that level (say, above the poverty line), without adding anything to incomes above that level. A public distribution system which makes available essential commodities at subsidized prices to the poor, will also achieve the same result. Free provision of services to all members of the society e. g. , free health service or free education, “narrows the area of inequality”.
Social security measures and social insurance schemes, which are helped partly or wholly from public funds, e. g. old age pensions, sickness and maternity benefits, unemployment relief, industrial injury compensation, widows’ pension etc. , improve distribution by reducing inequality of incomes. Economic Stabilization Business activity in an economy is usually characterized by fluctuations of a cyclical nature. A boom in the economy may burst and lead to a depression. While during boom, prices rise beyond the reach of common person, spelling misery.
During depression, employment and production levels fall drastically causing colossal damage. During depression, when employment, production and national income start declining, government can undertake compensatory spending. This may imply heavy public works programmes so that employment and incomes may pick up leading to economic recovery. During boom, public expenditure should be strictly curtailed, leading to surplus budgets. During depression, public expenditure policy would lead to heavy outlays on public works; expenditure would thus be in excess of revenues, leading to deficit budgets.
Thus public expenditure, if properly planned a n d conscientiously undertaken, will have the favorable effect of raising employment, production and national income, after pulling the economy on t of depression and thus bringing about greater economic stability. Economic Growth The goals of planning are effectively realized only through government expenditure. The government allocates funds for the growth of various sectors like agriculture, industry, transport, communications, education, energy, health, exports, imports, with a view to achieve impressive growth.
Government expenditure has been very helpful in maintaining balanced economic growth. Government takes keen interest to allocate more resources for development of backward regions. Such efforts reduce regional inequality and promote balanced economic growth. PUBLIC EXPENDITURE ON HEALTH: Public expenditure on health is a key area of spending for the government. The total life expectancy of the country, infant mortality rate and the human development index to some extent depends on how well the government has spend the funds in providing the health facilities in the country.
It is well known that health expenditure in India is dominated by private spending. India ranks 171 out of the 175 countries in the world in public health spending. This is less than some of the sub-Saharan African countries, a World Health Organization (WHO) study of 2007-08 has revealed. If this will be the status, we would not be able to tackle the existing epidemics and new entries like H1N1 flu. For a country of one billion, India spends 5. 2% of the GDP on healthcare. While 4. 3% is spent by the private sector, the government continues to spend only 0. % on public health. ”Public health spending as a percentage of GDP is minuscule. Due to this India is being overly dependent on private sector. Neighbouring China ranks among the leading developing countries in public health spending, almost 6% of the GDP. Over the last several years in India there has been a dramatic change in the national government’s approach to health sector. New national schemes, under the banner of the National Rural Health Mission (NRHM), were launched in April 2005.
One stated goal of this national scheme is to increase total government health spending form its previous level of about 1 percent of gross domestic product (GDP) to a target of 2-3 percent of GDP by 2012, the end of Eleventh Five year plan. The NRHM has introduced a number of strategies to improve the impact of spending along with providing a vehicle for increasing spending. Since India’s level of government health spending is quite low in absolute terms as well as in comparison to some other Asian countries, increasing expenditure makes sense.
But India’s government health financing structure is complex, so achieving goals is not simply a matter of greater central government allocations. International comparisons for health spending and outcomes across lower countries find rather weak links, suggesting that how well money has been spent may be at least as important as how much is spent. 1. Government Health Spending:1999 to April 2005 In nominal terms the total government health expenditure (both center and state) has increased from 20,117 crore in 2004-05 to Rs. 7, 704 crore in 2002-03 or by 38 percent. In the per capita terms too, the total public health spending has shown an increase, even if modest, from Rs. 202 in 1999-2000 to Rs. 257. However when these figures are recast in real terms i. e. corrected for inflation, the growth is very modest. For example, per capita spending increased from 202 to Rs. 215 during this period. Declining health expenditure can also be seen form the decline in the share of health expenditure of centre and states in the total government (centre and state) expenditure.
Since states account for three quarters of all government health spending, any rise or fall in sates health spending influences total spending much more than centers. 2. Government Health Spending since April 2005 In April 2005, the government launched NRHM, committing the national government to increased and more effective health spending. Before reviewing the evidence, it is important to highlight differences in the quality of evidence on health spending available form earlier and more recent years, up to 2004-05, we are able to report on actual expenditure.
Starting with 2005-06, we are reporting based in different types of data including budget estimates and revised estimates with some information on disbursements from the central government. Government health spending since April 2005 has increased significantly. We estimate that total government health expenditure increased from Rs. 27,704 crore in 2004-05 to Rs 39,046 crore in 2006-07 or by 41 percent, it share in GDP too increased from 0. 97 percent to about 1. 05 percent during this period a time of rapid increase in GDP as well.
The rise in government health spending post April 2005 can also be seen in the share of health expenditure in total expenditure in total expenditure of centre and states. Nominal per capita income has risen from Rs 257 in 2004-05 to Rs-351 in 2006-07, three times the increase in the preceding period. In real terms, it has increased from Rs215 to Rs 265. COMPARISON BETWEEN INDIA AND CHINA In spite of many efforts by the government towards health of India, it has not been much successful.
There has been an increase in the expenditure for health of the people of the country, than also the situation has not improved. India is lagging behind many developing countries in terms of health expenditure in the country. According to UN Report 2010 India’s rank in infant mortality rate is 152 with 52. 91 infants, while China’s rank is 95 with 21. 99 infants. The rank in life expectancy at birth of India is 139 with 64. 7 years, while China’s rank is 80 with 73 years. The human development index rank of India is 122. The HDI of India is 0. 519. The human development index of china is 91 with HDI of 0. 63. Many people in India are dying due to curable disease like malaria, typhoid, and jaundice. Etc. due to which the infant mortality rate and life expectancy at birth is low. Effects of Public Expenditure In Education Sector During the Financial Year 2011-12, the Central Government of India has allocated Rs 38,957 crores for the Department of School Education and Literacy which is the main department dealing with primary education in India. Within this allocation, major share of Rs 21,000 crores is for the flagship program ‘Sarva Siksha Abhiyan’.
However, budgetary allocation of Rs 21,000 crores is considered very low in view of the officially appointed Anil Bordia Committee recommendation of Rs 35,659 for the year 2011-12. This higher allocation was required to implement the recent legislation ‘Right of Children to Free and Compulsory Education Act, 2009. In recent times, several major announcements were made for developing the poor state of affairs in education sector in India, the most notable ones being the National Common Minimum Programme (NCMP) of the United Progressive Alliance (UPA) government.
The announcements are; (a) To progressively increase expenditure on education to around 6 percent of GDP. (b) To support this increase in expenditure on education, and to increase the quality of education, there would be an imposition of an education cess over all central government taxes. (c) To ensure that no one is denied of education due to economic backwardness and poverty. (d) To make right to education a fundamental right for all children in the age group 6–14 years. (e) To universalize education through its flagship programs such as Sarva Siksha Abhiyan and Mid Day Meal.
However, even after five years of implementation of NCMP, not much progress has been done on these promises or announcements. The public expenditure on education has actually declined from around 3. 23 percent of GDP in 2000–2001 to 2. 88 percent in the recent times. As a proportion of total government expenditure, it has declined from around 11. 1 percent in 2000–2001 to around 9. 98 percent during UPA rule. Due to a declining priority of education in the public policy paradigm in India, there has been an exponential growth in the private expenditure on education also. As per the available information, the private out of pocket expenditure by the working class population for the education of their children in India has increased by around 11. 50 percent or around 12. 5 times over the last decade]. As a part of the tenth five year Plan (2002–2007), the central government of India outlined an expenditure of 65. 6% of its total education budget of 438. 25 billion (US$9. 77 billion) i. e. 287. 5 billion (US$6. 41 billion) on elementary education; 9. 9% i. e. 43. 25 billion (US$964. 48 million) on secondary education; 2. 9% i. e. 12. 5 billion (US$278. 5 million) on adult education; 9. 5% i. e. 41. 765 billion (US$931. 36 million) on higher education; 10. 7% i. e. 47 billion (US$1. 05 billion) on technical education; and the remaining 1. 4% i. e. 6. 235 billion (US$139. 04 million) on miscellaneous education schemes. According to the United Nations Educational, Scientific and Cultural Organization (UNESCO), India has the lowest public expenditure on higher education per student in the world. India has made huge progress in terms of increasing primary education attendance rate and expanding literacy to approximately two thirds of the population.
The right to education at elementary level has been made one of the fundamental rights under the eighty-sixth Amendment of 2002, and legislation has been enacted to further the objective of providing free education to all children. Field% of contributionAmount (in billons) Elementary education65. 6% 287. 5 Secondary education9. 9% 43. 25 Adult education2. 9% 12. 5 Higher education9. 5% 41. 765 Technical education10. 7% 47 Miscellaneous education1. 4% 6. 235 Total 438. 25 Source: www. ibef. org However, the literacy rate of 74% is still lower than the worldwide average and the country suffers from a high dropout rate.
Further, there exists a severe disparity in literacy rates and educational opportunities between males and females, urban and rural areas, and among different social groups. •It pays to invest in education: A review mission of the central department of education recently visited eight states where the Sarva Shiksha Abhiyan was implemented. The number of out-of-school children which was around 12 million in January 2003 (as per the household survey conducted by the states) had dramatically reduced to 3 million in two years time.
More teachers had been recruited in all the states visited by the mission and in most states; the Pupil-Teacher ratios are approaching a manageable level of 40 students per teacher. •Investing in education—The Kerala effect: There is a strong relationship between economic growth and the level of education. Kerala is the most literate state in India. A 2002 survey showed Kerala as number 3 in affluence level, and number 5 in terms of infrastructure penetration and investment attractiveness. Because of the state’s ready supply of educated workers, big companies have started plugging in.
General Electric has set up training centers in Kolkata for prospective call centre employees. The state’s average per capita consumption between 1994 and 2000 grew at 19. 6 per cent in rural areas and 18. 2 per cent in urban areas, according to a study published in August 2002 by two economists, Angus Deaton and Jean Dreze. Today, the state’s domestic product (SDP) is growing at 7 per cent, and the state government’s finance department expects the SDP to grow at 7% in real terms, over the next three years. •Investing in education- Tami Nadu effect:
In early 1980s the MGR Government in Tamil Nadu introduced the mid-day meal programme at schools. The motives were probably to attract the votes of the poor, to enhance the image of the ruling party and the leader, and the genuine concern for the plight of the poor coupled with a desire to promote literacy. Unlike many other usual government promises and programs bureaucratically implemented, the mid-day meals scheme in Tamil Nadu was genuinely well-implemented. In 1999-2000, children in Tamil Nadu spent an average of 7 years in school, which is one of the highest in the country.
Thanks to the investments made in education, the average growth rate of Tamil Nadu’s economy has been around 6% – 7% and is consistently above the all India average. •Reduction in gender gap: A research paper by social economists Suddhasil Siddhanta and Debashish Nandy in 2003, analyses time series data between 1966 and 1996. It shows a steady narrowing of the gender gap – with a growing number of young women graduating with science and engineering degrees and taking up teaching and research positions – not only in the pure sciences, bio-technology, or computer technology, but also in fields such as civil and mechanical engineering.
The study also establishes a strong relationship between female education and growth. States like Maharashtra, Punjab, Kerala, Karnataka, Goa, Andhra Pradesh and Himachal Pradesh have the lowest gender gaps in India, and their SDP growth rates are among the highest. •Southern comfort: The recent success of the four southern states in attracting high-technology investment to their shores has much to do with their significantly higher pool of qualified computer science and engineering graduates compared to other Indian states. States like Andhra Pradesh have managed to literally double its engineering base in five years.
The result is that the state capital, Hyderabad has emerged as one of the prime IT hubs in the country. There is no doubt that the significantly higher concentration of computer science graduates in Southern India is attracting the world’s leading technological companies to set up software development centers in Bangalore, Chennai and Hyderabad. •Punjab learns from south: Now, states in the north are also trying to emulate the south India model. A decade ago, there was a severe shortage of engineering colleges in Punjab, and many young Punjabis were forced to seek admission in private colleges in Karnataka and elsewhere.
However, the gap has now been considerably narrowed, and the Chandigarh region has also become a draw for technology-related investment. Today, with an efficient infrastructure and a big pool of human talent, Chandigarh could become an infotech hub, according to Kiran Karnik, Nasscom president. •IT and literacy: Malappuram is a Muslim majority district, tucked away in the northern corner of Kerala. In June 2004, Malappuram became the first, completely e-literate district in India, run on the backbone of India’s largest rural wireless network.
The Malappuram project wired up the district, made PC and Internet connection available to all families within reach at reasonable costs, and familiarized at least one member of a family with PC and Internet applications. Residents of Malappuram are today e- literate, and face a better economic future. •Building blocks in science and engineering: When the tech industry boomed in the mid-1990s, the government increased enrolment at the IITs — 50 percent in the past seven years — in order to produce more tech workers. The IITs have contributed significantly to India’s steady stream of knowledge workers.
In fact, supply of technology workers – especially in the IT sector– has never been a problem in India, thanks to the growth of computer education and engineering institutes. In the beginning of 2005, there were1349 approved engineering colleges at the degree level, and 1030 institutes offering Master of Computer Application (MCA) program—according to the latest economic survey. •Spread to other cities: The proliferation of IT related institutes in conventionally non-IT states have also contributed to job creation.
At the beginning of the BPO boom, the ITES sector was mainly confined to Bangalore, Hyderabad, Gurgaon, Chennai, Mumbai and Pune. Other cities, not necessarily smaller, are now getting their act together. Chandigarh, Kochi, Nagpur, Ahmedabad, Coimbatore and Visakhapatnam have already been spotted on the radar of the BPO segment. Today, thanks to its ability to supply cheap knowledge workers, West Bengal, a slow starter in the IT sweepstakes, is now able to generate a healthy annual IT and ITES growth of 30 per cent. •Management education: There are 990 approved Management Institutions imparting education in Management Studies.
According to industry estimates, more than 70 per cent of these institutes offer placement programs for their students. And while the quality and nature of offers vary from institute to institute, a management degree at least guarantees a basic job. However, detailed research on the all-India impact of management education in India has not been attempted so far. Conclusion Any nation’s success depends upon how efficient its government is. Public expenditure is a tool to economic growth and development, but must be utilized effectively and cautiously, as it’s partly public money.
Public expenditure is necessary in every nation; under developed, developing or developed, as it contributes in various ways to an economy to sustain as well as grow. Public expenditure helps to increase the welfare of a nation. This happens when government does spend for society, which leads to resource & facility availability. This situation induces the producers to start production or increase the same. Increased production leads to increased employment generation. This situation results in income generation for the population. Income generation leads to consumption by the population.
When they start consuming, their standard of living improves. Income generation also leads to a situation of creation of demand, further inducing the producer to produce. When the government spends on factors like services, healthcare, and education, their condition changes and keeps improving. This leads to the welfare of the population, which eventually contributes to the economic growth and development of a nation. Below is given a chart and graph, showing the expenditures done by the government and what percentage it forms of the total GDP. YEARPUBLIC EXPENDITURE (IN RUPEES)RATIO OF PULIC EXPENDITURE TO GDP 999-200053162527. 2 2000-0158630627. 9 2001-0264008828. 1 2002-0369885228. 5 2003-0478948528. 6 2004-0586169427. 4 2005-0694990226. 5 2006-07109566326. 4 2007-08133909928. 4 Source: Reserve Bank of India, Handbook of statistics on the Indian economy 2008-09. WHAT IS PUBLIC EXPENDITURE? MEANING: Public expenditure refers to Government expenditure i. e. Government spending. It is incurred by Central, State and Local governments of a country. Spending by government , municipality, or any local authority. It covers things such as health, education or social services and is funded by tax revenue.
It is one of the element that make up aggregate expenditure. Government spending or government expenditure is classified by economists into three main types. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (gross fixed capital formation), which usually is the largest part of the government gross capital formation.
Acquisition of goods and services is made through own production by the government (using the government’s labor force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. Government expenditures that are not acquisition of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments. Government spending can be financed by seignior age, taxes, or government borrowing.
DEFINITION: Public expenditure can be defined as, “The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure. ” Throughout the 19th Century, most governments followed laissez faire economic policies & their functions were only restricted to defending aggression & maintaining law & order. The size of public expenditure was very small. But now the expenditure of governments all over has significantly increased.
In the early 20th Century, John Maynard Keynes advocated the role of public expenditure in determination of level of income and its distribution. In developing countries, public expenditure policy not only accelerates economic growth & promotes employment opportunities but also plays a useful role in reducing poverty and inequalities in income distribution. ECONOMIC GROWTH Economic development is a broad term that generally refers to the sustained, concerted effort of policymakers and community to promote the standard of living and economic health in a specific area.
Such effort can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other initiatives. It should be noted that economic development differs from economic growth. Whereas economic development is a policy intervention endeavor with aims of economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP. An increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country’s economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries. A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces.
By Economic Growth we simply mean increase in per capita income or increase in GNP. In recent literature, the term economic growth refers to sustained increase in a country’s output of goods and services, or more precisely product per capita. Output is generally measured in terms of GNP. THEORIES RELATED TO PUBLIC EXPENDITURE AND ECONOMIC GROWTH Adam Smith wrote in the ‘Wealth of Nations’ that the government should restrict their activities to; 1. Defense against foreign aggression. 2. Maintenance of internal peace and order. 3.
Public development work. All other functions besides these were considered beyond the scope of the state & expenditure on them was treated as unjust & wasteful. But there had been a spectacular expansion in the functions of state & this resulted in phenomenal increase in public expenditure for this we shall take a look at contribution by Adolph Wagner & Peacock-Wiseman hypothesis. Adolph Wagner’s Law of Increasing State Activity Adolph Wagner, the German economist made an in depth study relating to rise in government expenditure in the late 19thcentury.
Based on his study, he propounded a law called “The Law of Increasing State Activity”. Wagner’s law states that “as the economy develops over time, the activities and functions of the government increase”. According to Adolph Wagner, “Comprehensive comparisons of different countries and different times show that among progressive peoples (societies), with which alone we are concerned; an increase regularly takes place in the activity of both the Central Government and Local Governments constantly undertake new functions while they perform both old and new functions more efficiently and ore completely. In this way economic needs of the people to an increasing extent and in a more satisfactory fashion, are satisfied by the Central and Local Governments. ” Wagner’s Statement Indicates Following Points 1. In Progressive societies, the activities of the central and local government increase on a regular basis. 2. The increase in government activities is both extensive and intensive. 3. The governments undertake new functions in the interest of the society. 4. The old and the new functions are performed more efficiently and completely than before. . The purpose of the government activities is to meet the economic needs of the people. 6. The expansion & intensification of government function & activities lead to increase in public expenditure. 7. Though Wagner studied the economic growth of Germany, it applies to other countries too both developed and developing. The Peacock-Wiseman Hypothesis Peacock and Wiseman conducted a new study based on Wagner’s Law. They studied the public expenditure from 1891 to 1955 in U. K. They found out that Wagner’s Law is still valid.
Peacock and Wiseman further stated that:- 1. “The rise in public expenditure greatly depends on revenue collection. Over the years, economic development results in substantial revenue to the governments, this enabled to increase public expenditure”. 2. There exists a big gap between the expectations of the people about public expenditure and the tolerance level of taxation. Therefore, governments cannot ignore the demands made by people regarding various services, especially, when the revenue collection is increasing at constant rate of taxation. 3.
They further stated that during the times of war, the government further increases the tax rates, and enlarges the tax structure to generate more funds to meet the increase in defense expenditure. After the war, the new tax rates and tax structures may remain the same, as people get used to them. Therefore, the increase in revenue results in rise in government expenditure. Conclusion on the State of Public Expenditure Wagner’s law and Peacock-Wiseman hypothesis emphasize on the fact that public expenditure has tendency to increase overtime. Welfare theory of Public Expenditure
The new welfare economics has highlighted the practical problems in knowing the true preferences’ of individuals and the interpersonal comparison of utility unless there is prior determination of optimum distribution of income of the community, there can be no hope for the determination of optimum level of public spending and the optimum distribution of tax burden. Neither the benefits approach nor the ability to pay approach, from this angle, has succeeded in providing a satisfactory solution for the determination of optimum public expenditure and the optimum distribution of tax burden.
Moreover, modern state does not inure public expenditure on providing ‘pure’ public goods alone but on innumerable the economic life of country. Under the policy of laissez-faire when the state was regarded as a police state, the role of public expenditure in the economic life of the people and community remained neglected. Its effect on production and distribution were ignored and it was also held that public expenditure should be kept at the minimum but today, with the change in the nature of state, the showing of pendulum has moved to the other side.
The theory of public expenditure has come into prominences a result of the failure of market mechanism to respond fully to the true needs of the society and conditions of full employment of human and natural resources. Production theory of Public Expenditure In economics, a public good is a good that is no rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability that no one can be effectively excluded from using the good.
In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful. For example, if one individual visits a doctor there is one fewer doctor’s visit for everyone else, and it is possible to exclude others from visiting the doctor. This makes doctor visits a rivaled and excludable private good. Conversely, breathing air does not significantly reduce the amount of air available to others, and people cannot be effectively excluded from using the air.
This makes air a public good, albeit one that is economically trivial, since air is a free good. A less straight-forward example is the exchange of MP3 music files on the internet: the use of these files by any one person does not restrict the use by anyone else and there is little effective control over the exchange of these music files and photo files. Non- rivalness and non-excludability may cause problems for the production of such goods. Specifically, most economists recognize that uncoordinated markets driven by parties working in their own self interest are unable to provide these goods in optimal quantities.
There is a good deal of debate and literature on how to measure the significance of public goods problems in an economy, and to identify the best remedies. These debates are highly relevant to political arguments about the role of markets in the economy. While it does not follow that because markets will not spontaneously provide pure public goods, the state should do so, it may well be that if some public agency does not provide them, they will simply not be provided at all, notwithstanding effective demand for them.
Public goods problems are also quite closely related to externalities since situations in which complex multilateral externalities are present; typically raise the same “free-rider” problem that occurs with non-rival, non-excludable goods and services. Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good. This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.
CAUSES OF RISE IN PUBLIC EXPENDITURE There are certain aspects which become the cause for rise in public expenditure in our nation. They are as follows: 1)Population growth: During the 50 years 1951-2001, passing through the 2nd stage of demographic transition, India has faced population explosion. In 1951 the population of India was 36 crore. Growth in population on this scale will certainly require an increase in public expenditure. For example, expenditure on police, education, health and medical facilities rises as the demand for these services increase with population. )Increase in GDP: A rise in GDP is invariably accompanied by an increase in public expenditure. In India, over a period of 59 years from 1950-51 to 2008-09 the GDP rose by about 15 times and per capita income about 4 ? times. Under the circumstances, the government is not only expected to expand its traditional activities, it is also put under pressure to undertake new activities. In this context, it is pertinent to mention that in a backward economy in the early period of its development, public expenditure rises at an increasing rate in response to a rise in per capita income. )Urbanization: Since independence, the percentage of urban population has increased in this country. Against 17. 3% population living in cities in 1951, around 27. 8% population inhabited urban areas in 2001. The process of urbanization in any country raises various government expenditures with more and more people migrated in cities. The police machinery has to be strengthened, transport system has to be improved and sometimes housing facilities have also to be provided. All these activities involve heavy expenditure. 4)Defence:
Considerable increase in defence expenditure is an important cause of overall rise in public expenditure in India. In the 3rd world countries, governments have shown increasing reliance on military in the past. His tendency is largely due to internal discontent caused by wide spread poverty and the rising and the rising consciousness. In most cases danger of foreign aggression is just an alibi to expand the military system. India is no exception to this case. The expenditure on defence in this country has risen from rs. 3600 crore in 1980-81 to rs. 14600 crores in 2008-09. The defence expenditure has increase tremendously due to modernisation of defence equipment used by army, navy and airforce. India cannot postpone modernisation in defence specially when its neighbouring countries are buying the latest defence equipments from developed countries of the world. 5)Expansion and administrative system: India has retained colonial bureaucratic system even after getting independence. This administrative system is quite expansive for an under developed country. Since independence, many new departments have been setup.
Most of them may be necessary in view of the requirement of an independent country, but the criticism that some departments have been setup merely for accommodating important persons is not altogether baseless. Excess recruitment in government departments has become a normal feature. Over the years due to revision of pay scales and annual increments, there has been an immense increase in the expenditure on administration. As the government relies heavily on its employees for the stability, it often gives them unnecessary concessions, which involve colossal waste of public funds. )Development projects: An important cause of rise in public expenditure is heavy investment in development projects. Though the government in this country has never been committed to build a socialist society, its policy towards development has always been quite unambiguous. The government wanted to transform the country’s underdeveloped economy into a developed one, and thus undertook the task of developing the infrastructure and large scale basic industries. These projects have required heavy investment over the years. In India every new Plan has been bigger in size than earlier ones.
The investment, both in financial and real terms, has been steadily increasing during the planning period and with it overall public expenditure has also recorded a sharp rise. 7)Debt finance: Debt finance is often necessary to accelerate the pace of development. It nevertheless carries the burden of interest payments. In India, considerable reliance on debt finance under the various Plans lead to continuous growth in the total outstanding debt. The public debt of central government registered a sharp increase in the 1980s—from 41. 6% of GDP in 1980-81 to 55. 2% in 1990-91.
Since then it has increased further to 61. 5% in 2007-08. As a result of steep rise in the public debt, there has been a dramatic increase in interest payments by government. 8)Subsidies: Over the years subsidies have increased steeply contributing to rapid growth of public expenditure. No doubt, a large class of publicly produced services, as defence, general administration and the maintenance of law and order are in the nature of pure public goods and thus cannot be priced. However, other publicly provided services can be priced and thus their cost can be recovered.
But in the consumption of some of these goods and services, there maybe some externalities. Therefore is they are provided by the government at user cost prices, the privately optimal level of their consumption may turn out to be socially sub-optimal consumption. The government may therefore give some subsidy to ensure socially optimal level of consumption. Subsidy may also be provided in respect of consumption of a merit good, like the primary education to the poor. In India however, there is a huge volume of subsidies involved in delivery of goods and services provided by the government.
Over the years, recovery rates in respect of both economic and social services have declined. As a result, the burden of subsidies have increased. IMPACT OF PUBLIC EXPENDITURE Public expenditure diverts economic resources into channels determined by the government in accordance with national objectives and public policy. As a consequence, the scale and direction of public expenditure may affect the pattern and levels of consumption of the community Areas affected are as follows: ?Volume of production ?Consumption ?Allocation of resources Distribution of incomes ?Economic stability ?Economic Growth These effects are discussed below: Effects on Production The effect of public expenditure on production can be examined with reference to its effects on ability & willingness to work, save & invest and on diversion of resources. 1. Ability to work, save and invest: Socially desirable public expenditure increases community’s productive capacity. Expenditure on education, health, communication, increases people’s productivity at work and therefore their incomes.
With rise in income savings also increase and this in turn has a beneficial effect on investment and capital formation. 2. Willingness to work, save and invest : Public expenditure, sometimes, brings adverse effects on people’s willingness to work and save. Government expenditure on social security facilities may bring such unfavorable effects. For e. g. Government spends a considerable portion of its income towards provision of social security benefits such as unemployment allowances, old age pension, insurance benefits, sickness benefit, medical benefit, etc.
Such benefits reduce the desire to work. In other words they act as disincentive to work. 3. Effect on allocation of resources among different industries & trade : Many a times the government expenditure proves to be an effective instrument to encourage investment on a particular industry. For e. g. If government decides to promote exports, it provides benefits like subsidies, tax benefits to attract investment towards such industry. Similarly government can also promote a particular region by providing various incentives for those who make investment in that region.
Effects on Consumption Public expenditure enhances the quality of life of people by providing recreational, cultural- educational and public health facilities, such as public parks, playgrounds, libraries, educational institutions, hospitals and dispensaries and scientific, cultural and commercial exhibitions. Consumption, after all, is the end objective of economic activity of individuals. By promoting the level of economic activity and a more equitable distribution of income, the state can bring about a greater sense of social and economic security in the lives of individuals.
T h e government enables them to live a fuller and richer life. Allocation of Resources Public expenditure allocates resources in accordance with national priorities. The Priorities may be defense, agricultural production and self-sufficiency in food, industrial development, generation of employment opportunities, an equitable distribution of income, balanced regional development, population control, a better ecological balance etc. Public expenditure in these areas is bound to raise the community’s productive power.
According to Dalton “increased public expenditure in many of these directions is desirable in order to bring about that distribution of the community’s resources between different uses, which will give the best results, balancing without bias the present and future”. Changes in national priorities, from time to time, will be reflected in the pattern of public expenditure. Again, resource allocation has to take into account the balance between present needs and future requirements.
Apart from imparting a sense of fairness as between generations, projects with long gestation periods can be undertaken only by the state. Hence allocation has to keep in view the fact that market economy cannot always take care of social needs. These can be taken care of only by the state. Distribution In Dalton’s words, “Other things being equal, that system of public expenditure are best, which has the strongest tendency to reduce the inequality of incomes. ” A system of grants and subsidies is equitable in the measure in which it is progressive.
This leads to maximum social benefit. An approximation to this principle would be provided by a system of grants which would bring all incomes below a certain level to that level (say, above the poverty line), without adding anything to incomes above that level. A public distribution system which makes available essential commodities at subsidized prices to the poor,