Causes for the Growth of Public Expenditure In India

Post: Gaurav Akrani. Date: 2/11/2011. No Comments. Label: Economics.

Introduction - Rise in Government Expenditure ↓

Public expenditure is also referred as Government expenditure. It is incurred by the government to provide public goods & services, and to service debts.

The expansion in government activities during the planning period has resulted in a huge rise in the public expenditure.

Growth of the Public Expenditure ↓

Before independence, there was no planning in India and hence no effort was made on the part of the government to provide welfare services but the accelerating growth of government expenditure began in late seventies.

The table shows the rapid rise in public expenditure over the years. The ratio of public expenditure to GDP has increased steadily from 9.1% in 1950-51 to 28.3 in 2005-06.

There has been tremendous increase in total public expenditure during the perioc 1960-61 to 2005-06.

The total public expenditure increased from Rs.2,631 crores in 1960-61 to Rs.9,99,563 crores in 2005-06.

The ratio of Public Expenditure to national income in India is one of the highest in developing countries. But in India as a sizeable proportion of population is living below the poverty line. Many people fail to obtain even necessaries for human survival. They hardly derive any benefit from the public expenditure.

Causes for Increase In Government Expenditure ↓

1. Population Growth

During the past 50 years of planning, the population of India has increased from 36.1 crore in 1950-51, it has crossed over 102 crore in 2001. The growth in population requires massive investment in health and education, law and social order, etc. A young population requires increasing expenditure on education & youth services, whereas the aging population requires transfer payments like old age pension, social security & health facilities.

2. Defence Expenditure

There has been enormous increase in defence expenditure in India during planning period. According to Economic Survey 2006-07 the defence expenditure of central government was Rs.10,874 crores in 1990-91 which has increased significantly to Rs.51,542 crores in 2006-07.

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.

3. Increase in National Income

The increase in national income also resulted in more income to the government by way of tax revenue and other income. As a result of which the government Expenditure also increased because under the circumstances, the Government is not only expected to expand its traditional activities but it also undertakes new activities.

4. Government Subsidies

The Government of India has been providing subsidies on a number of items such as food, fertilizers, interest to priority sector, exports, education, etc. Because of the massive amounts of subsidies, the public expenditure has increased.

According to Economic Survey 2006-07 the expenditure on subsidies by central government in 1990-91 was Rs.9581 crores which has increased significantly to Rs.44,792 crores in 2005-06.

5. Debt Servicing

The internal debt as well as external debt is on the iocrease. The government has been borrowing heavily both from the domestic market and from foreign sources, to meet its expenditure. As a result of which, the government has to make huge amounts of money towards interest payments.

The interest payment of the central government has increased from 21,500 crore in 1990-91 to Rs.1,39,823 crores in 2006-07.

6. Expansion of Administrative Machinery

There has been an increase in the administrative machinery in the country with the rapid growth of population and also economic development. Heavy expenditure is to be incurred on administrative machinery in respect of police, tax administration, administration of public sector enterprises, etc.

7. Development Projects

The government has been undertaking various development projects such as irrigation, iron and steel, heavy machinery, power, telecommunications, etc. The development projects require lot of capital and revenue expenditure.

8. Urbanisation

There has been an increase in urbanization. In 1950-51 about 17% of the population was urban based. Now the urban population has increased to about 28%. There are more than 23 cities above one million population. The increase in urbanization requires heavy expenditure on law and order, education, civil amenities like drinking water housing, electricity, etc.

9. Industrialisation

Setting up key and basic industries requires a huge capital and profit may arise only in the long run. It is the government which starts such industries in a planned economy. India needs a strong network of infrastructure including transport, communication, power, fuel, etc. The public sector has created a strong infrastructure as a support base for our industrial sector by investing huge capital. The government has not only improved the rail, air and sea transport but has also expanded them manifold.

10. Economic Incentives

Economic incentives such as subsidies, cheap credit, tax concession, cheap electricity, etc. given by the Government to the agriculturists and industrialists have caused monetary burden on the Government whereas recoveries in respect of both economic and social services have been insignificant.

11. Increase in grant in aid to state and union territories

There has been tremendous increase in grant in aid to state and union territories during planning period. According to Tata Statistical Outline 2004-2005 the Grant in aid to states and Union Territories was Rs.3982 crores in 1990-91 which has increased to Rs.15,669 crores in 2003-2004.

The grant in aid to states and union territories has increased significantly both for developmental purposes like construction of roads, railways, etc. and for non-developmental purposes like police administration, tackling terrorism and naxalite activities, etc.

12. New Responsibilities

Several new responsibilities have been assumed by the Indian Government in the post independence period. In a Complex Multi Caste Indian Society there are frequent occasions of social tensions which require greater amount of public services like Law and Order, Defence, etc. Provisions of justice and constitutional remedies also require expenditure.

13. Education

Education not only contributes to mental development of man but also raises productivity. Moreover mass education is necessary condition for the success of democracy. The state has made attempts to create various types of educational facilities. In order to meet growing demand for skilled labours. Government has also set up specialised institutes for medical & technical education which involves heavy expenditure.

Conclusion ↓

There is a tremendous rise in total public expenditure in India during the period 1961-2007 without adequate increase in revenues. This has resulted in huge deficit in budget in India.

Hence there is a need to manage public expenditure in India to control and reduce fiscal deficit during future period of time.

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