Public expenditure trends, Microeconomics

Public Expenditure Trends:

The expenditure pattern of the Government sector has been generally guided by the concern about the role of the State in the economy, both as investor and as provider of  basic public services. As a result, Government expenditures have, over the years, shown steady growth. On the whole, the overall expenditure of both the states and the Centre is rising at a faster rate than national income; there is actually a rise in both revenue and capital expenditure as a percentage of total income. The aggregate of both the Centre's and State's expenditures accounts for about 35 per cent of the country's GDP. This share has risen by three percentage points since 1993-1994, when it was 32 per cent.   

According to Sudipto Mundle and M. Govinda Rao an analysis of the growth of real public expenditure since the mid-1970s reveals four distinct phases:  

i) During the  first phase, from the mid-1970s to 1981, real expenditure increased at the rate of about 7 per cent, and its current (revenue) and capital components were growing at similar rates. Expenditure was outstripping revenue, but the recourse to internal and external borrowing was still relatively modest.   

ii) In the  second phase (1981-86), the growth of Government expenditure accelerated to about 10 per cent. This was entirely attributable to the growth of revenue expenditure, which had accelerated to over 11 per cent, the growth of capital expenditure remaining more or less constant at under 7 per cent. The growth of revenue had also accelerated during this period, but growth in expenditure was running well ahead of it. As a consequence, the size of the fiscal deficit widened from under 5 per cent earlier to over 9 per cent, requiring increasing recourse to borrowed funds to finance the deficit. Also, by the end of this phase, revenue expenditure exceeded revenue receipts, implying the emergence of a revenue account deficit. In other words, the Government was now beginning to borrow money to  finance not just capital expenditure but also a part of its current expenditure.    

iii) The  third phase of Government expenditure (1987-90) was marked by some attempts to rein in its growth. The brunt of this attempt at expenditure compression was borne by capital expenditure, resulting in a steep deceleration in the growth of capital spending. However, revenue expenditure continued to grow at over 10 per cent. At the end of this phase total expenditure amounted to about 29 per cent of GDP while the total deficit amounted to about 9.9 per cent. The revenue deficit had risen to 4.4 per cent, implying that almost half of all fresh borrowing was being used to finance revenue expenditure.    

iv) The  fourth phase covers the period after 1991, during which India pursued an adjustment programme. Fiscal correction was an important component. However, revenue expenditure continued to grow faster than total expenditure, thereby crowding out capital expenditure. The imbalance in expenditure growth has led to reduced importance of the infrastructure sectors, particularly social sector which is highly growth-inducive in nature. The combined Government expenditure on social sector (comprising mainly, education, medical facilities, public health, family welfare and sanitation) has remained stagnant over the years as per cent of GDP. Social sector expenditure showed steady deterioration from about 7.9 per cent of GDP during the late eighties to 7.5 per cent of GDP during the post-reform period. The deterioration in the allocations under social sector is sharper in the case of Centre than States. This is adversely reflected on the quality of fiscal adjustment pursued since 1991-92.

Posted Date: 11/15/2012 1:54:51 AM | Location : United States

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