Beruflich Dokumente
Kultur Dokumente
Submitted By:
Utsav Vatsyayan
Fergusson College
Roll No. 131, M.A - II
Batch: 2007-09
CERTIFICATE
Signature:
(Utsav Vatsyayan)
CERTIFICATE
(HOD/Research Superviser)
Signature Signature
(Supervisor) (Head of Dept)
Dr. S.L. Matkar Dr. N.D. Bhalerao
ACKNOWLEDGEMENT
Signature
(Utsav Vatsyayan)
ABSTRACT
Empirical tests confirm that the major social upheavals produced inter-
functional and intra-functional ‘displacements’ in government spending
and thereby changed the character of public expenditure in India. There
was a strong resurgence in the growth of public expenditure on social
and development services; the State governments gained a greater role
in this area in the post-disturbance period. Perhaps this could be
inferred as a disturbance-generated ‘decentralization process’ giving a
greater scope for the State governments in dealing with social and
development services.
Thus, the present paper tries to examine the growth trend of public
expenditure and its various selected components. The assessment is
made considering the Five Year Plans as the timeline in detail and
general expenditure trend of India.
CONTENTS
1. INTRODUCTION
3. Plan Periods
4. Conclusion
5. BIBLIOGRAPHY
1. INTRODUCTION
Wagner's law named after the German economist Adolph Wagner (1835-1917). Wagner's law
Wagner's Law suggests that a welfare state evolves from free market capitalism due to the
In spite of some ambiguity, Wagner's statement in formal terms has been interpreted by Richard
Musgrave as follows:
As progressive nations industrialize, the share of the public sector in the national economy grows
continually. The increase in State Expenditure is needed because of 3 main reasons. Wagner
himself identified these as i) Social Activities of the State, ii) Administrative and Protective
The material below is an apparently much more generous interpretation of Wagner's original
premise.
assignments into the sciences, technology and various investment projects, etc.
Historical: the state resorts to government loans for covering contingencies, and thus the
sum of government debt and interest amount grow; i.e., it is an increase in debt service
expenditure.
Ever since the Independence of India, both the central and state governments have claimed that
they want to work towards social development and eradication of poverty. The role of public
expenditure in the goals of growth, equity and stability has varied across different phases of
economic development in India. The historical importance of public expenditure lies in the
mixed economy model adopted after Independence in India, whereby the government assumed
the primary responsibility of building the capital and infrastructure base to promote economic
growth.
The significance of public expenditure can be judged from its effects on the economy of the
country. Its ability to achieve important economic objectives depends partly on:
transfer benefits.
expenditure and central assistance and non-development expenditures. These categories can each
be divided into capital and revenue expenditures. Central plan expenditure is allocated to
development schemes outlined in the plans of central government and public sector
undertakings; central assistance refers to the financial assistance and development loans given
for plans of the state governments and union territories. Non-development capital expenditure
comprises capital defense expenditure, loans to public enterprises, states and union territories and
foreign governments; while non-development revenue expenditure comprises revenue defense
expenditure, administrative expenditure, subsidies, debt relief to farmers, postal deficit, pensions,
social and economic services (education, health, agriculture, science and technology), grants to
India’s public expenditure can further be described in terms of planned and non-plan
outlays, while non-plan expenditure is that expenditure for which the government is supposed to
do or committed to do or obliged to do. It includes all expenditure of the government which are
expenditure.
In this dissertation I have taken up India’s non-planned expenditure and planned expenditure in
general first and later on laid more emphasis on planned expenditure. For this I have studied
different FYPs (five year plans). There are two reasons behind taking such decision:
Public expenditure in India has grown fairly rapidly during the Plan Periods. Moreover, the
composition of Public Expenditure has also undergone a significant change. Here I have studied
the trends and patterns of public expenditure in India with the help of data provided by Central
India) website, RBI website and World Bank Report- 1988 to test whether Wagner’s law of
increasing state activities and increasing share of expenditure in GNP is relevant in the Indian
scenario or not.
2. General Trend and Pattern of Public Expenditure in India
The following table summarizes the expenditure of the Central government for selected years.
(Rs. Crores)
There has been tremendous increase in the expenditure of the central government particularly in
revenue expenditure financed through current taxation and other current non- tax revenue.
Before 1987-88 the revenue expenditure of the central government was broadly classified into
three types viz. civil expenditure (which included general services, social and community
services and economic services), defense expenditure and grants in aid to states and union
territories. At the same time the Central government also had adopted another classification of
(a) Under development expenditure, the Central government included: expenditure on social
and community services, on economic services and grants-in-aid to the States and Union
(c) Other expenditure of the central government consists of collection of taxes and duties,
administrative services, interest payments, pensions and other retirement benefits, other
If we add defence expenditure and other expenditure together we could obtain non- development
expenditure.
budgets. Under this new classification all public expenditure is classified into
capital expenditure. Revenue expenditure is financed out of revenue receipts, both tax revenue
(a) Interest payments, defence revenue expenditure, major subsidies(food, fertilizers and
export promotion), other subsidies, debt relief to farmers, postal deficit, police, pensions,
(c) Economic services (agriculture, industry, power, transport, communications, science and
technology, etc.)
(d) Grants to states and union territories and grants to foreign governments.
Capital non-planned expenditure includes such items as defence capital expenditure, loans to
public enterprises, loans to states and union territories and loans to foreign governments.
It will be seen from following table that non-planned expenditure, both on revenue and capital
accounts, has increased from Rs. 64500 crores in 1989-90 to Rs. 5,07,500 crores in 2008-09 –
(Rs. crores)
1989-90 2008-09
(Actual) (Budget)
composed of:
(a) Central plans such as on agriculture, rural development, irrigation and flood control,
energy, industry and minerals, transport, communications, science and technology and
(b) Central assistance for plans of the states and union territories.
It will be clear from the table that planned expenditure on both revenue and capital accounts was
Rs. 28,400 crores in 1989-90 but is expected to touch Rs. 2,43,385 crores in 2008-09 - a rise by
Capital expenditure of the central govt. consists of planned expenditure and non-planned
expenditure and it is financed out of capital receipts. The capital expenditure consists of:
(a) Loans to states and union territories for financing plan projects, and loans to foreign
governments.
expenditure has shown those trends in a marked manner. Government expenditure in India has
been growing very rapidly after 1950-51. Before independence, there was no planning in India
and no effort on the part of government to establish a welfare state. Public expenditure was,
therefore, comparatively small. During Second World War, government expenditure increased
because of the war efforts. In the post war period introduction of planning and the provision by
the government of welfare services in a big way caused public expenditure, both at the centre
Moreover the complexion of expenditure has also been changing very conspicuously. Before
independence the British government in India was interested primarily in the defence and civil
administration of the country. Therefore, a large part of the expenditure of the central and state
government in economic life has caused the proportion of development expenditure to the total
expenditure to increase rapidly. Defence expenditure has also been rising rapidly due to threat to
India’s security.
The first major trend in public expenditure which we observe in India is the growing revenue
expenditure of the government from over Rs. 350 crores in 1950-51 the revenue expenditure of
the government of India is over Rs. 6,58,120 crores in 2008-09. Increased defence commitments,
expansion of administration, the working of democratic institutions like the parliament, the
building activities like education and public health, rise in prices, etc. All these are responsible
Defence, debt services and administrative expenses are so large and so significant that they are
increase in non-planned expenditure was about Rs. 5000 crores and in the 1990’s the annual
increase was over Rs. 10,000 crores. Interest payments, defence expenditures, subsidies and
What is really serious is that there is absolutely no chance of these four items being kept under
control with ever-growing public debt and other liabilities, interest burden of the central
government is bound to increase over the years. For example Rs. 9,250 crores in 1986-87 to Rs.
21,500 crores in 1990-91 and Rs. 1,90,810 crores in 2008-09. Defence expenditure is increasing
because of growing tensions in the region and the use of highly expensive technology in war
equipments- defence expenditure on the revenue account has increased from Rs. 10,870 crores to
Subsidies on food, fertilizers and on export promotion, have become an integral part of Central
government and despite government’s frequent promise to reduce them, they are continuing to
rise, year after year. Total subsidies rose from Rs. 4,900 crores in 1985-86 to Rs. 12,160 crores
in 1990-91 and will be over Rs. 71,430 crores in 2008-09(budget estimates). The expenditure on
general service of the Central government consisting of expenditure on organs of state, tax
collection, external services, police, pensions etc. rises every year with wage revisions and
periodic increase in dearness allowance. Besides, the Centre has to assist States and Union
(Rs. crores)
payments
services, etc.
The total expenditure on these four items alone account for over 80% of the current non-planned
revenue expenditure. Since 1950-51, despite the professed objective of the government to be
interested in economic development and establishment of a welfare state, the single largest item
of expenditure of the country till a few years ago was the defence expenditure. For instance,
defence expenditure (revenue and capital) was Rs. 160 crores in 1950-51 and Rs. 96,000 crores
in 2008-09(budget). However, defence expenditure has gone down from 47% of the total
expenditure in 1950-51 to 14% in 2008-09(budget). Finally, interest payment has now become
the single largest item of expenditure (Rs. 1,90,810 crores). This is directly due to extensive
borrowing from the market, banks and financial institutions for purposes of development and
other needs, and consequent growing burden of debt services. Interest payment was only 11% of
40% in 2008-09.
Even though debt services i.e. interest payments are brought under non- development
expenditure we should recognize the relation to economic development in the country. Since
economic planning was initiated in 1950-51 the government has been borrowing extensively
from the market and also from other countries to finance economic development. This was the
position till about a decade ago. Since then the government has been borrowing even to meet its
current revenue expenditure. The total public debt and other liabilities of India has gone up from
Rs. 2860 crores in 1950-51 to over Rs. 2,896,740 crores by the end of March 2008.
To conclude the expenditure of the Central government since 1950-51 has been influenced
largely by two considerations viz. the necessity to speed up the economic development of the
country and keep the country prepared to face threats to its security from foreign aggression. But
defence and development are contradictory objectives to follow. To a very large extent India’s
development effort has been stunted because of the necessity to divert scarce resources for
defence needs.
3. PLAN PERIODS
During the first six plans, the Planning commission distinguished between five sectors of
development – agriculture and irrigation, power, industry, transport and communication and
social services. From the Seventh Plan there was a significant refinement of the sectors of
development. The distribution of public sector outlay on major heads clearly reflects the
priorities of development in different plans and also the subsequent changes in the pattern of
In determining an outlay on development of Rs. 2069 Cr. by public authorities over this period,
The need for initiating a process of development that will form the basis of much larger
The total resources likely to be available to the country for the purposes of development.
The close relationship between the rate of development and the requirements of resources
The necessity of completing the schemes of development initiated by central and state
The need to correct maladjustments in the country caused by War and Partition.
The pattern of priorities to be followed during a particular period has, according to the Planning
Commission, to take into account the immediate needs of the economy as also the desirability of
initiating certain long run changes in the economic structure. For the FIRST FYP (Five year
Plan), agriculture, including irrigation and power had topmost priority. Without a substantial
increase in the production of food and raw materials needed for the industry, a higher tempo of
development in the later cannot be sustained. The economy has first to be strengthened at the
base, and a sizeable surplus created in the agricultural sector and mobilized for sustaining
The table below shows the outlay of the Central and State Governments (excluding Jammu and
Kashmir for which Rs. 13 Cr had been provided) under various heads:
* Notes:
Before the reorganization of the States in 1956, the constituent units of the Indian Union were
classified as:
Part - A States: Assam, Bihar, Bombay, MP, Orissa, Punjab, The United Provinces & West
Bengal
Part - B States: Hyderabad, J&K, MP, Mysore, Patiala and East Punjab.
While the First FYP was admittedly a hastily compiled list of projects, considerable attention and
labor was devoted to the working out of a scientifically devised framework for Second FYP
based on an integrated strategy. A certain policy reorientation was also effected in this period,
which was supposedly to guide the elaboration of the plan. The most important landmark in this
respect was the adoption by Parliament in December 1954 of the goal of Socialistic Pattern of
Society.
To secure the increase in National Income by about 25% over five years.
The total development outlay of the central and State governments over the period of the plan
was fixed at Rs. 4800 Cr. The distribution of this outlay by major heads of development was
under –
Misc. 99 2.1
During this period, the figures of investment, outlay and (in some cases) the physical targets
underwent an upward revision. The plan envisaged an overall outlay of Rs. 11,600 Cr., of which
Rs.7500 Cr. was on Public Sector and Rs. 4100 Cr. in Private Sector.
In drawing up the Third FYP, the Planning Commission claimed to have kept in view the
To secure and increase in the national income of over 5% p.a., pattern of investment
being designed to sustain this rate of growth during subsequent plan period.
To achieve self-sufficiency in food-grains and increase in agricultural production to meet
To expand the basic industries like steel, chemical industries, fuel, power, and to
be met within a period of 10 years or so, mainly from country’s own resources.
To utilize to the fullest extent possible the manpower resources of the country and to
The following table gives the distribution of the financial outlay of Rs. 7,500 Cr. under major
heads:
(Rs. Cr.)
Development
(Rs. Cr.)
(Rs.Cr.)
For a better understanding of the allocation pattern in the different plans, it would be better to
Except during the first plan when agriculture and irrigation were allotted 30% of total outlay, all
Power Program:
The allocation on power development was unfortunately low during the first four plans between
10-15% of the total outlay. The low priority given to the power development was on the ground
that industries had not come up so fast and the progress in rural electrification, use of electric
power in railway transport system was inadequate. This however, proved to be a wrong judgment
on the part of planner. With rapid industrialization, and extensive demand for power both in rural
and urban areas, the country has been reeling under severe power shortages and the production
was curtailed. It was only in the seventh plan that the allocation on power was raised steeply to
The high priority given to the agriculture in the public sector programs in the first plan was at the
cost of low priority given to the industries. But from the second plan onwards the relative share
of industries and minerals was raised sharply from 6% in the first plan to 24% of the total plan
outlay in second plan. The allocation o industries have been generally around 24% of the total
public sector outlay till sixth plan. In the next two plans, outlays to industries declined steeply.
The allocation in transportation and communication was quite high during the first two plans-
between 25 to 28%. But since then their share has declined. However the country was regularly
facing serious transport bottlenecks which resulted in retarded output and income. Consequently,
The services include education, health and family planning, housing, labor welfare and welfare
of backward class, etc. These services are significant from the point of view of the poor and
services. But for the first and the third plan, which allotted 23% and 24% respectively for social
services, the outlay ranged between 15% to 19% from the Second to the Eighth Plans.
Right from 1980s, a marked deterioration was set into the budgetary positions of both the Center
and the State. The second oil price rise (1976) affected the state of government finances in a big
way. This resulted not only in increase in already high outstanding debt but also a larger interest
macroeconomic setup. Reduction in fiscal deficit, depreciation of exchange rate and a restoration
of market forces in the financial sector were all part of the package deal to save the economy.
A program of macroeconomic stabilization was initiated by the government in July 1991. it was
during this period that the new economic policy was adopted and the economy gradually
Henceforth a paradigm shift in the pattern of government expenditure was observed during this
The eighth five year plan reflected the process of fiscal reform and also economic reforms which
reflected government’s attempt to accelerate economic growth and improve the quality of life of
Communication
There was a slight improvement in the allocation for social services to 19% in this plan so as to
improve “human capital” especially by improving literacy. Also outlay on energy was increased
During this period, infrastructure which became a major constraint due to inadequacy of
complementary private investment, was paid due attention. There was a re-orientation of plan
By allocating 72% of the plan funds to irrigation, energy, transport and communication and
The approach paper to the Tenth plan has been spoken of the need for a new development policy
to make a break from the past. In this new policy framework reduction of subsidies and cost
The main objective of the tenth plan has been to set at least an 8% growth rate for the state’s
economy as compared to the previous plans with the aim to “catch up” with the rest of the
country. The first priority would therefore be generation of more wealth. Basic needs and equity
In the four decades of economic planning in India the share of govt. expenditure in GDP has
increased from 10 to 13%. By 1990-91 the Central expenditure had increased by 5 times to Rs.1,
07,995 Cr. While the total expenditure of both States and Center combined had increased from
26.3% of the GDP in 1980-81 to 28.8% of GDP in 1990-91, it came down during the mid 90s
before climbing again to 28.4% in 1999-2000. While the development expenditure in absolute
terms has been higher than the non development component, the latter has been rising faster
throughout the 80s and the 90s. In the 80s non development expenditure rose at an average
rate of 18.7% as compared with 14.9% for the development expenditure, while in the 90s the
growth was even faster at 19.1% with a concomitant decline in growth in development
expenditure at 13.7%. Expenditure on maintaining the assets created in the previous plan is
activities at levels already reached in plan period is shifted to non-planned in the next plan e.g.,
education and health facilities, etc. Thus as more plans are more completed a large amount of
expenditure on operation and maintenance of facilities and services created get added to non-
Our study therefore makes us conclude that while there is no doubt on the upward trend in
public expenditure, its allocation changed over time depending upon the change in government
priorities. From the sixth plan, specific allocation for rural development as a head of
development and increased allocation for social services were made. Simultaneously, greater
attention was also paid to the allocation in the social services sector covering education, health
and family planning, housing and urban development and other social services. Likewise there
was a sharp reduction in the share of public investment in total investment from 45% to 33.4%
in the Ninth Plan. The expenditure on administrative services increasing from Rs.99225 Cr. in
1990-91 to Rs.29219 Cr. in 2000-2001 and pensions increasing from Rs.3593 Cr. in 1990-91 to
Rs.23810 Cr. in 2000-2001 enhanced the constricting nature of the n on planned expenditure
and implied meager availability of resources for new projects particularly in the infrastructural
Along with the increasing allocation for the areas of rural development and social services there
was growing concern over the efficacy of expenditure and realization of the need to avoid
As the RBI Study of State Finances 1999-2000 observed “failure to contain expenditure has
been accepted as a major reason for the fiscal woes of the state governments. As the Revenue
Receipts, from Tax and Non-Tax sources and Capital Receipts from recovery loans and
disinvestments was not adequate to meet the rising tide of expenditure, the Center’s
borrowing and other liabilities increased. The emerging resource gap was made mostly through
Lastly, it can be said that the ‘modern formulation of Wagner’s Law of increasing state activities
Bhattacharya B.B. – India’s Economic Crisis, Debt, Burden and Stabilisation, 1992, B.R.
Publishing Corporation.
Bajpai A. D. N., Chaubey S. K., Gupta A., Pendse N. G., Joshi P. K. – Post Reform: Leading Issues
Datt R.and Sundaram K.P.M. – Indian Economy, Fortieth Edition, S. Chand Publishers
Roy A. – Planning in India: Achievements and Problems, First Edition (March 1956), National
Publishers
SOURCES OF DATA
RBI website