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CHAPTER 4

Growth and Pattern of Expenditure of the Central Government


Public expenditure is an important instrument of the fiscal system of a federal nation. The size and pattern of the public spending has great relevance in the growth process and in the reduction of economic disparities. The study of public expenditure was neglected till 1920s because of the belief that all public expenditure was waste. Infact, this belief was strengthened by the writings of the classical economists and especially that of Adam Smith (1776) who advocated that the government should restrict its activities to justice, police and arms (Zahir, 1972). To J. B. Say, public spending was usually for useless gratification of the wasteful whims of rulers; also it usually interfered with the process of the private capital formation necessary to the development of trade and industry by draining of funds that otherwise might have been accumulated by thrifty savers (Newman, 1968). Ricardo, too, viewed public spending as wasteful because of its possible effects on private capital formation. On the question of governments role, public 1968). expenditure Malthus was also of the view that could be excessive, leading to

injudicious taxation or too large a national debt (Newman,

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Less extreme but having much in common with classical views is the position of John Stuart Mill who was in favour of laissez-faire held that the business of life is better performed when those who have an immediate interest in it are left to take their own course, uncontrolled either by the mandate of law or the meddling of any public functioning (Groves, 1964). Contrary to it, in 1936, Lutz favoured public expenditure as it directly adds to the community commercial wealth. He said, Well run and government reclamation enterprises, reforestation

projects, and other forms of state business are the most obvious illustrations. Even the expenditure on ordinary services may result in the accumulation of certain assets, such as public buildings, which are a useful addition to the aggregate of community wealth. Keynes, a revolutionary economist, regarded public expenditure as an exogenous factor which can be utilized as a policy instrument to stimulate economic growth. Taylor (1953) favoured public expenditure by saying, Government funds may not only help to fill in the troughs of deficiencies in national income, but under proper circumstances may generate increase in private spending which constitute recovery and prosperity (Taylor, 1953). R. A. Musgrave, a twentieth century economist, advocated public expenditure since a government is forced to do many activities such as: (i) redistributive activities; (ii) activities to secure a re- allocation of resources; (iii)
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commercial activities, and stabilizing activities (Chand, 2008). Governments today incur expenditure in order to fulfill the following roles in the economy: (a) to correct distortions of market failures; (b) regulate private activity that might harm society; (c) provide public goods and services (i.e., economic and social infrastructure) and (d) often engage in production activity (Sattar, 2006). The increased participation of the government in economic activities has brought public spending to the forefront among the fiscal instruments. Through public expenditure, the government influences directly or indirectly production, consumption and distribution of the nation. It thus helps towards the economic and social development of the society. It can be used for stabilization, business cycle inversion, and growth purposes. It gives rise to positive externalities to economy and society, the more so through its capital component (Piana, 2001). It is worth noting here that public expenditure has played significant role in developed as well as underdeveloped countries. In the developed economies, the role of public expenditure consists in preventing cyclical fluctuations, counteracting a secular tendency towards stagnation and improving income distribution. Public expenditure can also be used as a lever to raise the level of income and employment. However, public expenditure has
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played threefold role in an underdeveloped economy in: (a) promoting economic development; (b) redistribution of income; and (c) balanced regional development (Zahir, 1972). Public expenditure is also playing an important role in the development of Indian economy. Classification of Public Expenditure in India Classification of Public Expenditure in India is important because different categories of expenditure (a) explain the interrelationship between the government sector and the rest of the economy and (b) reveal the relative size of different governmental activities in the economy. However, the Constitution requires revenue and capital expenditures to be shown separately in the budget. Article 112(2) states: The estimates of expenditure embodied in the annual financial statement shall show separately (a) the sums required to meet expenditure charged upon the Consolidated Fund of India; and (b) the sums required to meet other expenditure proposed to be made from the Consolidated Fund of India, and shall distinguish expenditure on revenue account from other expenditure. The same provision is repeated under Article 202 under the State Section. The distinction between revenue and capital expenditures not only is a constitutional requirement but also an essential ingredient for policy formulation and efficient resource allocation (Economic Survey, 2006-07). Thus it is useful to analyse the various

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components of public expenditure of central government of India Total expenditure of the central government comprises of revenue and capital expenditure. Revenue expenditure is expenditure incurred for purposes other than creation of assets of the central government. In many countries, it is known as current expenditure (Economic Survey, 2006-07). On the other hand, those expenditures of the Government which lead to the reduction in recurring financial liabilities fall under the category of capital expenditure. Such expenditures pertain to payments on acquisition of assets and loans and advances given. Trends of total expenditure, revenue expenditure and capital expenditure have been calculated by using semilogarithmic trend (Y=abx). Total expenditure of the central government since 1975-76 has been continuously growing and revenue expenditure has grown at higher rate as compared to capital expenditure (as shown in Graph 4.1). Table 4.1 presents the amount of revenue expenditure, capital expenditure and total expenditure and the share of revenue expenditure and capital expenditure in total expenditure of the central government. Since mid-1970s, the main objective of the central government was to give a concrete shape to the new design of development by revamping public expenditure policy in the direction of more employment programmes, rural development and also to maintain price stability. To achieve this objective, the
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Table 4.1: Total Expenditure of the Central Government of India


Year Revenue Expenditure* (per (Rs. cent) crore) 64.43 7094.45 67.00 8250.22 68.84 9079.38 66.27 10699.05 67.31 11736.76 62.05 13258.15 64.82 15430.46 66.35 18758.62 66.51 22112.69 65.43 27044.22 66.65 33603.94 67.39 40717.82 70.70 46162.22 71.57 54096.83 71.66 64005.68 72.91 73551.33 76.26 82290.80 75.66 92690.20 76.58 108499.50 79.12 122345.70 80.19 139714.90 82.14 158810.70 86.68 179996.53 86.28 216417.41 85.99 248869.34 88.81 277975.49 87.06 301774.76 92.61 340092.66 100.9 363044.82 95.15 383030.66 88.66 440302.87 91.04 514313.34 Capital Expenditure** (per (Rs. cent) crore) 35.57 3916.28 33.00 4080.32 31.16 4109.29 33.73 5446.23 32.69 5698.31 37.95 8110.01 35.18 8373.89 33.65 9511.69 33.49 11135.53 34.57 14288.63 33.35 16811.47 32.61 19699.62 29.30 19136.19 28.43 21492.68 28.34 25309.71 27.09 27327.12 23.74 25612.16 24.34 29825.57 23.42 33190.07 20.88 32294.36 19.81 34504.46 17.86 34533.77 13.32 27667.92 13.72 34415.81 14.01 40530.93 11.19 35035.72 12.94 44838.28 7.39 27134.24 -0.90 -3206.28 4.85 19536.20 11.34 56310.75 8.96 50620.96 Total Expenditure (per (Rs. cent) crore) 100 11010.73 100 12330.54 100 13188.67 100 16145.28 100 17435.07 100 21368.16 100 23804.35 100 28270.31 100 33248.22 100 41332.85 100 50415.41 100 60417.44 100 65298.41 100 75589.51 100 89315.39 100 100878.45 100 107902.96 100 122515.77 100 141689.57 100 154640.06 100 174219.36 100 193344.47 100 207664.45 100 250833.22 100 289400.27 100 313011.21 100 346613.04 100 367226.90 100 359838.54 100 402566.86 100 496613.62 100 564934.30

1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (R.E.) 83.50 588378.05 16.50 116289.42 100 704667.47 * Excludes self-balancing item. **Excludes states share against small savings collections from 1997-98 onwards. Note: Central government means centre and UTs as defined in Indian Public Finance Statistics. Source: Computed on the basis of the data compiled from various issues of Indian Public Finance Statistics.

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central governments total expenditure stepped up to Rs. 50415.41 crore in 1985-86. This sharp increase in the total expenditure is mainly because of continuous increase of revenue expenditure which created serious imbalances in the fiscal sector of the economy. The government undertook number of measures to programmes, implementation employment of a system strengthen creating of the control activities over and expenditure such as a large number of anti-poverty zero-base budgeting

(Economic Survey, 1986-87). Though top priority was given by the government to reduce the expenditure but it did not yield any fruitful results and the expenditure reached to the level of Rs. 89315.39 crore in 1989-90, out of which 71.66 per cent (or Rs. 64005.68 crore) was revenue expenditure. The main aspect for sharp increase in revenue expenditure of the central government from 1975-76 to 1979-80 was the rapid increase in subsidies. Thereafter, the substantial increase was due to hike of expenditure on items like defense , interest payments and grants and loans to States, UTs on account of relief against drought and other natural calamities (Economic Survey, 1982-83). A tremendous increase in the share of expenditure on revenue account of the central government was accounted for by the decline in the share of capital expenditure in the pre-reform period. Capital expenditure moved up from Rs. 3916.28 crore in 1975-76 to Rs. 25309.71 crore in 1989-90 recorded the growth of 16 per cent per annum in the pre91

reform period of fifteen years (Table 4.2). It constituted


Graph 4.1: Trends in Revenue, Capital and Total Expenditure of the Central Government of India
800000

700000

600000

Rs. crore

500000

400000

300000

200000

100000

0 1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08

Pre-reform period Revenue Expenditure Capital Expenditure

Post-reform period Total Expenditure

Source: Computed on the basis of data compiled from the various issues of Indian Public Finance Statistics. 35.57 per cent of the total expenditure of the central government in the year 1975-76. This percentage decreased to 34.57 per cent in 1984-85 and further declined to 28.34 per cent in 1989-90. The share of capital account expenditure in total expenditure declined by 7 percentage points in the pre-reform period. The central government has also taken number of steps since 1990s to curtail built-in-growth in expenditure and to bring about structural changes in the composition of expenditure which include reduction of posts at various levels, introduction of Expenditure Reforms Commission, subjecting all existing schemes to zero-base budgeting and review of all subsidies. Despite these numerous measures
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initiated by the government, the expenditure continuously increased during the post-reform period which was the main contributory factor in the fiscal crisis. In the post-reform period, total expenditure of the central government has grown at a lesser rate (11 per cent per annum) from Rs. Table 4.2: Compound Growth Rates of Expenditure of the Central Government of India and its Components 1975-76 1990-91 1991-92 1975-76 Year to to to to 2005-06 2005-06 2005-06 1989-90 Total 17 10 11 14 Expenditure (i) Revenue 17 12 13 15 Expenditure (ii) Capital 16 17 20 13 Expenditure Note: The whole period of the study has been split into pre and post-reform period i.e., 1975-76 to 1989-90 and 199192 to 2005-06. The growth rate for the period between 1990-91 to 2005-06 which also includes the crisis period i.e., 1990-91 has been calculated as stated above. However, in the interpretation, the main emphasis has been put on the post-reform period of 1991-92 to 2005-06. Source: Computed on the basis of data compiled from various issues of Indian Public Finance Statistics. 100878.45 crore in 1990-91 to Rs. 107902.96 crore in 1991-92 and to Rs. 496613.62 crore in 2005-06 and to Rs. 704667.47 crore in 2007-08 (R.E.) as compared to the growth of 17 per cent per annum in the pre-reform period. The increase in total expenditure was mainly because of a sharp hike in expenditure on revenue account. Such expenditure during the period 1991-92 to 2005-06 has
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registered the growth of 13 per cent per annum (from Rs. 82290.8 crore to Rs. 440302.87 crore). It constituted 76.26 per cent in 1991-92 and was as much as 88.81 per cent and reached to the level of 91.04 per cent of total expenditure in 2000-01 and 2006-07, respectively. This increasing trend was because of the rise in interest payments and the sharp escalation in its salary bill (pay and allowances) and pension payments. Another reason behind this growing share of public expenditure on revenue account was the measures designed by the government for the welfare of poor, especially for those in rural areas. To benefit agricultural
Graph 4.2: Share of Revenue and Capital Expenditure in Total Capital Expenditure of the Central Government of India
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100

35.57 A sp e rc e n to fT o ta l
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35.18 32.69 33.49

31.16 64.43 64.82 67.31 68.84

13.32 12.94 28.34 23.42 14.01 29.30 19.81 23.74 33.35

11.34 16.50

60

40

66.51

70.70

76.26

100.90 80.19 85.99 87.06

83.50

20

66.65

71.66

76.58

86.68

88.66

-0.90

-20 19 7576 19 7778 19 7980 19 8182 19 8384 19 8586 19 8788 19 8990 19 9192 19 9394 19 9596 19 9798 19 9900 20 0102 20 0304 20 0506 20 0708

Pre-reform period Revenue Expenditure

Post-reform period Capital Expenditure

Source: Computed on the basis of data compiled from various issues of Indian Public Finance Statistics. sector like debt relief for agricultural loans up to Rs. 10,000, introduction of an employment guarantee drought prone areas with acute scheme in of rural problems

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unemployment were the measures especially designed by the government. It is clearly observed from the Graph 4.2 that revenue expenditure not only constitutes a significant share of total expenditure of the central government, but has also observed an increasing trend. As a result, there is a secular fall in the share of capital expenditure, which is mirrored in the rise in the share of revenue expenditure in the postreform period too. Capital expenditure of the central government went up from Rs. 25612.16 crore in 1991-92 to Rs. 56310.75 crore in 2005-06 - recorded the growth of 20 per cent per annum during the post-reform period. It rose to Rs. 116289.42 crore in 2007-08 (R.E.). Looking at capital expenditure as a proportion of total expenditure of the central government, the share of capital expenditure has been on the decline in the post-reform period and reached to 8.96 per cent in 2006-07. This was due to the fact that expenditure compression was brought about mainly through cut in capital expenditure. During post-reform period, the share stepped down by 11 percentage points. This happened partly because of the cessation of loans from the central government to states, which were classified as capital expenditures (Reserve Bank of India Bulletin, December 2008). So, in spite of all these reforms, the decline in the share of capital account expenditure is greater than the decline in this share in pre-reform period.

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Thus it is clear from the table that the share of revenue expenditure as compared to the capital expenditure of the central government remained significantly higher during 1975-76 to 2005-06 and a little improvement as a result of reform measures has been observed as revenue expenditure has grown at a lower rate in the post-reform period (13 per cent per annum) as compared to the pre-reform period (17 per cent per annum). On the other hand, capital expenditure has recorded a higher growth in the post-reform period (20 per cent per annum) than the pre-reform period (16 per cent per annum). Total expenditure, revenue and capital expenditure of the central government as per cent of GDP reveal the true picture of the importance and quality of the expenditure of this layer of government in Indian federal set-up. Table 4.3 shows that total expenditure of the central government as a proportion of GDP had risen from 13.07 per cent in 1975-76 to around 20 per cent in the latter half of the 1980s due to large number of anti-poverty programmes and employmentcreating activities. Besides it, a large part of total expenditure (over 70 per cent) was accounted for by three items namely interest payments, defense and subsidies which had placed a difficult burden on budgetary balances. This expenditure witnessed some fall relative to GDP in the first half of the 1990s which was on account of steps taken by the government in 1994-95. These include reduction of

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Table 4.3: Total Expenditure of the Central Government of India as per cent of GDP Year Revenue Expenditure 8.42 9.09 8.83 9.60 9.60 9.12 9.03 9.81 9.94 10.85 11.94 12.93 12.90 12.74 13.12 12.91 12.57 12.31 12.53 12.04 11.72 11.52 11.78 12.35 12.75 13.22 13.24 13.85 13.18 12.16 12.29 12.40 12.46 Capital Expenditure 4.65 4.50 4.00 4.89 4.66 5.58 4.90 4.98 5.01 5.73 5.98 6.26 5.35 5.06 5.19 4.80 3.91 3.96 3.83 3.18 2.90 2.50 1.81 1.97 2.08 1.67 1.97 1.11 -0.10 0.62 1.57 1.22 2.46 Total Expenditure 13.07 13.59 12.83 14.49 14.26 14.70 13.93 14.79 14.95 16.58 17.92 19.19 18.25 17.80 18.31 17.71 16.48 16.27 16.36 15.22 14.62 14.02 13.59 14.32 14.83 14.89 15.21 14.96 13.08 12.78 13.86 13.62 14.92

1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (R.E.)

Source: Computed on the basis of the data compiled from various issues of Indian Public Finance Statistics.

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posts at various levels, overall cut on consumption of petrol/diesel, reduction in expenditure on telephone and restrictions on purchases of additional vehicles (Economic Survey, 1994-95). Total expenditure-GDP ratio declined from 17.71 per cent in 1990-91 to 16.48 per cent in 199192 and further to 13.59 per cent in 1997-98. Consequently, there was decline in the central government fiscal deficit. The situation changed with growth in total expenditure picking up from 1998-99. The compression in total expenditure witnessed in the first half of the 1990s was mainly on account of the fall in the capital expenditure-GDP ratio. In 2001-02, total expenditure was 15.21 per cent of GDP (13.24 per cent of GDP of revenue expenditure and 1.97 per cent of GDP of capital expenditure) which was marginally higher than the level in the previous year. While the level of expenditure is not very high by international comparison, the main problem in public expenditure management has been the poor quality outcomes of such expenditure (Economic Survey, 2004-05). In 2004-05, the government tried to check the deterioration in the composition of expenditure and also carried the process of improving revenue expenditure and increasing capital expenditure (Singh, 2008). At the same time, the compression entirely on non-plan account of revenue expenditure became the target (Economic Survey, 2004-05). As such, an important reform undertaken was the enactment of the FRBM Act in 2003 which became effective from July 5, 2004. It provides an institutional framework and binds the government to prudent fiscal policies which
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facilitated the process of fiscal consolidation. As a result, the total expenditure fell to 12.78 per cent in 2004-05. But it began to rise thereafter and reached to 14.92 per cent of GDP in 2007-08 (R.E.). Looking at revenue expenditure as per cent of GDP, a secular rise was noticed. Revenue expenditure rose from 8.42 per cent of GDP in 1975-76 to 13.12 per cent of GDP in 1989-90. Due to continuous attempts since 1991-92, revenue expenditure-GDP ratio of the central government could be brought down from 12.57 per cent in 1991-92 to only by 1.39 per cent points and reached to 11.52 per cent in 1996-97. This was despite the fact that interest payments continue to increase (Economic Survey, 1995-96). Thereafter, fiscal discipline became loose on the expenditure side of the central government. Revenue expenditure-GDP ratio increased to 13.85 per cent in 2002-03. Due to the enactment of the FRBMA in 2003, revenue expenditure of the central government fell to 12.16 per cent of GDP in 2004-05 from 13.18 per cent of GDP in 2003-04. It again increased to the level of 12.46 per cent of GDP in 2007-08 (R.E.). It has serious implications for economic growth as well as for fiscal discipline. Capital expenditure, on the other hand, hovered around 4 to 6 per cent of GDP during pre-reform period. However, the fiscal crisis of 1990-91 had its impact on the total expenditure of the central government in the 1990s. Infact, the expenditure cut of the nineties could be affected at the cost of capital expenditure. It declined from 4.8 per

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cent of GDP in 1990-91 to 3.91 per cent of GDP in 1991-92 and further to -0.1 per cent of GDP in 2003-04. The fiscal correction through reduction in capital expenditure is often cited as one of the causes for economic slowdown during second half of the nineties (Sinha and Pant, 2004). The position improved a little and it reached to the level of 2.46 per cent of GDP in the revised estimates of 2007-08. This improvement was mainly the result of an increase in the non-plan capital outlay to acquire RBIs stake in the State Bank of India (Report of 13th Finance Commission, 20102015). Graph 4.3 reveals the clear picture regarding total
Graph 4.3: Revenue, Capital and Total Expenditure of the Central Government of India as per cent of GDP
25

20

As per cent of GDP

15

10

Source: Computed on the basis of data compiled from various issues of Indian Public Finance Statistics. expenditure, revenue expenditure and capital expenditure as per cent of GDP of the central government for the period

19 75 -7 6 19 77 -7 8 19 79 -8 0 19 81 -8 2 19 83 -8 4 19 85 -8 6 19 87 -8 8 19 89 -9 0 19 91 -9 2 19 93 -9 4 19 95 -9 6 19 97 -9 8 19 99 -0 0 20 01 -0 2 20 03 -0 4 20 05 -0 6 20 07 -0 8
-5

Pre-reform period Revenue Expenditure

Post-reform period Capital Expenditure Total Expenditure

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1975-76 to 2007-08. Revenue expenditure as per cent of GDP was not only high and continuously growing in the prereform period but the gap between revenue expenditure and capital expenditure started widening in the mid-eighties. During the post-reform period, no doubt, it has followed a stable path but has not only much higher than capital expenditure and the gap between these two widened extremely up to mid-2000s. Composition of Revenue Expenditure Revenue expenditure is classified into nondevelopmental expenditure, developmental expenditure and statutory grants to states. Non-developmental expenditure consists of expenditure on administration and defense and also payment of interests. Developmental expenditure consists of expenditure on social and community services such as education and health and on economic services such as agriculture, industry, power, transportation and communication. When we categorize revenue expenditure into

developmental and non-developmental categories, it has been observed that expenditure in both of these categories has increased during the period under study (Table 4.4). From the share of non-developmental and developmental revenue expenditure in total revenue expenditure of the central government, it can be observed that nondevelopmental revenue expenditure contributes a significant
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Table 4.4: Share of Non-Developmental and Developmental Revenue Expenditure in Total Revenue Expenditure of the Central Government of India (As per cent of Total)
Year NonDevelopmental Expenditure 66.07 65.48 60.90 58.77 62.14 63.54 63.81 62.72 62.83 61.65 61.90 63.08 60.80 60.57 58.98 59.29 60.46 61.32 63.75 65.33 65.86 66.44 67.81 68.78 69.00 66.79 66.16 65.86 64.09 64.20 59.06 56.26 54.51 Developmental Expenditure Statutory Grants to States 7.32 6.26 6.60 6.40 2.34 2.53 2.30 2.37 2.10 2.01 3.19 2.38 2.80 2.52 2.50 4.63 4.19 4.16 3.72 1.40 3.78 3.36 1.72 1.56 1.52 4.17 4.28 3.16 3.03 3.17 5.71 5.54 4.61 Total Revenue Expenditure 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (R.E.)

26.61 28.26 32.50 34.83 35.52 33.93 33.89 34.91 35.07 36.34 34.91 34.54 36.40 36.91 38.52 36.08 35.35 34.52 32.53 33.27 30.36 30.20 30.47 29.66 29.48 29.04 29.56 30.98 32.88 32.63 35.23 38.20 40.88

Source: Computed on the basis of the data compiled from various issues of Indian Public Finance Statistics.

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proportion of the total revenue expenditure of the central government (as shown in Graph 4.4). Throughout the period covered by the study, the share of non-developmental revenue expenditure was more than developmental revenue expenditure of the centre and has remained 60 to 70 per cent. The share for most of the years of non-developmental revenue expenditure of the central government fell down to 58.77 per cent in 1978-79 from 66.07 per cent in 1975-76. The share of non-developmental revenue expenditure rose to 62.14 per cent in 1979-80. An important factor responsible for this was the increasing interest burden on the budget (Economic Survey, 1980-81). Thereafter, this expenditure category indicates roughly a stable and a high share in the pre-reform period. During post-reform of period, the noncentral to Rs. developmental Rs. 49754.40 revenue crore in expenditure 1991-92 and in

government raised from Rs. 43614.83 crore in 1990-91 to further total 320739.25 crore in 2007-08 (R.E.). The share of nondevelopmental revenue expenditure revenue expenditure increased from 59.29 per cent in 1990-91 to 60.46 per cent in 1991-92 and to 69 per cent in 1999-00. It was only in the twenty first century that the nondevelopmental revenue expenditures share in total revenue expenditure began to fall. In 2001-02, it fell to 66.16 per cent of total revenue expenditure, to 64.2 per cent in 200405 and 54.51 per cent in 2007-08 (R.E.). The reason behind this fall was the significant measures introduced by the
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government. One among them was regarding pension reforms. A new pension programme based on defined contributions was envisaged for those entering central government services after October 1, 2001 (Economic Survey, 2001-02). Further, developmental revenue expenditure increased from Rs. 1888.1 crore in 1975-76 (26.61 per cent) to Rs. 4168.96 crore in 1979-80 (35.52 per cent) and it was due to
Graph 4.4: Share of Non-developmental and Developmental Revenue Expenditure in Total Revenue Expenditure of the Central Government of India
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As per cent of Total

2.50 4.19 3.72 3.78 1.72 1.52 4.28 3.03 4.61 7.32 6.60 2.34 2.302.10 3.19 2.80 5.71 35.35 90 29.56 26.61 32.53 38.52 29.48 32.50 32.88 80 30.36 36.40 35.52 30.47 35.23 34.91 33.89 70 35.07 40.88
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66.07 63.75 60.90 65.86 59.06 60.46 40 62.14 67.81 64.09 58.98 54.51 63.81 69.00 30 60.80 62.83 66.16 61.90 20
50 10 0 19 7576 19 7778 19 7980 19 8182 19 8384 19 8586 19 8788 19 8990 19 9192 19 9394 19 9596 19 9798 19 9900 20 0102 20 0304 20 0506 20 0708

Pre-reform period
Non-Developmental Revenue Expenditure

Post-reform period
Developmental Revenue Expenditure Statutory Grants to States

Source: Computed on the basis of data compiled from various issues of Indian Public Finance Statistics. the sharp increase in subsidies. Thereafter, there was reduction in the share of
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developmental

revenue

expenditure in total revenue expenditure to 33.93 per cent in 1980-81. This was achieved due to reduction in the subsidies of fertilizers. Its share further rose to 38.52 per cent in 1989-90. The major components which contributed to this increase were defense and interest payments. On the other hand, developmental revenue expenditure, as a proportion of total revenue expenditure, has observed a declining trend till 2000-01 but thereafter it has been showing a positive trend around 34-35 per cent during postreform period. Looking at the statutory grants to states, such expenditure fell to Rs. 274.16 crore in 1979-80 from Rs. 519.37 crore in 1975-76. This decline in statutory grants to states was due to the implementation of the recommendations of the Seventh Finance Commission (Economic Survey, 1979-80). It increased from Rs. 335.21 crore to Rs. 1593.6 crore in 1989-90. During post-reform period, these grants increased to Rs. 28454.17 crore in 2006-07. The relative share of these grants continuously declined and reached to the lowest level of 1.52 per cent during 2001-02. It is only after this period that the relative share has increased to 3 to 4 per cent reflecting the impact of implementation of the Twelfth Finance Commission award. Thus it can be concluded that non-developmental revenue expenditure as well as developmental revenue

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expenditure of the central government has been growing. But the share of non-developmental revenue expenditure has remained greater than developmental revenue expenditure. Even during the post-reform period, the share of developmental revenue expenditure declined till 2000-01. It is only recently that no doubt the share of nondevelopmental increasing. revenue expenditure is greater but is declining and the share of developmental expenditure is

Composition of Capital Expenditure Capital expenditure is incurred on capital projects both of a non-development and development nature. It also includes loans and advances to states and other bodies. Table 4.5 displays the components of capital

expenditure of the central government. Except the year 2003-04, there has been significant rise in the total capital expenditure during the study period. The share of developmental capital expenditure has remained more than non-developmental capital expenditure out of total capital expenditure of the central government in the pre-reform period, but the situation reversed in the post-reform period (as shown in Graph 4.5). Non-developmental capital expenditure of the centre increased from Rs. 464.95 crore in 1975-76 to Rs. 5241.38 crore in 1989-90. Its share as a proportion of total capital expenditure has shown a

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Table 4.5: Share of Non-Developmental and Developmental Capital Expenditure in Total Capital Expenditure of the Central Government of India (As per cent of Total)
Year 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (R.E.) NonDevelopmental Expenditure 11.87 7.43 6.37 9.46 5.08 11.38 5.89 7.62 12.31 8.57 9.64 13.07 22.85 22.30 20.71 19.63 27.15 42.61 38.89 21.87 32.88 26.72 36.02 48.92 35.90 40.58 39.82 64.55 -629.00 179.20 63.52 72.48 36.43 Developmental Expenditure 45.59 37.91 48.20 34.93 37.73 37.73 45.45 43.46 44.05 46.33 40.90 39.70 32.14 30.46 32.23 29.36 27.17 24.06 18.14 24.28 15.51 14.38 27.32 23.14 27.56 31.84 27.47 46.43 -472.00 92.21 35.25 44.65 57.98 Loans and Advances 42.54 54.66 45.43 55.61 57.19 50.89 48.66 48.92 43.64 45.10 49.46 47.23 45.01 47.24 47.06 51.01 45.68 33.33 42.97 53.85 51.61 58.90 36.66 27.94 36.54 27.58 32.71 -10.98 1201.00 -171.41 1.23 -17.13 5.59 Total Capital Expenditure 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Source: Computed on the basis of the data compiled from various issues of Indian Public Finance Statistics.
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fluctuating trend. It was 11.87 per cent in 1975-76 and reached to 8.57 per cent in 1984-85 and climbed to 20.71 per cent in 1989-90. During the post-reform period, it rose from Rs. 5364.08 crore in 1991-92 to Rs. 42370.83 crore in 2007-08 (R.E.). To curtail this high growth rate of nondevelopmental capital expenditure, the government undertook various reforms on this front very late with the beginning of the process of downsizing government. These included abolishing of four-secretary level posts in April 1, 1999, introduction of Expenditure Reforms Commission in February 29, 2000 and ban on creation of new posts for one year in 2000-01 but even then the share of nonvery high. As a developmental expenditure remained

proportion of total capital expenditure, the share of nondevelopmental capital expenditure went up to 72.48 per cent in 2006-07. Further, developmental capital expenditure increased from Rs. 1785.48 crore in 1975-76 to Rs. 8158.41 crore in 1989-90. The share of developmental capital expenditure in total capital expenditure increased continuously till 1984-85 which was 46.33 per cent. Thereafter, the share of developmental capital expenditure decreased to 30.46 per cent in 1988-89. During post-reform period, developmental capital expenditure which stood at Rs. 6958.08 crore in 1991-92 galloped to Rs. 22602.49 crore in 2006-07. As a proportion of total capital expenditure, its share was 27.17

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per cent in 1991-92 and stood at 27.32 per cent in 1997-98 and 44.65 per cent in 2006-07.
Graph 4.5 : Share of Non-Developmental and Developmental Capital Expenditure in Total Capital Expenditure of the Central Government of India
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100

1.23 5.59 42.54 48.66 55.61 42.97 45.1 45.01 51.01 36.54 58.9 27.56 14.38 38.89 11.87 9.46 5.89 8.57 22.85 19.63 -10.98
197576 197879 198182 198485 198788 199091 199394 199697 199900 200203 200506 200708

As per cent of Total

46.43

80

35.25 57.98

60

18.14
40

45.59 34.93

45.45 46.33

32.14

29.36

64.55 63.52 35.90 36.43

20

26.72

-20

Pre-reform period
Non-Developmental Capital Expenditure

Post-reform period
Developmental Capital Expenditure Loans & Advances

Source: Computed on the basis of data compiled from various issues of Indian Public Finance Statistics. Looking at the share of loans and advances during the period 1975-76 (Rs. 1665.85 crore) to 1989-90 (Rs. 11909.92 crore), it was 42.54 per cent of the total capital expenditure in the year 1975-76, rose to 57.19 per cent in 1979-80 and further decreased to 47.06 per cent in 198990. Such expenditure during the period 1991-92 to 2001-02 increased by little amount and reached from Rs. 13939.8 crore to Rs. 14667.09 crore. It constituted 51.01 per cent in 1990-91 and was declined to 32.71 per cent in 2001-02. Thereafter, it became negative and reached to the level of

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17.13 per cent in 2006-07 because of Debt Consolidation and Debt Waiver Schemes for the state governments started by the central government. After a look at the trends in expenditure at the central level in the end, it is concluded that total expenditure of the central government has been rapidly growing and it increased at the rate of 14 per cent per annum throughout the study period. This sharp increase has been mainly on account of continuous increase in the share of revenue expenditure which created serious fiscal imbalance in the fiscal sector of the economy. What is more disturbing is that revenue expenditure shot up at the cost of capital expenditure. Besides it, as a result of reform measures, revenue expenditure has grown at a lower rate in the postreform period than the pre-reform period. On the other hand, capital expenditure has recorded a higher growth in the post-reform period than the pre-reform period. As a proportion of GDP, total expenditure of the central government increased from 12 to 18 per cent in the prereform period but again declined to 12 per cent by mid-2000 in the post-reform period. Revenue expenditure as per cent of GDP was not only high and continuously growing in the pre-reform period but the gap between revenue expenditure and capital expenditure started widening in the mideighties. During the post-reform period, no doubt, it has followed a stable path but has not only much higher than

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capital expenditure and the gap between these two widened extremely up to mid-2000s. While analyzing the components of revenue

expenditure, it can be observed that non-developmental revenue expenditure contributes a significant proportion (more than 60 per cent) of total revenue expenditure of the central government. With the significant measures introduced by the government, only during 2000s, the share of growth of non-developmental revenue expenditure has started declining in the post-reform. Looking at the share of non-developmental and developmental capital expenditure in total capital expenditure of the central government, it is observed that the share of developmental capital expenditure has remained more than non-developmental capital expenditure in the pre-reform period, but this situation has been reversed in the post-reform period. It may thus be concluded that there is a need to give more emphasis in the reform process on improvement in the composition of revenue expenditure as well as of capital expenditure.

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