DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM

TRENDS IN PUBLIC
EXPENDITURE
ECONOMICS - I

Submitted To: Prof. G. Ramachandrudu

Malavika Ganta
2013047

Index

Topic

Page

Introduction..2
Significance of Public Expenditure..3
Classification of Public Expenditure4
Development and Non-Development Expenditure..5
Capital and Revenue Expenditure6
Pre Reforms period...8
Post Reforms period.9
Main Cause of Increase in Public Expenditure...10
Conclusion ..12
Bibliography13

Introduction

Public Expenditures refer to government expenditures incurred by central, state and local
governments of a country for the maintenance of the government, internal and external
security and for the promotion of socio-economic welfare of the people. Governments all
over the world assume certain responsibilities for the people of their country, the performance
of which requires public expenditures. The government expenditures mainly consist of
Expenditures on general, social and economic services.

Significance and Importance of Public Expenditure

In modern economic activities public expenditure has to play an important role. It helps to
accelerate economic growth and ensure economic stability. Public Expenditure can promote
economic development as follows:

To promote rapid economic development.

To promote trade and commerce.
To promote rural development
To promote balanced regional growth
To develop agricultural and industrial sectors
To build socio-economic overheads e.g. Roadways, railways, power etc.
To exploit and develop mineral resources like coal and oil.
To provide collective wants and maximise social welfare.
To promote full - employment and maintain price stability.
To ensure an equitable distribution of income.

Thus public expenditure has to create and maintain conditions conducive to economic
development. It has to improve the climate for investment. It should provide incentives to
save, invest and innovate.1
Classification of Public Expenditure
Every year, the government prepares Estimates of Expenditures it is projecting to incur or has
incurred in past and then puts it for a parliamentary approval (Article 112 Indian
Constitution) in the form of the budget document. This budget document classifies diverse
expenses under various categories for better reporting, accounting and financial management
purposes. The Central government had adopted a new classification of public Expenditures
from the 1987-88 budget. Under this new classification all public expenditures are classified
into:
1 Public Finance by S.N Chand

Plan Expenditures comprising of all the expenditures of the government which are
included in the central plan. The expenditures related to new projects and programmes
become Plan Expenditures during the period of a five year plan. Plan Expenditures are

divided into Revenue and Capital Expenditures.

Non-Plan Expenditures are committed expenditures on completed schemes of earlier
plans and the interest on borrowings. Non-Plan Expenditures are further sub divided
into Revenue Expenditures and Capital Expenditures. Revenue Expenditures relate to
the day to day running expenses of the government and consists of interest payments,
defence revenue expenditure, subsidies (food, fertilizers and export promotion and
others), debt relief to farmers, postal deficit, police, pensions, other general services
(organs of state, tax collection, external affairs, etc.). Capital Expenditures are those
expenditures that lead to a creation of financial or physical assets or reduction in
recurring financial liabilities. They include capital outlays and loans to states and
union territories for financing plan projects, loans to foreign governments and loans to
public enterprises.2

There is another classification of government expenditures i.e., Development Expenditures

and Non-Development Expenditures. Development Expenditures are broadly defined to
include all items of expenditures that are designed directly to promote economic development
and social welfare. It mainly includes spending on economic services (agriculture, industry,
energy, communication, transport, science, technology and environment) and social services
(education, health, employment, nutrition, housing and others). Non-Development
Expenditures include expenditures pertaining to the general services rendered by the
Government such as preservation of law and order, defence of the country and the
maintenance of the general organs of the government. Expenditures by the government on
social and economic services are a crucial necessity for fulfilling the basic needs of people in
developing countries. However the share of the centres expenditures on social services is low.
Given the division of responsibilities between the Centre and the States in India, on an
average about 85 percent of the spending in social services in India is undertaken by the state
governments. It is the responsibility of the states, rather than the centre, to provide social
services that matter more for human development. Further, states are responsible for most of
the infrastructure facilities (except telecommunications, civil aviation, railways and major
ports) and law and order.
2 Economic Impact of Government Expenditure by Atul Sharma, Page 233

Development and Non-Development Expenditure

Levels of Development Expenditures followed a trend similar to that of the total public
expenditures. The share of Development Expenditures in the GDP rose after 1981-82 and
reached its peak values in the mid1980s. In the 1990s and 2000s, the share of Development
Expenditures in GDP fell sharply. Thus, while there was a rise in the share of public
expenditures and development expenditures in the GDP until the mid-eighties, the trend had
reversed significantly in the nineties and continued in 2000s. An important factor that has
been constraining the growth of Development Expenditures is the rising share of Non
Development Expenditures. Non-Development Expenditures continues to be a large
proportion of the Total Expenditures. Defence, debt services and administrative expenses are
so large and so significant that they are responsible for keeping non- Development
Expenditures at a high level. The share of non-developmental expenditures in Total
Expenditures of the Centre grew from 42.54 percent in 1980-81 to 45.70 percent in 1990-91
and 58.62 percent in 2000-01. Then in 2000s, post FRBMA the trend reversed and it fell to
47.21 percent in 2011-12.3
Capital and Revenue Expenditure
Capital Expenditure of the government refers to that expenditure which results in creation of
fixed assets. They are in the form of investment. They add to the net productive assets of the
economy. Capital Expenditure is also known as development expenditure as it increases the
productive capacity of the economy. It is an investment expenditure and a non-recurring type
of expenditure. For Eg. Expenditure - on agricultural and industrial development, irrigation
dams, and public enterprises etc, are all capital expenditures
Revenue expenditures are current or consumption expenditures incurred on civil
administration, defence forces, public health and, education, maintenance of government
machinery etc. This type of "expenditure is of recurrent type which is incurred year after year.
Development and Non - Developmental Expenditure / Productive and Non Productive Expenditure
Expenditure on infrastructure development, public enterprises or development of agriculture
increase productive capacity in the economy and bring income to the government. Thus they

3 Money, Baking and Public Finance by Hajela T.N, Page 134

are classified as productive expenditure. All expenditures that promote economic growth
development are termed as development expenditure.
Unproductive (non - development) expenditure refers to those expenditures which do not
yield any income. Expenditure such as interest payments, expenditure on law and order,
public administration, do not create any productive asset which brings income to government
such expenses are classified as unproductive expenditures.4
Transfer and Non - Transfer Expenditure
Transfer expenditure refers to those kind of expenditures against there is no corresponding
transfer of real resources i.e., goods or services. Such expenditure includes public expenditure
on: - National Old pension Scheme, Interest payments, subsidies, unemployment allowances,
welfare benefits to weaker sections etc. By incurring such expenditure, the government does
not get anything in return, but it adds to the welfare of the people, especially to weaker
sections of society. Such expenditure results in redistribution of money incomes within the
society.
The non - transfer expenditure relates to that expenditure which results in creation of income
or output The non - transfer expenditure includes development as well as non - development
expenditure that results in creation of output directly or indirectly. Economic infrastructure
(Power, Transport, Irrigation etc.), Social infrastructure (Education, Health and Family
welfare), internal law and order and defence, public administration etc. By incurring such
expenditure, government creates a healthy environment for economic activities.5
Plan and Non - Plan Expenditure
The plan expenditure is incurred on development activities outlined in ongoing five year plan.
In 2009-10, the plan expenditure of Central Government was 5.3% of GDP. Plan expenditure
is incurred on Transport, rural development, communication, agriculture, energy, social
services, etc.
The non - plan expenditure is incurred on those activities, which are not included in five-year
plan. It includes development and non - development expenditure. It includes:-Defence,
subsidies, interest payments, maintenance etc.
4 Public Economics in Indian Theory, J.R Gupta, 2007, Page.107
5 Ibid

Expenditure in Pre- Reform Period

During the eighties the main focus of the government was improvement in infrastructure
therefore the expenditures on development activities like rural electrification, irrigation and
flood control and rural upliftment was high. The Development Expenditures as a percentage
of Total Expenditures remains more than the Non Development Expenditures in eighties.
Development Expenditures as a percent of total expenditures were 57.46 percent in 1980-81,
increased to 61.16 percent in 1985-86 then it reduced to 56.92 percent in 1989-90. As a
percentage of GDP it increased from 8.91 percent in 1980-81 to 10.80 percent in 1989- 90.
During 1984-85 greater expenditures on social services were incurred and the expenditures
on social services as a percent of GDP increased to 0.84 percent in 1984-85 from 0.67 percent
in 1980-81. Crop insurance schemes, social security schemes and anti-poverty programmes
were launched in 1984-85. Many employment generation schemes and other rural
development programmes were launched in 1987-88. Apart from these there was an increased
expenditure on energy, transportation, railways, communication, health services and rural
water supply, housing etc. The expenditures on economic services increased from 3.77
percent of GDP in 1980- 81 to 5.10 percent in 1989-90.6
Non Development Expenditures increased during this period owing to increased interest rates
and defence expenditures. As a percentage of GDP, Non Development Expenditures
increased from 6.59 percent in 1980-81 to 8.17 percent in 1989-90. External debts were
increasing and large portion of the borrowed funds was loaned to weaker sections of the
society at subsidized rates. As a percentage of Total Expenditures the share of Non
Development Expenditures remained almost stable. It was 42.54 percent in 1980-81, dipped
slightly in 1984-85 to 40.36 percent and rose back to 43.08 percent in 1989-90.
The average compound growth rate of Development Expenditures remained high at 15.06
percent during this period. The average compound growth rate of the Non Development
Expenditures and Total Expenditures were around 15.31 percent and 15.17 percent during the
same time period.

6 Indian Economy Volume I, K.R Gupta and J.R Gupta, 2008, Page. 308

Government Expenditure in the last decade

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02
0

2000

4000

6000

Revenue Exp. (In Billions) 1

Total Expenditure

8000

10000

12000

14000

Capital Exp.
Total Exp. In GDP

Published by www.indiastats.com
Post Reform Period
In the 1990s the Development Expenditures started declining. With the introduction of the
reforms the composition of expenditures started changing towards Non Development
Expenditures. Development Expenditures as a percentage of Total Expenditures in 1990-91
were 54.30 percent which came down to 42.06 percent in 1999-2000. On the other hand the
share of Non Development Expenditures in Total Expenditures increased from 45.70 percent
in 1990-91 to 57.94 percent in 1999-2000. As a percentage of GDP the rate of Development
Expenditures came down from 10.00 percent in 1990-91 to 6.42 percent in 1999-2000. In

2000s, the Development Expenditures as a percentage of Total Expenditures started rising

again. As a share of Total Expenditures, Development Expenditures have risen from 41.38
percent in 2000-01 to 52.79 percent in 2011-12. This was on account of slowdown of reforms
since 1996-97, the drought of 2002-03 and the growth objectives of FRBMA. Development
Expenditures as a percentage of GDP rose from 6.43 percent in 2000-01 to 7.28 percent in
2002-03. Then it started declining again and came down to 5.95 percent in 2006-07 and rose
to 8.37 percent in 2008-09. On account of the increased Development Expenditures due to
expansionary fiscal stance followed by the government post global financial and economic
crisis in 2008-09, the Development Expenditures have remained in that range with 8.03
percent in 2011-12.The share of Non Development Expenditures during the nineties remained
stable with a marginal increase from 8.42 percent in 1990-91 to 8.84 percent in 1999-2000.
Non Development Expenditures as a percentage of GDP continued to fall throughout the next
decade. It was 9.11 percent in 2000-01, came down to 7.60 percent in 2008-09 and has been
recorded at 7.18 percent in 2011-12. As a percentage of Total Expenditures, Non
Development Expenditures fell from 58.62 percent in 2000-01 to 47.21 percent in 2011-12
showing a reversal of the situation from 1990s.
The compound growth rate of Development Expenditures had declined to 8.21 percent in the
nineties as compared to 15.66 percent in the eighties. Then it rose once again to 14.25 percent
in 2000-10. On the other hand the compound growth rate of Non Development Expenditures
had decreased from 15.31 percent in the eighties to 13.68 percent in the nineties. It continued
to fall gradually keeping up with the earlier trend and was 10.04 percent in 2000s.
Main Causes of Increase in Public Expenditure7
Growing Population
A high growth of population naturally calls for increase in public expenses as all state
functions are to be performed more extensively^ Population growth has made necessary for
governments of most countries to spend increasing amounts on education, health,
infrastructure, subsidies and social security. In 2011,the population of India has increased to
121 cores.
Defence Expenditure

7 Indian Economy Volume I, K.R Gupta and J.R Gupta, 2008, Page. 308

The defence expenditure of the Central Government has increased over the years. The
defence expenditure minimises the possibility of external threats, which in turn creates a good
environment for social and economic activities of the nation.

Interest Payments
Government borrowings are on increase. The government borrows funds from domestic
market and foreign sources to meet expenditure on various government activities. As a result,
the government has to incur huge interest payments.
Subsidies
Government of India has been providing subsidies on number of items such as food,
fertilizers, fuels, education etc. Because of massive amount of subsidies, the government
expenditure has increased over the years. In 1990-91 the Central Governments subsidies was
Rs. 9,581 crores which increased to Rs. 1,23,396 crores in 2009-10. In order to reduce
unproductive expenditure, Central Government must make attempts to reduce subsidies.
Administration
The Central Governments expenditure on administration has increased due to growth in
population and economic development. Government incurs on law and order, tax
administration, civil administration etc. Due to inflation the government has to revise the
payscale periodically. The production cost of public goods and services has also risen due to
rising prices.
Rise in National Income
The national income of the country has increased over the years. The increase in national
income resulted in more revenue to the government by way of tax revenue and other income,
which in turn enabled the government to increase its expenditure. For Eg. From 1980-81 to
2007-08, the N.I. has increased at the rate of 5.7% p.a. Percapita Income has also risen.
Urbanisation
Urbanisation has led to increasing expenditure on civil administration. Government
expenditure on courts, police, transport, railways, schools and colleges, public health

10

measures, water and electricity supply, public parks, libraries etc. have increased due to
growth of towns and cities.8
Rural Development
In developing countries, government has to undertake community development projects and
other social measures to promote rural development. Such measures cause a rise in public
expenditure.
Inflation
Rise in prices have caused an increase in public expenditure. The cost of supplying public
goods and services has increased. Rising prices have also necessiated the payment of higher
salaries and dearness allowances.
Democratic Government
A democratic government has to incur increasing expenditure on elections, legislatures,
ministries, international conferences, embassies abroad etc. Public expenditure also increases
when a country becomes a member of international organisations like UNO, WHO etc.
Social Security Measures
For the welfare of the people government provides social security measures which increases
its expenditure. It provides measures such as sickness benefits, old - age pensions, free
education, medical facilities, public works and relief programmes etc.9
Growth of Transport and Communication
The government has to incur huge expenditure on construction of railways, roadways,
national highways, bridges etc. to promote mobility and economic development. Thus with
growth of transport and v- communication public expenditure have increased.
Development of Agriculture
The government may develop agriculture by providing seeds, fertilisers, irrigation facilities,
modern implements, cheap loans etc. All these will increase public expenditure.
Development of Industry
8 Developments in Indian Financial System, Kedharnath Singh, Page 499
9 Ibid

11

The government may encourage the growth of private sector industries through protection,
subsidies to exporters, loans at cheap rate of interest etc. causing a rise in public expenditure.
Poverty Alleviation Programmes
In developing countries, governments are spending a good amount of funds on poverty
alleviation and employment generation programmes. Some of the programmes are
Swarnajayanti Gram Swarojgar Yojana, Indira Awas Yojana, and National Food for Work
Programme etc.
Research and Development
Research and Development is important to improve quality and to reduce costs. The
government finances Research and Development projects undertaken by non - government
organisations, universities and i other educational organisations.
Economic Planning
To promote rapid economic development modern governments adopt economic planning. The
public sector outlay on various sectors has been increasing with the increasing role of
government.

Conclusion
Public Expenditure if properly utilised is good for an Economy. It must be productive and
used for developmental purposes. A proper authority should give the approval of public
expenditure. Auditing of public expenditure should be done to ensure that money is spent for
the purpose for which it is sanctioned. Public Expenditure should be incurred on essential
items of common benefit. It should promote flexibility and changes in spending policy of the
state. There should be flexibility and changes in spending policy of the state. Thus, the
spending policy of the government must give benefits to the society as a whole.

12

Bibliography
Books

Developments in Indian Financial System, Kedharnath Singh

Indian Economy Volume I, K.R Gupta and J.R Gupta
Public Economics in Indian Theory, J.R Gupta, 2007
Public Finance by S.N Chand
Economic Impact of Government Expenditure by Atul Sharma
Money, Baking and Public Finance by Hajela T.N

Web

www.indiastats.com