Trends, Lessons & Priorities in Public Expenditure in India

Introduction

Public expenditure refers to the expenditure which is incurred by the government of a country on central, state and local levels for the maintenance of the economy, external and internal security and the promotion of the socio-economic welfare of the people. These government expenditures also consist of expenditures done on general, social and economic services.

The principles of public expenditure are closely associated with the functions of the state and are interrelated with the aims as well as the ideals of the state which it attempts to achieve. The method of spending resources and the activities to be performed by the state are, thus, dependent upon the needs of the state, which are the given objectives for public expenditure. The scope of public expenditure, therefore, enfolds within itself the money-spending activities of the government.

Throughout the 19th century, most governments followed laissez-faire economic policies and their functions were only restricted to defending aggression and maintaining law and order. Therefore, there was a minimal size of public expenditure. In the early 20th century, to determine the level of income and its distribution, the role of public expenditure was advocated by John Maynard Keynes.

In developing countries, a public expenditure policy not only accelerates economic growth and promotes employment opportunities but also plays a useful role in reducing poverty and inequalities in income distribution. Thus, the expenditures of governments all over have significantly increased.

Classification of Public Expenditure

Every year, the government prepares an estimate of expenditures it is projected to incur or had incurred in the past and then puts it for parliamentary approval (Article 112 – Indian Constitution) in the form of a budget document. This document classifies various expenses under different categories for better accounting, reporting and financial management purposes.

The government expenditures are classified as:

1. Revenue and Capital Expenditures:

Revenue expenditure is current or consumption expenditure. This recurring expenditure is incurred year after year. Revenue expenditures comprise interest payments, defence revenue expenditures, subsidies (food, fertilizers and export promotion, others), debt relief to farmers, postal deficits, police expenditures, pensions, and expenditures on other general services (organs of state, tax collection, external affairs, etc.).

On the other hand, Capital Expenditures of the government refer to those expenditures which result in the creation of fixed assets. Capital expenditures are incurred in building durable assets like expenditures on agricultural and industrial development, highways, dams and irrigation projects, and purchasing machinery and equipment. They are non-recurring types of expenditures in the form of capital investments. Such expenditures are anticipated to improve the productive capacity of the economy. Capital expenditures include capital outlays and loans to states and union territories to finance the plan projects, loans to public enterprises and loans to foreign governments. Capital defence expenditures are also included in this category.

2. Plan and Non-Plan Expenditures

Under this classification, all public expenditures were classified into:

● Plan Expenditures: Plan expenditures comprise all the expenditures of the government, which are included in the central plan. The expenditures related to new projects and programs become plan expenditures during a plan. Plan expenditures are further divided into revenue and capital expenditures.

● Non-Plan Expenditures: Non-plan expenditures are expenditures which are committed on completed schemes of earlier plans and the interest on borrowings to finance capital. Non-plan expenditures are also further segregated into revenues and capital expenditures. Revenue expenditures occur in the day-to-day running of the government. Capital expenditures, on the other hand, are those expenditures that lead to the creation of either physical or financial assets or a reduction in recurring financial liabilities.

3. Development and Non-Development Expenditures

There is yet another classification of government expenditures:

● Development Expenditures: Development expenditures include all the items of expenditures which are designed to further social welfare and economic development directly. Development expenditures mainly include spending on economic services (agriculture, industry, communication, transport, energy, science, technology and environment) and social services (education, health, employment, nutrition, housing and others). The basic needs of people in developing countries can be fulfilled through expenditures by the government on social and economic services. However, the share of the Centre’s expenditure on social services is small. Given the division of responsibilities between the Centre and the states, about 85 percent of the spending on social services in India is undertaken by the state governments. It is the responsibility of the states to spend on social services for human development. Further, states are responsible for most of the infrastructure services (except telecommunications, railways, civil aviation, and major ports) and law and order.

● Non-Development Expenditures: Non-development expenditures include expenditures which relate to the general services rendered by the government, such as the preservation of law and order, defence of the country and the maintenance of the general organs of the government. Non-development capital expenditures comprise capital defence expenditures, loans to public enterprises, states and union territories and foreign governments, while non-development revenue expenditures comprise revenue defence expenditures, administrative expenditures, subsidies, debt relief to farmers, postal deficit, pensions, grants to states and union territories and foreign governments.

Trends in Public Expenditure in India

Government expenditures in India have been growing very rapidly since 1980 -81. Moreover, the structure of expenditures has also been changing. The economic crisis of 1991 led to fiscal deficits, and the only way to reduce them was by reducing expenditures. The revenues could not be increased much because of the rationalization of the tax structure. Post the crisis, the deficits were reduced by cutting down the plan expenditures along with capital expenditures.

The increase in government expenditures in the eighties and then a fall in the nineties and beyond is evident from Table 1. Total expenditures as a percentage of GDP was 15.21 in 1980-81 and increased to 17.96 percent in 1990-91. In the nineties, the rate fell down and was 15.01 percent in 2000-01. In 2010-11, it was 15.60 percent. In absolute terms, the total public expenditure has increased by almost 50 times, from Rs. 22,768 crores in 1980-81 to Rs. 11,97,328 crores in 2010-11. the absolute figures are in current prices; therefore, the actual growth is shown as a percentage of GDP.

Table 1: Total Expenditures of the Central Government (in current prices)

Year	Rs. Crores	As a Percentage of GDP
1980-81	22768	15.21
1990-91	105298	17.96
2000-01	325592	15.01
2010-11	1197328	15.60

Trends in Development and Non- Development Expenditures

Levels of development expenditures followed a trend similar to that of total public expenditure. The share of development expenditures in the GDP rose after 1980-81 and reached its peak values in the mid-eighties. In 1980-81, the share of development expenditures in GDP was 8.91 percent and it increased to 10.00 percent in 1990-91. Thereafter, the share fell sharply in the nineties and was 6.43 percent in 2000-01. In 2010-11, the share of development expenditures in GDP increased to 8.68 percent. Thus, while there was a rise in the share of public expenditure and development expenditure in the GDP until the mid-eighties, the trend had reversed significantly in the nineties and continued in the 2000s.

The rising share of non-development expenditures is an important factor that has been constraining the growth of development expenditures. Non-development expenditures continued to be a large proportion of the total expenditures. Defence, debt services and administrative expenses were so large and so significant that they were 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 the 2000s, the trend reversed, and it fell to 45.29 percent in 2010-11 (Table 2).

Development expenditures remained more than non-development expenditures as a percentage of total expenditures in the eighties. In 1980-81, it was 57.46 percent and remained at 54.30 percent in 1990-91. The government was focused on the improvement of infrastructure. Therefore, the expenditures on development activities like rural electrification, irrigation and flood control and rural upliftment were high. Crop insurance schemes, social security schemes and anti-poverty programmes were launched. Many employment generation schemes and other rural development like the national rural employment plan, integrated rural development plan, national rural employment plan, and rural landless employment guarantee programme, were launched in 1987-88. Apart from these, expenditures on energy, transportation, railways, communication, health services, rural water supply, housing, etc, were increased.

Non-development expenditure increased during this period owing to increased interest rates and defence expenditures. As a percentage of GDP, non-development expenditure increased from 6.59 percent in 1980-81 to 8.42 percent in 1990-91(Table 2). A large portion of the borrowed funds was loaned to priority sectors, weaker sections of the society and state governments for development at subsidized rates. External debts were increasing along with deterioration in the quality of the debt during the last half of the decade. This was the major cause of an increase in non-developmental expenditure during that period. Thus, the composition of expenditures was more in favour of development expenditures during the eighties.

In the nineties, the development expenditure started declining. With the introduction of 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. It came down to 41.38 percent in 2000-01. On the other hand, the share of non-development expenditures in total expenditures increased from 45.70 percent in 1990-91 to 58.62 percent in 2000-01. As a percentage of GDP, the rate of development expenditure came down from 10.00 percent in 1990-91 to 6.43 percent in 2000-01 and the share of non-development expenditure during the same period increased from 8.42 percent to 9.11 percent.

In the 2000s, the development expenditures as a percentage of total expenditures started rising again after falling in the nineties. This was because of a slowdown of reforms since 1996-97, the drought of 2002-03, and the growth objectives of FRBMA and the National Common Minimum Programme (NCMP) in 2007-08.

Development expenditures as a percentage of GDP rose from 6.43 percent in 2000-01 to 8.68 percent in 2010-11. Non-development expenditure as a percentage of GDP continued to fall throughout. It was 9.11 percent in 2000-01 and came down to 7.19 percent in 2010-11. As a share of total expenditures, development expenditures have risen from 41.38 percent in 2000-01 to 54.71 percent in 2010-11. Non-development expenditures fell from 58.62 percent in 2000-01 to 45.29 percent in 2010-11.

Table 2: Development and Non-Development Expenditures (in Current Prices)

Year	Development Expenditure (Rs. crores)	Non- Development Expenditure (Rs. crores)	As a Percentage of Total Expenditure		As a Percentage of GDP
			Developmen t Expenditure	Non- Development Expenditure	Developme nt Expenditure	Non-Development Expenditure
1980-81	13327	9867	57.46	42.54	8.91	6.59
1990-91	58645	49349	54.30	45.70	10.00	8.42
2000-01	139386	197470	41.38	58.62	6.43	9.11
2010-11	666069	551471	54.71	45.29	8.68	7.19

Trends in Plan and Non-Plan Expenditures

Plan expenditure’s share in total expenditure declined in the eighties, nineties and the decade 2000-10. It was 39.50 percent in 1980-81, declined to 26.94 percent in 1990-91 and in 2000-01, it was 25.39 percent. In 2000s the trend reversed, though the share of plan expenditure improved to 31.66 percent in 2010-11. The plan expenditures had increased from Rs. 8,994 crores in 1980-81 to Rs. 3,79,039   crores in 2010-11, showing an absolute increase of about 45 times.

Non-plan expenditures have been rising very fast in recent years. In the eighties, the non-plan expenditures were about Rs. 13,774 crores, and it was Rs. 8,18,289 crores in 2010-11 (Table 3). As a percentage of total expenditures, the share of non-plan expenditures increased from 60.50 percent in 1980-81 to 74.61 percent in 2000-01. Then it came down to 68.34 percent in 2010-11.

Plan expenditures as a percentage of GDP decreased from 6.01 percent in 1980-81 to 4.84 percent in 1990-91. Non-plan expenditures went up from 9.20 percent to 13.12 percent during the same period. The reasons for high growth in non-plan expenditures during this period were draught faced by the major parts of the country during the years 1985-88, increasing interest payments, defence expenditure, subsidies and implementations of fourth pay commission recommendations. Thus, during the eighties, the non-plan expenditures were increasing at a greater pace as compared to plan expenditures.

In the eighties, the growth of non-plan expenditures had been faster than the growth of plan expenditures. This continued in the beginning of the nineties. However, with the introduction of the reforms, this trend had reversed. As a percentage of GDP, the non-plan expenditure was 13.12 percent in 1990-91 and reduced to 11.20 percent in 2000-01. A check on the fast growth of non-plan expenditure had been possible because of a number of steps taken by the government in 1991 reforms like the reduction of subsidies.

26.94 percent in 1990-91 to 25.39 percent in 2000-01. Non-plan expenditures increased from 73.06 percent to 74.61 percent in the same year. In the 2000s, the plan expenditures rose again and was 31.66 percent of the total expenditures in 2010-11. Non-plan expenditures went down to 68.34 percent in 2010-11. As a percentage of GDP, plan expenditures were 4.94 percent and non-plan expenditures were 10.66 percent in 2010-11.

Table 3: Plan and Non-plan Expenditures ( in Current Prices)

	Plan Expenditures (Rs. Crores)	Non-Plan Expenditures (Rs. Crores)	As a percentage of GDP		As    a     percentage    of Total Expenditures
Year			Plan Expenditures	Non-Plan Expenditures	Plan Expenditures	Non-Plan Expenditures
1980-81	8994	13774	6.01	9.20	39.50	60.50
1990-91	28365	76933	4.84	13.12	26.94	73.06
2000-01	82669	242923	3.81	11.20	25.39	74.61
2010-11	379039	818289	4.94	10.66	31.66	68.34

Lessons

An analysis of the Central Government expenditures shows that while the development expenditures in absolute terms had been higher than the non-development expenditures, the latter had been rising faster throughout the eighties and nineties. Development expenditures had outweighed non-development expenditures in absolute terms in the 2000s. Accordingly, the increase in non-plan expenditures has been more than the plan expenditures for the three decades. The increase in total expenditures of the Central Government can be mainly attributed to an increase in revenue expenditures at the cost of capital expenditures. Wages and salaries, interest payments and subsidies accounted for a predominant share of the government expenditure.

The sharp increase in expenditures in the eighties, as compared to the modest increase in tax and non-tax revenues, resulted in high deficits by the end of the decade. The immediate response to the economic crisis in 1991 was to compress expenditures, mainly focusing on reducing subsidies. There was a shift away from plan expenditures accompanied by a reduction in capital expenditures. The deficits were reduced by cutting down the development and capital expenditures. Within revenue expenditures, in 1980-81, defence expenditures had the highest share of 22.75 per cent; the interest component was 18.07 per cent, while subsidies were 14.07 per cent. However, by 1990-91, the largest component was the interest share of 29.24 per cent, with subsidies constituting 16.54 per cent and defence only 14.79 per cent.

Because of the reforms, there was some reduction in the Centre’s fiscal deficits up to 1996-97. The trend was reversed afterwards under the impact of the industrial slowdown and the implementation of the recommendations of the Fifth Pay Commission’s award. Once again, fiscal consolidation was brought about through the compression of capital expenditures, with consequential effects on growth and infrastructure constraints in the future. Since the fiscal correction was achieved through cutbacks in capital expenditures rather than through improved revenues, the consolidation efforts could never be sustained for long.

The government had limited scope to reduce the defence budget due to security problems across the Indian borders. The interest payments, both on domestic and foreign loans, have been one of the major components of government expenditure and have been increasing throughout as the government debt has increased considerably over the years. Another cause of concern is subsidies. The government has been providing subsidies on a number of items such as fertilisers, exports, food and fuel, and these subsidies have been increasing over the years, resulting in fiscal imbalance. Therefore, the development and capital expenditures have suffered the most when it comes to reducing the expenditures.

Priorities:

Despite rapid economic growth and buoyant revenues, India’s inability to contain expenditure growth has led to a modest decline in the general government debt. The government needs to focus on reducing revenue expenditures and increasing the growth rate of capital expenditures.   Greater detail is required for better targeting of social expenditures to achieve fiscal consolidation while maintaining the process of growth. Expenditures need to be reoriented to contain the deficits whilst providing adequate outlays for essential social sectors like education, health, etc. The government needs to strengthen the public distribution system for better targeting of subsidies, bring in efficiencies and make the system more transparent. Overstaffing in government departments has led to low productivity and inefficiencies; hence, downsizing of staff is essential. This shall also reduce the wage bill of the government substantially. The borrowings from internal and external sources should be closely monitored in order to control the interest payments.

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