Analysis of the Pattern and Composition of Public Expenditure in India

(For the partial fulfillment of M.A. in Economics, University of Pune)

Submitted By:

Utsav Vatsyayan

Fergusson CollegeRoll No. 131, M.A - II

Batch: 2007-09

CERTIFICATE

I, Utsav Vatsyayan, a student of M.A. Economics from the department of Economics, Fergusson College, declares that the following research titled - Analysis of the Pattern and Composition of Public Expenditure in India is an individual work done by me and submitted for the partial fulfillment of the requirements for the award of the degree of post graduation in Economics under the University of Pune.

Signature:

(Utsav Vatsyayan)

CERTIFICATE

(HOD/Research Superviser)

Name : Utsav Vatsyayan

College : Fergusson College

Batch : 2007-09

Dissertation:

Analysis of the Pattern and Composition of Public Expenditure in India

This is to certify that the above information is true to the best of my knowledge and is an individual work completed by the candidate for the partial fulfillment of degree of M.A. in Economics.

Signature Signature

(Supervisor) (Head of Dept)

Dr. S.L. Matkar Dr. N.D. Bhalerao

ACKNOWLEDGEMENT

I would like to express my gratitude to the HOD, Dr. N.D. Bhalerao, Fergusson College, University of Pune, for encouraging me to do this project.

I also express my sincere thanks to my supervisor, Dr. S.L. Matkar for being a constant source of guidance and helping me to complete this dissertation work.

I would also like to thank all the staff of the Department of Economics, Fergusson College for extending their support in completion of this work.

Signature

(Utsav Vatsyayan)

ABSTRACT

Named after German economist ADOLPH WAGNER (1835-1917),

Wagner's law states that the development of an industrial economy will

be accompanied by an increased share of public expenditure in GNP.

The basic thrust of Wagner's law is that the relative size of the public

sector in the economy (G/GDP) has an inherent tendency to grow as per

capita income (GDP/POP) increases.

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

2. General Trend and Pattern of Public Expenditure in India

3. Plan Periods

3.1. Pre Reform Period:

FIRST FIVE YEAR PLAN (1951-1956)

SECOND FIVE YEAR PLAN (1956-61)

THIRD FIVE YEAR PLAN (1961-1966)

TWO ANNUAL PLANS (1966-67 and 1968-69)

FOURTH FIVE YEAR PLAN (1969-74)

FIFTH FIVE YEAR PLAN (1975-80)

SIXTH FIVE YEAR PLAN (1980-85)

SEVENTH FIVE YEAR PLAN (1985-90)

3.2. An Analysis of Pre Reform Period

3.3. Post Reform Period:

EIGHTH FIVE YEAR PLAN (1992-97)

NINTH FIVE YEAR PLAN (1997-2002)

TENTH FIVE YEAR PLAN (2002-2007)

4. Conclusion

5. BIBLIOGRAPHY

1. INTRODUCTION

Wagner's law named after the German economist Adolph Wagner (1835-1917). Wagner's law

predicts that the development of an industrial economy will be accompanied by an increased

share of public expenditure in gross national product.

Wagner's Law suggests that a welfare state evolves from free market capitalism due to the

population voting themselves ever-increasing social services. Neo-Keynesians and socialists

often urge governments to emulate modern welfare states like Sweden.

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

Actions, and iii) welfare functions.

The material below is an apparently much more generous interpretation of Wagner's original

premise.

Socio-political, i.e., the state social functions expand over time:

retirement insurance, natural disaster aid (either internal or external), environmental

protection programs, etc.

Economic: science and technology advance, consequently there is an increase of state

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:

1. The volume of government expenditure in relation to national income; and partly on

2. The proportion of public expenditure on development activities and welfare activities or

transfer benefits.

India’s public expenditure is classified as development expenditure comprising central plan

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

states and union territories and foreign governments.

India’s public expenditure can further be described in terms of planned and non-plan

expenditure. Plan expenditure comprises current developmental outlays as well as investment

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

not included in the Plan. It includes both developmental as well as non-developmental

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:

(a) It indicates what and how government wants to do in the economy

(b) It is one of the most distinguished features of the Indian economy

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

Statistical Organisation (CSO), Economic Survey(s) of India, Ministry of Finance (Govt. of

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.

Expenditure of the Central Government

(Rs. Crores)

Years Revenue Expenditure Capital Expenditure Total Expenditure

1950-51 350 180 530

1980-81 14,540 9,630 24,170

2001-02 3,01,610 60,840 3,62,450

2008-09(Budget) 6,58,120 92,765 7,50,885

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

expenditure, viz., development expenditure, defence expenditure and other expenditure.

(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

territories for development purposes.

(b) Defence expenditure of the central government was on armed forces and it included

pensions given to the retired armed personnel.

(c) Other expenditure of the central government consists of collection of taxes and duties,

administrative services, interest payments, pensions and other retirement benefits, other

grants to states, etc.

If we add defence expenditure and other expenditure together we could obtain non- development

expenditure.

New classification of expenditure:

The Central government adopted a new classification of public expenditure from 1987-88

budgets. Under this new classification all public expenditure is classified into

(a) Non-planned expenditure

(b) Planned expenditure

Non- planned expenditure:

Non-planned expenditure of the central govt. is further divided into revenue expenditure and

capital expenditure. Revenue expenditure is financed out of revenue receipts, both tax revenue

and non tax revenue. Under revenue expenditure we include:

(a) Interest payments, defence revenue expenditure, major subsidies(food, fertilizers and

export promotion), other subsidies, debt relief to farmers, postal deficit, police, pensions,

other general services(organs of state, tax collection, external affairs, etc.)

(b) Social services (education, health, broadcasting, etc.)

(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 –

increase by nearly eight times.

Total Expenditure of the Central Government

(Revenue and Capital Accounts)

(Rs. crores)

1989-90

(Actual)

2008-09

(Budget)

1. Non-Plan Expenditure

On revenue account

On capital account

64,500

52,130

12,370

5,07,500

4,48,350

59,150

2. Plan Expenditure

On revenue account

On capital account

28,400

12,070

16,330

2,43,385

2,09,765

33,620

Total Expenditure 92,900 7,50,885

Planned Expenditure:

The second major item of Central government expenditure is planned expenditure which is

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

environment, social services and others.

(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

nearly nine times.

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.

(b) Capital expenditure on economic development

(c) Capital expenditure on social and community development

(d) Capital expenditure on defence

(e) Capital expenditure on general services

Trends in expenditure of the central government:

Public expenditure in a developing economy has certain notable trends, and Indian public

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

and in the states to increase rapidly.

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

governments was on these services. Since independence, increasing participation of the

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

government’s international commitments, increase in government’s participation in nation

building activities like education and public health, rise in prices, etc. All these are responsible

for increased revenue expenditure of the central government.

Non-development expenditure still continues to be a large proportion of the total expenditure.

Defence, debt services and administrative expenses are so large and so significant that they are

responsible for keeping non-development expenditure at a high level.

Non-planned expenditure has been rising very fast in recent years- in the 1980’s the annual

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

general services- these together form over 90% of non-planned expenditure.

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

Rs. 57,590 crores between 1991 and 2009.

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

Territories with grants assistance for national calamities.

Non-plan Revenue Expenditure on Major Selected Items

(Rs. crores)

1985-86

(Actual)

1990-91

(Actual)

2008-09

(Budget)

1. Interest

payments

7,500 21,500 1,90,810

2. Defence 7,000 10,870 57,590

3. Subsidies 4,900 12,160 71,430

4. General

services, etc.

2,060 6,850 98,200

Total 24,460 51,380 4,18,030

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

current revenue expenditure in 1950-51. It increased to 20% in 1985-86. It is expected to rise to

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

PRIORITIES AND PATTERN OF PUBLIC EXPENDITURE:

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

expenditure, depicting largely the structural shifts in the economy.

3.1. PRE REFORM PERIOD:

FIRST FIVE YEAR PLAN (1951-1956)

In determining an outlay on development of Rs. 2069 Cr. by public authorities over this period,

the main considerations said to have taken into account are –

The need for initiating a process of development that will form the basis of much larger

effort needed in future.

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

in public and private sectors.

The necessity of completing the schemes of development initiated by central and state

governments prior to the commencement of the plan.

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

increased employment in the other sectors.

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:

(in Rs. Crores.) Center *Part – A Part – B Part - C

Agriculture & Community Development 186.3 127.3 37.6 8.7

Irrigation & Power 265.9 206.1 81.5 3.5

Transport & Communication 409.5 56.5 17.4 8.8

Industry 146.7 17.9 7.7 0.5

Social Services including Rehabilitation 191.4 192.3 28.9 10.4

Misc. 40.7 10.0 0.7 -

* 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.

Part – C States: Ajmer, Bhopal, Bilaspur, Cooch Behar, Coorg

Part – D Territories: Andaman and Nicobar Islands, acquired territories.

SECOND FIVE YEAR PLAN (1956-61)

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.

The principle tasks of the Second FYP were declared to be as follows:

To secure the increase in National Income by about 25% over five years.

To increase employment opportunities at a rate sufficient to absorb the increase in labor

force consequent in increase in population.

To take a major stride forward in the direction of Industrialisation so as to prepare the

ground for more rapid advance in the plan period to come.

Plan Outlay and Allocations:

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 –

Heads Total Provision (Rs. Cr.) Percentage

Agriculture & Community Development 568 11.8

Irrigation & Power 913 10.0

Transport & Communication 1385 28.9

Industry & Mining 890 18.5

Social Services 945 19.7

Misc. 99 2.1

THIRD FIVE YEAR PLAN (1961-1966)

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

following principal aims:

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

the requirements of industry and export.

To expand the basic industries like steel, chemical industries, fuel, power, and to

establish machine building capacity, so that requirements of further industrialisation can

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

ensure a substantial expansion in the employment opportunities.

To establish progressively greater equality of opportunity and to bring about a reduction

in disparities in income, wealth and a more even distribution of economic power.

The following table gives the distribution of the financial outlay of Rs. 7,500 Cr. under major

heads:

Head State UT* Center Total

(Rs. Cr.)

%age

Agriculture & Community

Development

919 24 125 1068 14

Major and Medium Irrigation 630 2 18 650 9

Power 880 23 109 1012 13

Industry and Minerals 207 4 1573 1784 24

Transport & Communication 226 35 1225 1486 20

Social Services and Misc. 863 87 350 1300 17

inventories - - 200 200 3

TWO ANNUAL PLANS (1966-67 and 1968-69)

Heads 1966-67 to 1968-69

(Rs. Cr.)

%age

Agriculture and Community 948.21 7.13

Water and Power 908.97 6.83

Industry and Minerals 996.70 7.5

Transport and Communications 546.45 4.11

Social Services 3040.52 22.88

Misc 1257.42 9.46

Social Costs and Other Expenditures 5586.29 42.05

FOURTH FIVE YEAR PLAN (1969-74)

Heads Total

(Rs.Cr.)

%age

Agriculture and Community 2389.71 6.72

Water and Power 2553.62 7.18

Industry and Minerals 2710.42 7.62

Transport and Communications 1105.16 3.1

Social Services 8843.14 24.88

Misc 3541.75 9.96

Social Costs and Other Expenditures 14395.68 40.50

FIFTH FIVE YEAR PLAN (1975-80)

Heads Total (Rs.Cr.) %age

Agriculture and Community 7475.48 7.13

Water and Power 5596.76 6.83

Industry and Minerals 6148.68 7.5

Transport and Communications 5433.48 7.5

Social Services 19172.07 26.15

Misc 3608.8 4.42

Social Costs and Other Expenditures 25884.45 35.30

SIXTH FIVE YEAR PLAN (1980-85) AND SEVENTH FIVE YEAR PLAN (1985-90)

Heads 1980-85 (Rs. Cr.) 1985-90 (Rs. Cr.)

Agriculture and Community 26130 48100

Water and Power 30750 61690

Industry and Minerals 16950 29220

Transport and Communications 17680 41000

Social Services 17880 381720

3.2. AN ANALYSIS OF PRE REFORM PLANS

For a better understanding of the allocation pattern in the different plans, it would be better to

study the figures in percentage terms.

Agriculture and irrigation:

Except during the first plan when agriculture and irrigation were allotted 30% of total outlay, all

other plan allotted between 20-24% of outlay.

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

28% of the total outlay.

Industries and Minerals:

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.

Transportation and Communications:

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 Eighth plan pushed up the outlay to 23%.

Social and Miscellaneous Services:

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

economically backward people.

A considerable amount of scarce resources have been allotted in plans for the provision of these

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.

3.3 POST REFORM PERIOD

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

payment. An efficient response to the shock, involved a thorough reorganization of the

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

underwent towards liberalization, privatization and globalization.

Henceforth a paradigm shift in the pattern of government expenditure was observed during this

period which can be studied as follows:

EIGHTH FIVE YEAR PLAN (1992-97)

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

the common man.

Heads Total (Rs. Cr.) %age

Agriculture and Community 96170 22.2

Energy 115560 26.6

Industry 46920 10.8

Transportation and

Communication

90080 20.8

Social and other Services 85370 19.6

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

in order to reduce infrastructure constraint.

NINTH FIVE YEAR PLAN (1997-2002)

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

priorities and hence the change in public outlay was distinct.

Heads Total (Rs. Cr.) %age

Agriculture and Community 37546 4.4

Irrigation and Flood Control 55598 6.5

Rural Development 73439 8.5

Social Program 3649 0.4

Energy 215545 25.1

Industry and Minerals 69972 8.1

Transport 121324 14.1

Communication 47616 5.5

Science and Technology 25529 3.0

General and Economic Services 26978 3.1

Social Services 182005 21.2

By allocating 72% of the plan funds to irrigation, energy, transport and communication and

social services this plan stressed on the development of infrastructure.

TENTH FIVE YEAR PLAN (2002-2007)

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

recovery measures assume importance in public expenditure management, increased investment

and improvement in efficiency.

Heads Total (Rs. Cr.) %age

Agriculture and Allied Activities 1922.02 6.03

Rural Development 2678.68 8.42

Special Area Programs 197.18 0.62

Irrigation and flood Control 3225.22 10.13

Power 8460.43 26.58

Industry and Minerals 1113.56 3.50

Transport 3542.06 11.13

Scientific Services 14.18 0.04

Social and Community Services 9318.07 29.27

Economic Services 1258.32 3.96

General Services 102.03 0.3

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

objectives in the state will be better achieved in an environment of high growth.

4. Conclusion

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

also treated as non-planned expenditure. Similarly expenditure on containing services and

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-

planned expenditure, besides the interest on borrowings to finance the plans.

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

sector and even for maintenance expenditure.

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

wastage and leakage of funds at the implementation level.

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

high cost borrowing.

Lastly, it can be said that the ‘modern formulation of Wagner’s Law of increasing state activities

as national income increase is certainly relevant in Indian context.

5. BIBLIOGRAPHY

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

of Indian Economy, Volume – II, Atlantic Publishers and Distributors.

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

Central Statistical Organisation

Economic Survey(s) of India

GOI, Ministry of Finance website

Indian Economics and Statistics

RBI website

World Bank Report – 1988