Q1: Explain the classification of Public Expenditure in India.
Ans:
*INTRODUCTION:
~ Public Expenditure refers to the expenses of public authorities like the central state and local governments.
~ Public expenditure is incurred for the welfare of the society in the form of various developmental and non-developmental activities.
~ Public Expenditure has an impact on production, distribution, national income and employment.
~ In developing economies, public expenditure helps to achieve higher economic growth and create employment.
*CLASSIFICATION:
~ Classification of public expenditure is the systematic arrangement of different areas under which government expenditure occurs.
~ Public Expenditure can be broadly classified as follows:
i) Capital and revenue Expenditure.
ii) Productive and Unproductive Expenditure.
iii) Transfer and Non-transfer Expenditure.
iv) Plan and Non-plan Expenditure.
v) Dalton’s classification.
i) CAPITAL AND REVENUE EXPENDITURE:-
^ Capital Expenditure:
~ Capital expenditure is the expenditure incurred on building durable assets like infrastructure such as roads highways, etc, multi-purpose dams, irrigation projects, power generation projects, purchase of machinery, equipments, etc.
~ They are non-recurring in nature.
~ Such expenditures are capital investments incurred to improve the socio-economic development of the nation.
~ The following are the main features of Capital Expenditure:
# Certain capital expenditures are productive in nature. These include expenditure in infrastructure facilities.
# Certain capital expenditures are non-productive in nature. They may not have direct impact on the economic development or they may not generate income. These can be expenditure on defence establishment or expenditure on social infrastructure like government schools, hospitals, primary health centers etc.
# Certain capital expenditures are remunerative in nature. These include power, oil and gas projects as they bring revenue to the government.
# Certain capital expenditures are non-remunerative in nature. This includes expenditure on gardens, parks, health, etc.
# Most capital expenditures are made through borrowings so they impose debt burden on the economy. So they should be incurred for productive purposes.
^Revenue Expenditure:
~ Revenue Expenditures are current expenditures incurred on public administration, defence force, public health and education, maintenance of government machinery, subsidies and interest payments.
~ These expenditures are recurrent in nature.
~ The revenue expenditure can be divided into two groups:
^ Development Revenue Expenditure.
^ Non-development Revenue Expenditure.
# Development Revenue Expenditure:
~ The part of the revenue expenditure that directly / indirectly contributes to the development of the nation is known as development revenue expenditure.
~ It includes expenditure incurred on activities like:
^ Education related expenditure such as maintenance of educational institutions.
^ Health related expenditure such as maintenance of public health through Government hospitals and clinics.
^ Infrastructure related expenditure like irrigation projects, electricity boards etc.
^ Social and community services related expenditure like human development, improvement of labour productivity etc.
# Non-development Revenue Expenditure.
~ The part of the revenue expenditure that may not contribute to the economic development of the nation is known as non-development revenue expenditure.
~ These include activities such as:
^ Administration of Government Organisations.
^ Maintenance of defence establishments.
^ Interest payments.
^ Subsidies on food, fertilizers, etc.
ii) PRODUCTIVE AND UNPRODUCTIVE EXPENDITURE:
~ Classical economist like Adam Smith made this classification on the basis of creation and maintenance of productive capacity.
# PRODUCTIVE EXPENDITURE:
~ This includes creation of tangible assets like infrastructure, public enterprises, irrigation projects, power generation etc.
~ These bring income to the government in the form of tax and non-tax revenue.
# UNPRODUCTIVE EXPENDITURE:
~ It is incurred on non-productive activities.
~ This includes activities like: defence, interest payments, expenditure on law and order, public administration, etc.
~ These activities do not bring any income or returns to the government.
iii) TRANSFER AND NON-TRANSFER EXPENDITURE:
# TRANSFER EXPENDITURE:
~ Transfer expenditure refers to expenditure against which there is no corresponding return.
~ It includes:
^ Pension to senior citizens.
^ Unemployment allowance.
^ Sickness benefits.
^ Welfare benefits.
^ Scholarships
^ Subsidies.
^ Interest paid on public debt, etc.
~ These activities add to the welfare of the people.
~ It results in redistribution of money incomes with the society.
# NON-TRANSFER EXPENDITURE:
~ This expenditure is incurred for buying goods and services. It results in direct/ indirect creation of income/output.
~ This is an investment expenditure on capital assets and includes development as well as non-development expenditure.
iv) PLAN AND NON-PLAN EXPENDITURE:
~ In India government expenditure is divided into plan and non-plan expenditure.
?PLAN EXPENDITURE:
~Plan expenditure refers to the spending of the annual funds allocated by the Government as per the on-going Five-year plan.
~ This includes expenditure incurred on transport, rural development, agriculture, communications, energy, social services like education, health, family welfare, etc.
?NON PLAN EXPENDITURE:
~ It includes all those expenditures of the government that are not mentioned in the on-going Five-year plan.
~ It includes both development and non-development expenditure like:
^ Administration of government organisations.
^ Interest payments.
^ Pensions
^ Defence Expenditures.
^ Subsidies.
^ Maintenance of assets created in previous plans.
v) DALTON’S CLASSIFICATION:
~ Economist through Dalton has provided the following comprehensive classification of public expenditure:
^ Expenditure on political executives.
^ Administrative expenditure.
^ Security expenditure.
^ Development expenditure
^ Social expenditure.
^ Expenditure on administration of justice.
^ Public debt charges.
Q2: Write a note on growth of public expenditure in India?
Ans: *INTRODUCTION:
~ The increase in governmental functions has led to the rise in the size of public expenditure.
~ The growth in public expenditure has a far reaching impact on the economic growth and development of the economy through production, distribution, consumption saving and investment.
~ In India, there has been a spectacular increase in public expenditure since 1950-51. In 2009-10, public expenditure was almost 10 times the public expenditure in 1990-91. It’s ratio to the GDP was 16.6%.
*CAUSES:
~ The following are the causes for growth of public expenditure in India:
i) DEFENCE:
~ Defence expenditure is very important for national security.
~ So, the growing defence expenditure is one of the major seasons for the rising public expenditure in India.
~ It increase from 10874 crores in 1990-91 to 86879 crores in 2009-2010.
ii) POPULATION:
~ India’s population grew from 36.1 crores in 1951 to 115.4 crores in 2009.
~ The massive growth in population has resulted in increasing public expenditure related to education, health, infrastructure, subsidies and development programmes.
iii) ADMINISTRATIVE MECHINERY:
~ Growth in population and economic development of the nation has led to the expansion of the already vast administrative machinery of the Indian Government.
~ Maintenance of various ministries, department and offices, payment of salaries to a large staff has increased administrative expenditure to a great extent.
iv) JUDICIARY AND INTERNAL SECURITY:
~ Due to huge population, there has been considerable growth in the Indian Judiciary System.
~ Huge Expenditure has to be incurred for maintaining internal law and order.
v) RISE IN NATIONAL INCOME:
~ Rise in public expenditure has a direct relation to the rise in national income and per-capita income.
~ The rise in national income leads to increase in demand of public goods like education, healthcare, communication, transportation, infrastructure, etc.
~ Also, the increase in national income leads to increasing tax revenue to the government.
~ Thus, a rise in national income results in growth of public expenditure.
vi) INTEREST PAYMENT:
~ Over the years, the borrowing of the government has increased considerably both from internal and external source. Thus, there has been a continuous growth in the outstanding debt of the Government.
~ The public debt of the Government rose sharply from 41.6% of GDP(1980-81) to 56.7% of GDP (2009-10).
~ Hence in India, interest payments are the single largest item of public expenditure.
vii) SUBSIDIES:
~ The Government of India provides subsidies to different sectors to make essential goods affordable to the weaker sections of the society.
~ The government also promotes export sector and small-scale sectors as they are important for the growth of our economy.
~ The major subsidies of the government increased by 11 times from 1990-91 to 2009-2010.
~ So the government must make attempts to reduce subsidies that have been a major reason for India’s large fiscal deficit.
viii) URBANISATION:
~India is witnessing an increase in urbanization due to economic development and industrialization.
~The increase in urban has increased expenditure on creation and maintenance of urban infrastructure.
~It also requires heavy expenditure on law and order, education, housing, electricity, etc.
ix) DEVELOPMENT PROJECT:
~ The government of India has aimed at planned development of the nation.
~ So, heavy investments are undertaken in various physical and social infrastructure projects.
(eg. Bharat Nirman, Sarva Shiksha Abhiyaan, etc.)
~ Sometimes, there is considerable delay in the implementation of project that increase the expenditure further.
~ In 2009-10, plan development expenditure was RS: 3,25,149 crores.
x) POVERTY ALLEVIATION AND EMPLOYMENT GENERATION:
~ The government of India undertakes various planned programmes for alleviation of poverty and employment generation. (eg. National Rural Employment Guarantee Scheme).
~ In 2010 Budget, Rs: 40,100 crores were allocated NREGS that is operational in all states.
xi) INFLATION:
~ India is witnessing inflation since past several years.
~ This increases the costs/expenses of various government activities.
~ This also leads to increase in public expenditure.
xii) DEMOCRACY:
~ India is the largest democratic nation of the world.
~ Periodic election and maintenance of the political system has also increased public expenditure to a considerable extent.
xiii) SOCIAL DEVELOPMENT:
~ India has adopted the concept of a WELFARE STATE.
~ Hence, huge expenditure is involved in social development activities.
~ The estimated expenditure for social development activities.
~ The estimated expenditure for social welfare in 2009-10 was Rs 1.12 lakh crores.
*CONCLUSION:
~ Thus, various factors are responsible for the growth of public expenditure all over the world.
~ While certain factors are common for all the nations, countries like India incur heavy expenditure on factors like payment of subsidies, interest payment and poverty alleviation programmes.
Tags: capital expenditures, infrastructure facilities, irrigation projects, power generation projects, state and local governments