BUSINESS ENVIRONMENT ASSIGNMENT

PUBLIC EXPENDITURE

Submitted to: Dr. Manoj Kumar Sharma

SUBMITTED BY: ANKUSH GOYAL MBA GEN A ROLL NO.6

Public Expenditure refers to expenditure incurred by Central and State Governments to satisfy collective social wants of people. Public expenditure is of special importance in developing countries as it accelerates not only economic growth and promotes employment opportunities but also plays major role in alleviation of poverty and inequalities in income distribution.

Classification of Public Expenditure: Based on different views of different economists, public expenditure can be classified into following different type 1) Functional Classification: The Government performs various functions like social welfare, education, defence, industrial development. Expenditure incurred on such different functions lies under this classification. It gives us a clear idea which sector gets what percentage of public expenditure and how the public funds are spent.

2) Revenue and capital expenditure: Revenue expenditure are expenses incurred on civil administration, education, healthcare services, defence forces, pensions and other allowances, maintenance of Government machinery etc. Such types of expense are incurred year after year.

Capital expenditure are expenditure incurred in building long term assets like construction of dams, bridges, roads, setting up new industries, buying new machinery etc. Such expenses are expected to give returns by improving productive capacity of economy.

3) Transfer and Non Transfer expenditure: Transfer expenditures refer to the expenses that are not expected to give back returns. E.g. expenses on national old age pension schemes, interest payments, subsidies, welfare packages for weaker sections of society, earthquake & riots etc relief packages, defence etc.

Such expenses add to the welfare of people and results in redistribution of money within the society.

Non transfer expenditure refer to the expenses made by the government that give back some return and involves creation of income and output. They include development and non development expenditures or productive and non productive expenditures. Expenditure on infrastructure development, public enterprises or development of agriculture increase productive capacity in the economy and bring income to the government. Thus they 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) Grants and Purchase price: Grants are those payments made by government for which they dont receive any goods or services in return e.g. Old age pensions, unemployment allowance, relief packages, and subsidies to weaker sections etc.

Purchase price are the payments made by government for which they buy some goods for services. E.g. payment to buy raw material, salaries and wages paid to government employees etc.

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.

6) Hugh Daltons classification of Public Expenditure: Hugh Dalton has classified public expenditure as follows: 1) Expenditures on political executives: i.e. maintenance of ceremonial heads of state, like the president. 2) Administrative expenditure: to maintain the general administration of the country, like government departments and offices. 3) Security expenditure: to maintain armed forces and the police force. 4) Expenditure on administration of justice: include maintenance of courts, judges, public prosecutors. 5) Developmental expenditures: to promote growth and development of the economy, like expenditure on infrastructure, irrigation, etc. 6) Social expenditure: on public health, community welfare, social security, etc. 7) Public debt charges: include payment of interest and repayment of principle amount.

Public Expenditure of Government of India as a percentage of GDP: Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(BE) 2010-11(P) 2011-12(BE) 2011-12(RE) 2012-13(BE) Public Expenditure as % of GDP 15.50 15.90 16.80 17.10 15.37 13.70 13.59 14.29 15.83 15.87 15.99 15.60 14.00 14.80 14.67

Effects of Public Expenditure on Economy of a country: 1) Effects on Production: Socially desirable public expenditure e.g. expenditure on education, healthcare services, communication etc increases the efficiency, productivity and willingness of people to work thus, increasing their income and savings which in turn has positive impact on investments and setting up of new ventures by people. Sometimes public expenditure can negatively impact the productivity level and willingness of people to work. E.g. providing unemployment allowances, insurance benefits, absurd reservation policy can give rise to lethargy among people as they are getting their needs fulfilled without any extra effort.

2) Effects on distribution:

Public Expenditure plays a major role in decreasing inequality in income distribution. Through its taxing policy, Government collects taxes from rich people and distribute that money to poor people in form of welfare and relief packages thus increasing the purchasing power parity and income of weaker sections of society. Public expenditure on public education increases skillet and efficiency of poor people enhancing their earning capacity.

3) Effects on consumption: Government expenditure on education for poor and other welfare packages improve their earning capacity and living standards which leads to increase in their consumption level which is beneficial for other economic activities as well.

4) Effects on Economic Stability: Public expenditure becomes more or less mandatory when economy tends to become instable i.e when economy is in state of recession, depression or inflation. According to Keyness theory during the times of recession or depression, when buying power of people is low and private players are not willing to invest their money, government has to invest to bailout the economy. Public expenditure is also important to counter inflation or deflation. Expansion of public expenditure during deflation and reduction in public expansion during inflation controls the money supply in market and stabilizes the economy.

5) Effects on Economic Growth: Government expenditure has a very crucial role in maintaining balanced economic growth. The government allocates funds for her growth of various sectors like agriculture, industry, transport, communications, education, energy, health, exports, imports, with a view to achieve impressive growth. Government takes keen interest to allocate more resources for development of backward regions. Such efforts reduce inequality and promote balanced economic growth. Modern economies have all experience tremendous growth in public expenditure. So it is absolutely necessary for governments to formulate rational public expenditure policies in order to achieve the desired effects on income, distribution, employment and growth.

Causes of increase in Public Expenditure in India: Over the years after independence there has been huge rise in Public expenditure in India. There are various factors responsible for it: 1) Population Growth: Year Population (in Crore) 1950-51 2001 2011 36.1 102 121

During last 63 years of planning, population of India has increased from 36.1 Crore to 121 Crore in 2011. This explosion in population requires heavy investment in education, healthcare, infrastructure development, agriculture etc. Young people require expenditure on education and old people require investment in old age pensions, social security and heath care facility.

2) Defence Expenditure: During last 2 decades, India has seen increased insurgency in J&K, uprisings in North Eastern States and a lot more terror threats which have lead to enormous increase in defence expenditure incurred by government. There has been modernisation of defence equipment used by army, navy and air force. Continuous threat from neighbouring countries like Pakistan and China has further prompted Indian government to invest heavily in defence.

Public Expenditure in defence:

Year

1995-96

Defence Services (Rs Crore) 26856.22 29505.12

Annual growth (%) 9.87 19.56

As % of GDP 2.26 2.16 2.32

1996-97 35278.08 1997-98

39897.58 1998-99 47069.99 1999-00 49622.04 2000-01 54265.24 2001-02 55661.83 2002-03 60299.68 2003-04 77000 2004-05 80548.98 2005-06 85509.60 2006-07 91681.06 2007-08 114223.28 2008-09 2009-2010 141781.09 151581.69 2010-11 164415.49 2011-12

13.09 17.98 5.42 9.36 2.57 7.69 27.69 4.61 6.16 7.22 24.59 24.13 6.91 8.47

2.29 2.4 2.4 2.4 2.30 2.20 2.34 2.18 1.20 1.09 1.31 1.40 1.20 1.18 1.12

2012-2013

3) Government Subsidies: The Government of India has been providing subsidies on a number of items such as food, fertilizers, petroleum, exports, education etc. Because of such massive amount of subsidies, the public expenditure has increased.

Subsidies as percentage of total subsidies:

Food Year Fertiliz ers Petroleu m Grants to NAFED for MIS/PP Import / Export Of Sugar Interest Subsidie s Other Subsidie s Subsidy on import of pulses/edibl e oils

55.53 2002-03 57.84 2003-04 59.26 2004-05 53.01 2005-06 55.16 2006-07 44.2 2007-08 33.7 2008-09 41.3 2009-10 36.8 2010-11 33.79 201112(R) 20122013(R)

25.3 26.73 34.55 38.85 45.90 45.81 59.06 43.34 35.92 31.07

12.00 14.33 6.43 5.65 4.72 3.98 2.2 10.58 22.13 31.66

S 0.69 0.35 0.26 0.55 0.98 1.21 0.29 0.60 0.14 0.09

__ __ __ __ __ __ __ __ __ __

1.72 0.38 1.23 4.58 4.92 3.26 2.69 1.90 2.70 2.68

4.75 1.75 1.65 2.37 2.42 2,79 2.32 2.83 2.44 0.93

__ __ __ __ __ __ __ 0.26 0.56 0.28

38.68

32.09

22.94

0.11

__

4.19

1.31

0.48

4) Urbanisation: There has been very rapid increase in urbanization. In 1950-51 about 17% of the entire population lived in urban India but now that number has increased to more than 30%. This increase in urbanization requires heavy expenditure on infrastructure, education facilities, law and order, civil amenities like drinking water, electricity etc.

5) Industrialisation: There are many industries which requires heavy investment but offer any immediate returns. It is the government which starts such industries in a planned economy. Public sector has created a strong infrastructure as a support base for industrial sector by investing huge capital in industries such as transportation, fuel, electricity, communication etc.

6) Increase in grant to state and union territories: Over the years, grants to states and union territories has increased significantly both for developmental purposes like construction of roads, railways, etc. And for nondevelopmental purposes like police administration, tackling terrorism and naxalite activities, etc. Public Expenditure on grants to States and UTs: Years Expenditure(Rs) (In Crore) 1990-91 2003-04 3982 15669

7) Education: Raising the literacy level of its people is essential for the development of any country. Education not only contributes to mental development abut also raises productivity. In order to meet increasing demand for skilled labour, Indian government has established several professional institutes for medical and technical education which involves heavy expenditure. To promote education at lower level Government has provided huge amount of grants to primary and secondary schools by making education up to the age of 14 free and by starting innovative schemes like mid-day meal.

8) Economic incentives: Economic incentives such as subsidies, cheap credit, tax concession, cheap electricity, etc. Given by the government to the agriculturists and industrialists have caused monetary burden on the Government whereas recoveries in respect of both economic and social services have been insignificant.

There is a huge increase in total public expenditure in India during the period 19612007 without adequate increase in revenues. This has resulted in huge deficit in budget in India. Hence there is a need to manage public expenditure in India to control and reduce fiscal deficit during future period of time.

Expenditure of Central Government as a percentage of GDP:

Year

Interest

Defence

Subsidies

Plan

Other

Fiscal

Expenditure Expenditure Deficit 4.80

2002-03

2.30 2.20 2.34 2.18 1.20 1.09 1.31 1.40 1.26 1.20 1.06 1.18 1.12

1.80 1.60 1.42 1.29 1.25 1.35 2.21 2.10 1.57 1.71 1.50 2.43 1.87

4.50 4.40 4.08 3.81 3.96 4.11 4.93 4.70 5.38 4.94 4.92 4.79 5.13

3.5 4.40 3.70 2.92 3.68 4.31 3.93 4.36 4.19 4.70 3.55 3.31 3.41

5.90 4.50 3.88 3.97 3.32 2.55 6.04 6.48 5.50 4.87 4.60 5.86 5.06

4.50
2003-04

3.92
2004-05

3.59
2005-06

3.5
2006-07

3.43
2007-08

3.44
2008-09

3.30
2009-10 201011(BE) 2010-11(P) 20112012(BE) 201112(RE) 201213(BE)

3.59 3.05 2.98 3.09 3.15