Introduction:

Before independence, there was no planning in India and hence no effort was made on the part of
the government to provide welfare services but the accelerating growth of government
expenditure began in late seventies.The ratio of public expenditure to GDP has increased steadily
from 9.1% in 1950-51 to 28.3 in 2005-06.There has been tremendous increase in total public
expenditure during the perioc 1960-61 to 2005-06.The total public expenditure increased from
Rs.2,631 crores in 1960-61 to Rs.9,99,563 crores in 2005-06.The ratio of Public Expenditure
to national income in India is one of the highest in developing countries. But in India as asizeable
proportion of population is living below the poverty line. Many people fail to obtain even
necessaries for humansurvival. They hardly derive any benefit from the public
expenditure.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 itaccelerates not only economic growth and promotes employment
opportunities but also plays major role in alleviation of provetry and inequalities in income
distribution.

What is public expenditure?

Public Expenditure refers toGovernment Expenditure.
It comprise all expendituresincurred by the central government,the local
government and otherpublic sector entities for thedelivery of public services or
for apublic course
The expenditure incurred by publicauthorities like central, state andlocal
governments to satisfy thecollective social wants of the peopleis known
as public expenditure.
It consist of all legitimate spendingfrom the public funds

Why Public expenditure?

Government spends for thevarious reasons:
To run government machinery onday to day basis (i.e administrationcost)
To provide public protection andsecurity

 To compensate public service staff

To provide infrastructure fordevelopment
To service debt obligations
To make equity investment
To stimulate national growth andemployment

Classification of publicexpenditure:
Public expenditure may beclassified in various ways basedon their nature,
purpose , andfunction. These include:
Statutory and Discretionalexpenditures
Capital and revenue expenditure
Productive and Non productiveexpenditure
Transfer and non-transferexpenditure
Planned and Unplannedexpenditure
Functional expenditures

Classification of PublicExpenditure (control):

Statutory and Discretionaryexpenditure
Statutory expenditure refers toexpenditures that are charged on thepublic funds by the
Constitution andother enactments.
These expenditures are regarded asstatutory obligations and therefore donot require prior
approval ofParliament

for example,
debt servicing,
pension payments (CAP 30 scheme)
salaries of certain public officers such asthe Auditor General and Judges of
theCourt of Appeal.
Transfers to statutory funds such asDistrict Assembly Common
Fund,GETFund
Nugatory payments (e.g judgment debt)

Statutory andDiscretional Expenditures:

Discretional expenditures
They are also known as non-statutoryexpenditure.
They are those that Parliamentapproves annually through anAppropriation
Act.
Once approved the vote wording andthe expenditure authority attributableto
each vote become the governingconditions under which theseexpenditures
may be made.
The government in power thus hascontrol over the decision to incur
suchexpenditures.
This spending is optional as part of fiscal policy

Revenue Expenditureand Capital expenditure:

Revenue expenditure

 REs are also known as recurrentexpenditures.

REs are current or consumptionexpenditures incurred on civiladministration,
defense forces,public health and education,maintenance of governmentmachinery.
This type of expenditure is ofrecurring type which is incurredyear after year

Revenue Expenditure andCapital expenditure (cont):

Capital Expenditures
capital expenditures are incurred onbuilding durable assets,
likehighways, multipurpose dams,irrigation projects, buyingmachinery
and equipment.
They are non recurring type ofexpenditures in the form of capitalinvestments.
Such expenditures are expected toimprove the productive capacity ofthe economy
.Productive and Non-Productive Expenditure:
Classical economists classifyexpenditures based on their productivecapacity.
Productive/development expenditures:
They expenditures on infrastructuredevelopment, public enterprises ordevelopment of
agriculture to increaseproductive capacity in the economy andbring income to the government
Non-productive /non-developmentexpenditures:
Expenditures in the nature ofconsumption such as defense, interestpayments,
expenditure on law and order,public administration,
These expenditures do not create anyproductive asset which can bring incomeor
returns to the government
.

Transfer and Non transferExpenditures-A.C Pigou:

 Transfer expenditures
Transfer expenditure relates to theexpenditure against which there isno
corresponding return.

Such expenditure includes publicexpenditure on : National Old Age Pension Schemes,

Interest payments,
Subsidies,
Unemployment allowances,
Welfare benefits to weaker sections,e.g. livelihood empower payment
Such expenditure basically resultsin redistribution of money incomeswithin
the society

Transfer and Non transferExpenditures (cont):

Non transfer Expenditure
The non-transfer expenditurerelates to expenditure whichresults in creation of
income oroutput.
The non-transfer expenditureincludes development as well asnondevelopment expenditure thatresults in creation of outputdirectly or indirectly.
Examples include;
Economic infrastructure such aspower, transport, irrigation, etc.
Social infrastructure such aseducation, health and family welfare.
Internal law and order and defense.

 Public administration, etc

Planned and Unplanned Expenditures:

Planned expenditures
Expenditures that are incurred inaccording to the legally adoptedbudget.
These expenditures arepredetermined by the executive and.approved by parliament.
Unplanned Expenditures
They are contingent expenditures,which are not anticipated bygovernment.
Examples include:
Disaster relief cost
Social disorder management
Unanticipated rise in the cost of fuel

6. Functional expenditure:
Some economists classify publicexpenditure on the basis offunctions for
which they areincurred.
This kind of classification provides aclear idea about how the publicfunds
are spent
These includes:

Defense expenditure,

Social services ,

economic services,


General service

infrastructure and industrialdevelopment

Control of PublicExpenditure

The objective is to ensure thatpublic expenditure producesvalue for money .

Expenditure control measurescovers authority, approval,payment and accounting for

theexpenditure
Expenditure control measure

General controls include;

Ensure that the expenditure islawful charge against appropriation

Ensure that appropriate approval issought from the MOF (warrant) orthe Head of
Department.

Ensure that goods, services andworks are performed beforepayment

Ensure that the prices or rates are inaccordance with the contract or arereasonable

Ensure that appropriate supportingdocuments are provided andverified

General expenditure controlmeasure (cont)

Ensure that large payment are doneby cheques or direct transfers.

Ensure safe custody of all value books(,Cheques LPOs, PVs, Travel warrantsetc) to avoid
abuse

Ensure that records are maintainedfor all cheques and PVs issued forcross references

Ensure that cash books are updatedregularly

Ensure segregation of duties in theprocessing ,payment and

accountingof expenditure
Expenditure Loss

Expenditure loss occurred whenthe government is deprived of thebenefits associated with

publicspending

Expenditure loss may arise from:

Irrecoverable overpayments

Nugatory payments

Improper payments

Excess expenditures

Fraudulent payments

Irrecoverable overpayments

It occurs when an excess paymenthas been made by error and recoverycannot be effected
because therecipient cannot be traced or isincapable of making payment.

Nugatory payments

It occurs when government is legallyobliged to make payment of penaltyfor which

no corresponding receipt ofgoods or services has been derived.Example is judgment
debts.

Ex-gratia payment does notconstitute expenditure loss

Improper payments

It occurs when the transaction is

contrary to the law but does not

constitute any criminal offence.Example are gross waste orextravagance.

Excess Expenditure

Its a variation of improper payments

where payments have been made inexcess of approved estimates withoutthe prior
authority of parliament.

Fraudulent payments

It arises from transactions which

involve use of falsified documents or
certificates to steal money or otherproperty of state.

It is a criminal offence under theCriminal code.

Matter:
Principles of Public Expenditure:
The main
principles or canons of public expenditure
are as follows:
(i) The Principle of Maximum Social Advantage:
The government expenditure should beincurred in such a way that it should give
benefit to the community as a whole. The aim of the public expenditure is the
provision of maximum social advantage. If one section of thesociety or one
particular group receives benefit of the public expenditure at the expense of the
society as a whole, then that expenditure cannot be justified in any way, because it
doesnot result in the greatest good to the public in general. So we can say that the
public,expenditure should secure the maximum social advantage.
(ii) The Principle of Economy:
The principle of economy requires that government should spend money in such a
manner that all wasteful expenditure is avoided. Economydoes not mean
miserliness or niggardliness. By economy we mean that public expenditureshould

be increased without any extravagance and duplication. If the hard-earned moneyof

the people, collected through taxes, is thoughtlessly spent, the public expenditure
willnot confirm to the cannon of economy.
(iii) The Principle of Sanction:
According to the principle, all public expenditure shouldbe incurred by getting
prior sanction from the competent authority. The sanction isnecessary because it
helps in avoiding waste, extravagance, and overlapping of publicmoney. Moreover,
prior approval of the public expenditure makes it easy for the audit department to
scrutinize the different items of expenditure and see whether the money hasnot
been overspent or misappropriated
(iv) The Principle of balanced Budgets:
Every government must try to keep its budgetswell balanced. There should
be neither ever recurring surpluses nor deficits in the budgets.Ever recurring
surpluses are not desired because it shows that people are unnecessarilyheavily
taxed. If expenditure exceeds revenue every year, then that too is not a healthy
signbecause this is considered to be the sign of financial weakness of the country.
Thegovernment, therefore, must try to live within its own means.
(v) The Principle of Elasticity:
The principle of elasticity requires that public expenditureshould not in any way be
rigidly fixed for all times. It should be rather fairly elastic. Thepublic authorities
should be in a position to vary the expenditure as the situation demands.During the
period of depression, it should be possible for the government to increase
theexpenditure so that economy is lifted from low level of employment. During
boom period,the state should be in a position to curtail the expenditure without
causing any distress tothe people.
(vi) No unhealthy effect on Production and Distribution:
The public expenditure shouldbe arranged in such a way that it should not have
adverse effect on production ordistribution of wealth in the country. Public
expenditure should aim at stimulatingproduction and reducing inequalities of
wealth distribution.
Causes for Increase In Government Expenditure1. Population Growth
During the past 50 years of planning, the population of India has increased from
36.1 crore in 1950-51, it has crossed over 102 crore in 2001. The growth in
population requires massive investment in health and education, law and social
order,etc. A young population requires increasing expenditure on education &
youth services, whereas the aging populationrequires transfer payments like old
age pension, social security & health facilities.
2. Defence Expenditure

There has been enormous increase in defence expenditure in India during planning
period. According to Economic Survey2006-07 the defence expenditure of central
government was Rs.10,874 crores in 1990-91 which has increasedsignificantly to
Rs.51,542 crores in 2006-07.The defence expenditure has increase tremendously
due to modernization of defense equipment used by army, navy andairforce. India
cannot postpone modernisation in defense specially when its neighboring countries
are buying the latestdefence equipments from developed countries of the world.
3. Increase in National Income
The increase in national income also resulted in more income to the government by
way of tax revenue and other income.As a result of which the
government Expenditure also increased because under the circumstances, the
Government is notonly expected to expand its traditional activities but it also
undertakes new activities.
4. Government Subsidies
The Government of India has been providing subsidies on a number of items such
as food, fertilizers, interest to prioritysector, exports, education, etc. Because of the
massive amounts of subsidies, the public expenditure has increased.According to
Economic Survey 2006-07 the expenditure on subsidies by central government in
1990-91 was Rs.9581crores which has increased significantly to Rs.44,792 crores
in 2005-06.
5. Debt Servicing
The internal debt as well as external debt is on the iocrease. The government has
been borrowing heavily both from thedomestic market and from foreign sources, to
meet its expenditure. As a result of which, the government has to make
hugeamounts of money towards interest payments.The interest payment of the
central government has increased from 21,500 crore in 1990-91 to Rs.1,39,823
crores in 2006-07.
6. Expansion of Administrative Machinery
There has been an increase in the administrative machinery in the country with the
rapid growth of population and alsoeconomic development. Heavy expenditure is
to be incurred on administrative machinery in respect of police, taxadministration,
administration of public sector enterprises, etc
7. Development Projects

The government has been undertaking various development projects such as

irrigation, iron and steel, heavy machinery, power, telecommunications, etc. The
development projects require lot of capital and revenue expenditure.
8. Urbanisation
There has been an increase in urbanization. In 1950-51 about 17% of the
population was urban based. Now the urban population has increased to about
28%. There are more than 23 cities above one million population. The increase
inurbanization requires heavy expenditure on law and order, education, civil
amenities like drinking water housing,electricity, etc.
9. Industrialisation
Setting up key and basic industries requires a huge capital and profit may arise
only in the long run. It is the governmentwhich starts such industries in a planned
economy. India needs a strong network of infrastructure including
transport,communication, power, fuel, etc. The public sector has created a strong
infrastructure as a support base for our industrialsector by investing huge capital.
The government has not only improved the rail, air and sea transport but has
alsoexpanded them manifold.
10. Economic Incentives
Economic incentives such as subsidies, cheap credit, tax concession, cheap
electricity, etc. given by the Government to theagriculturists and industrialists have
caused monetary burden on the Government whereas recoveries in respect of
botheconomic and social services have been insignificant
11. Increase in grant in aid to state and union territories
There has been tremendous increase in grant in aid to state and union territories
during planning period. According to TataStatistical Outline 2004-2005 the Grant
in aid to states and Union Territories was Rs.3982 crores in 1990-91 which
hasincreased to Rs.15,669 crores in 2003-2004.The grant in aid to states and union
territories has increased significantly both for developmental purposes
likeconstruction of roads, railways, etc. and for non-developmental purposes like
police administration, tackling terrorism andnaxalite activities, etc.
12. New Responsibilities
Several new responsibilities have been assumed by the Indian Government in the
post independence period. In a ComplexMulti Caste Indian Society there are
frequent occasions of social tensions which require greater amount of
public serviceslike Law and Order, Defence, etc. Provisions of justice and
constitutional remedies also require expenditure.

13. Education
Education not only contributes to mental development of man but also raises
productivity. Moreover mass education isnecessary condition for the success of
democracy. The state has made attempts to create various types of
educationalfacilities. In order to meet growing demand for skilled labours.
Government has also set up specialised institutes for medical & technical education
which involves heavy expenditure