The second hypothesis about the growth of public expenditure has been put forward by Wiseman and Peacock in their study of public expenditure of U.K. According to this Wiseman-Peacock hypothesis, Government expenditure does not increase at a steady rate continuously but in jerks and step-like manner.
However, in the view of the present author, both these factors, one making for a continuous increase in Government activity and consequently public expenditure as emphasised by Wagner and others like war and depression causing the public expenditure to rise by jerks as emphasised by Wiseman and Peacock have been responsible for the enormous increase in public expenditure. In what follows, we shall explain the factors responsible for growth in public expenditure with special reference to the Indian economy.
An important factor responsible for public expenditure is the mounting defence expenditure incurred by countries all the world over. It is not only during actual wars that defence expenditure has been rising but even during peace time, the countries have to remain in the state of military preparedness demanding large defence expenditure.
There is arms race going on between countries. A poor country like India has to safeguard its hard earned freedom and this involves a lot of expenditure on building up efficient and adequate armed forces. India is wedged in between two enemies, namely, expansionist China and aggressive Pakistan, which have been strengthening their armed forces.
India had to fight three wars since independence. India has thus to remain in a state of military preparedness. Internally also in view of clash of linguistic, territorial and political interests, lot of expenditure has to be incurred on maintaining internal security.
- Population Growth and Urbanisation:
Another factor responsible for the increase in public expenditure is the growth in population and urbanisation of the economies. Population has been increasing in almost all countries of the world, though at varying rates.
In India the population has been increasing at an alarming rate since independence. The population of India which was 36 crores in 1951 has now gone upto about 100 crores in 2001. The scale of government activities such as providing education, public health, roads and transport facilities has to increase in harmony with the growth of population. Further, when population increases, more has to be spent on administrative services (police, jails, judiciary etc.) to maintain law and order in the country.
With the progress of the economy and the growth of population, the extent of urbanisation increases. In India, the proportion of urban population to the total population has raised from 11.3 per cent in 1921 to 25.5 per cent in 1991 and to 27.8 per cent in 2001.
As a result of the increasing urbanisation, the existing towns expand and the new ones come up. Urbanisation calls for greater per capita expenditure on social and administrative services. Therefore, the increase in urbanisation in India has tended to increase the government expenditure.
- Activities of a Welfare State:
The Government activities and functions have been increasing due to the change in the nature of State. The modern States are no longer Police States concerned mainly with the maintenance of law and order. They have now become Welfare States.
A Welfare State is one which provides for social insurance of its citizens against old age, sickness, unemployment etc. The modern Governments have therefore to incur a lot of expenditure on social security measures such as old age pensions, unemployment allowances, sickness benefits.
- Maintaining Economic Stability:
As pointed out by Wagner, state functions increase with the advancement and progress of the economy. In the nineteenth and early twentieth century, the Government followed laissez-fair policy. Now, need for active intervention of the Government has been increasingly felt.
Thanks to J.M. Keynes whose macroeconomic theory clearly brought out that the working of free-market mechanism does not ensure economic stability at full employment level. According to his theory, lapses from full employment or depressions are caused by deficiency of aggregate demand due to the slackened private investment activity.
In order to compensate for this shortfall in private investment, the Government has to step up its expenditure on public works. The increase in Government expenditure raises aggregate demand manifold through the working of what Keynes has called income multiplier.
This helps to push the economy out of depression and to raise levels of income and employment. Now, this compensatory fiscal policy is being followed by all the world over, since achievement of full employment and maintenance of economic stability has become an important objective of the Government.
It is in line with the objective of employment that in India, the Government has taken over several private sick mills and incurs a lot of expenditure on them so that workers employed in them are not rendered unemployed.
Further, the Indian Government, both Central and States, incur a lot of expenditure on relief public works in rural areas when drought and other natural calamities occurs. Besides, a lot of public expenditure is being incurred on special employment schemes to promote employment in the economy.
- Economic Growth and Development:
The most important factor in developing countries such as ours that has led to a phenomenal increase in public expenditure is the expansion in developmental activities of the Government. In countries like India which have socialistic tendencies the public sector plays an important role in promoting economic growth and development.
Not only public utility services such as water supply, electricity, post and petroleum and transport services have been undertaken by the public sector, but also the Government has invested a huge sum of resources in industrial and agricultural development of the economy.
Several steel plants, multipurpose irrigation projects, fertilizer factories, coal mining, exploration and production of oil and petroleum, different kinds of machine-making industries and chemical plants have been started and are being operated in the public sector.
On these a huge amount of expenditure is being incurred by the Government in India. Owing to these developmental activities of the Government in India, the proportion of developmental expenditure to the total Government expenditure has greatly increased. In 2003-04, Central Government’s plan expenditure, which is mainly developmental expenditure, was 122.3 thousand crores which rose to 137.4 thousand crores in 2004-05.
- Mounting Debt Service Charges:
The Governments in all developing countries (including India) has been borrowing heavily in recent years to finance their increasing activities. Not only the debt money has to be paid back when it matures, interest payments have also to be made annually to the creditors.
These debt service charges have resulted in enormous increase in public expenditure. It should be noted that the Government in India has not only been borrowing from within the country but also from abroad through foreign aid or commercial loans from private capital markets to finance her development plans. It has been estimated that for the year 1998-99, Rs. 75 thousand crores were spent on the interest payments which went up to Rs. 125.9 crores in 2004-05 by the Central Government.
- Mounting Expenditure on Subsidies:
Governments, both in the developed and developing countries, incur a lot of expenditure on subsidies to the various sections of population. In India, the Government has been providing subsidies on food, fertilizers, exports and education, and expenditure on them has been increasing at a rapid rate which is the main cause of large fiscal deficit in India.
For example while in 2002-2003, the Central, Government expenditure on subsidies was of the order of Rs. 44.6 thousand crores and for the year 2004-2005 it was estimated to go up to Rs. 46.5 thousand crores.
The expenditure of Central Government’s expenditure on subsidies on food, fertilizers, exports now account for about 7 per cent of budget expenditure. While the aim of giving food subsidy is to help the people below the poverty line, the aim of fertilizer subsidy is to promote the growth of agriculture and help small farmers.
- Anti-Poverty Schemes:
Another important cause of increasing public expenditure in India is huge expenditure which he Government is incurring on employment generating anti- poverty schemes. It has now been realised that economic growth alone will not eradicate poverty, at least in the short run. Therefore, various employment schemes have been started by the Government for the people living below the poverty line.
Prominent among these anti-poverty schemes in India are Jawahar Rozgar Yojna, Prime Minister’s Employment Scheme and Integrated Rural Development Scheme (IRDP). Expenditure on these schemes has greatly risen in recent years.