Trends in government spending

Abstract

India is often described as a welfare state – where the government plays the key role in protecting and promoting the well-being of its citizens socially and economically. The Indian Constitution is guided by the six Directive Principles of State Policy which assigning a socialist role to the state with an onus to promote education, health and economic interests of marginalized sections. The government through the tandem between the tax revenue and public expenditure enacts its fiscal policy & schemes aimed at skilling youth, creating employment, creating equitable distribution of wealth and determining the general direction of the nation’s economy is pushed towards. The study also highlights the growth in the country’s obligatory expenditure in the form of pension and interest payments and how these have changed over time. The increasing number of personnel retiring coupled with increasing life expectancy and the legacy system of defined benefits pension plans – has been constantly increasing the tax-payer’s burden and has also prompted to the switch to contribution plans. Through this report we have used the government expenditure and its distribution between different sectors as a proxy for national priorities – and have studied how these have changed since the advent of the 21st century with different political regimes that have altered their fiscal policy with macroeconomic cycles and monetary policy. As a part of this project, we have created a disaggregated view of Indian central government’s expenditure and done qualitative and quantitative comparisons with global benchmarks to provide a timeline of India’s economic journey. The motivation of this study emanates from the intention to understand India’s economic journey and how the overarching role of the government has helped shape it. Since independence, the India has seen multiple economic cycles – most of which occurred in the pre-liberalization era when the indian economy was insulated from the global economy. The priorities of paternalistic state back then were to promote the fledgling Indian industries and build competencies important to be competitive on the global stage in the future. Post liberalization, the government has again changed its priorities to slowly reduce its interventions to ensure growth and allow the Indian economy to assimilate into the larger global economy – with the focus being on income redistribution and welfare activities not under the ambit of the private sector. The Indian economy has also faced various global economic crises since then – with the 2008 crisis being most notable – which have also influenced the fiscal & monetary policies and the country’s economic direction. We believe that the study of the quantum and effectiveness of government expenditure would tell a compelling story about how the country has changed its priorities, goals and growth targets with changing political regimes in the broader global context.