FISCAL POLICY MEANING & ITS MAIN OBJECTIVES IN INDIA

Meaning of Fiscal Policy: The fiscal policy is concerned with the raising of
government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue. Fiscal policy has to decide on the size and pattern of flow of expenditure from the government to the economy and from the economy back to the government. So, in broad term fiscal policy refers to "that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government." In other words, fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings. The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In a democratic society direct methods are not approved. So, the government has to depend on indirect methods of regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development.

Main Objectives of Fiscal Policy In India :

The fiscal policy is designed to achive certain objectives as follows :-

1. Development by effective Mobilisation of Resources : The principal

objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by :-

Taxation : Through effective fiscal policies, the government aims to mobilise

resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation.

Public Savings : The resources can be mobilised through public savings by

reducing government expenditure and increasing surpluses of public sector enterprises.

Private Savings : Through effective fiscal measures such as tax benefits, the
government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

2. Efficient allocation of Financial Resources : The central and state

governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable.

3. Reduction in inequalities of Income and Wealth : Fiscal policy aims at

achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

4. Price Stability and Control of Inflation: One of the main objective of

fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by Reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc.

5. Employment Generation : The government is making every possible effort

to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generates more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas.

6. Balanced Regional Development : Another main objective of the fiscal

policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.

7. Reducing the Deficit in the Balance of Payment : Fiscal policy attempts

to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export.

8. Capital Formation : The objective of fiscal policy in India is also to increase

the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.

9. Increasing National Income : The fiscal policy aims to increase the national
income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country.

10. Development of Infrastructure: Government has placed emphasis on the

infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange Earnings : Fiscal policy attempts to encourage more

exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.

Conclusion On Fiscal Policy :

The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used. Though there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and growth oriented one.

The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.

Fiscal Crisis In India - Indicators, Causes and Consequences

What is Fiscal Crisis ? The fiscal imbalance takes place when the government
expenditure exceeds government revenue. This fiscal imbalance is also refered as the fiscal crisis.

In 1980, the growing burden of non-development expenditure caused deterioration in the fiscal situation of India. Later this resulted in a fiscal crisis at the beginning of 1991-1992.

Indicators of Fiscal Crisis :

The main indicators of fiscal crisis are various deficits such as :-

Revenue Deficit (RD) : It is the difference between revenue receipts (income)

and revenue expenditure.

Budgetary Deficit (BD) : It is the difference between total expenditure and

total receipts. Here, both revenue and capital expenditure and receipts are considered.

Fiscal Deficit (FD) : It is the excess of total expenditure over revenue receipts
and grants. In other words, fiscal deficit is the budget deficit plus government borrowings and other liabilities.

Primary Deficit (PD) : It is the fiscal deficit minus interest payments.

From the above table, it is clear that fiscal deficit is about 4.1% of GDP. Overall the revenue deficit has declined from 3.3% in 1990-91 to 2.7% of GDP in 2005-06.

Causes of Fiscal Crisis :

The main factors responsible for the fiscal crisis in India are as follows :-

1. Increase in Subsidies : The government has been providing subsidies on a

number of items such as fertilizers, exports, food items, etc. This has resulted in a fiscal imbalance. The major subsidies provided by the Central Government of India has increased over the years resulting in fiscal imbalance. The increase in subsidies by the central government is given in data below :-

2. Payment of Interest : One of the major components of government

expenditure is the interest payment both on domestic loans and foreign loans.

The government debt has increased considerably over the years. This has resulted in increased interest burden on the government. Interest payment of the Central Government increased from Rs. 21,500 crores in 1990-91 to Rs. 1,39,823 crores in 2006-07.

3. Defence Expenditure : The defence expenditure is increasing over the

years. The government has limited scope to reduce defence budget due to security problems across the Indian borders. The defence expenditure on the part of central government has increased from Rs. 10,874 crores in 1990-91 to Rs. 51,542 crores in 2006-07.

4. Poor Performance of Public Sector : The poor performance of public

sector has also resulted in fiscal imbalance. The poor performance of public sector is due to various reasons such as political interference, inefficiency and corruption of management, low labour efficiency, lack of professionalism, surplus staff, etc. Due to poor performance of public sector, the Government gets low revenue by way of dividend from public sector units.

5. Excessive Government borrowings : The internal and external debt of the

government has increased considerably during the past few decades. Due to the debts; the government has to incur high expenditure in form of interest payments.

6. Tax Evasion : Indian tax system is made up of complex procedures with

numerous exemptions. Corruptions is rampant at all levels, which leads to the fiscal imbalance.

7. Weak Revenue Mobilisation : While increase in government expenditure

has been the major cause of fiscal imbalance, inadequate rise in revenue receipts also contributed to fiscal imbalance. The revenue receipts of the centre, consisting of tax revenue, net of state's share and non-tax revenue, has increased at slower rate than that of growth in expenditure.

8. Huge Borrowings : The gap between expenditure and revenue is financed

through loans, both internal and external. The borrowings have been spent on unproductive purposes as well. The huge borrowings resulted in large interest payments.

9. Other Causes : Unproductive expenditure by the government, Weak

resource mobilisation and Low Capital Formation.

Consequences of Fiscal Crisis :

The fiscal imbalance has resulted in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affected the growth of economy. The government must introduce major fiscal correction policies to overcome the fiscal crisis. The consequences of fiscal crisis i.e. a sustained high fiscal deficits over 20 years are as follows :-

1. Debt Trap : With increasing levels of borrowing for financing activities, which
have zero or low yields, interest payments increase at faster rate. Thus, nonproductive expenditures rise, give rise to higher and higher revenue deficits.

2. Cut in Capital Expenditure : Because of debt service payments forming a

higher proportion of expenditures, all other activities of the government suffer. The main sufferer in this process is government capital expenditure in both economic and social infrastructure.

3. No Increase in Expendture on Education and Health : High debt

service payments also prevents increase in or even maintenance of real expenditure on social services, i.e. on education and public health.

4. High Interest Rates : The continued high level of public borrowings has an
effect on the rest of the economy through prevalence of high interest rates.

5. Slow Economic Growth : The fiscal imbalance affects economic growth in

the country. Fiscal imbalance first affects capital formation which in turn affects the economic growth.

6. Other Consequences : Some other consequences of fiscal crisis are :Fiscal imbalance may also lead to inflation in the economy. High fiscal deficit may discourage foreign investment in the country. The government has to borrow additional funds to solve fiscal deficit, which put extra burden on the government for payment of interest. It further worsens the fiscal imbalance.

Conclusion On Fiscal Crisis :

The fiscal imbalance however still continue as the Government has failed to reduce its own expenditure. The extravagant expenditure done by politicians and minister continues without any restriction. The populist policy followed by the Government, failure to reduce fertilizer subsidy, and massive burden of interest payment has still not take out the Indian economy from a situation of severe fiscal imbalances.

Measures To Overcome Fiscal Imbalance In India - Fiscal Policy

Fiscal imbalance takes place due to excess of government expenditure over revenue. To overcome the deficit, government resort to borrowings. This further aggravates the situation of debt servicing. Therefore there is a need to correct and overcome the fiscal imbalance.

The fiscal imbalance can be corrected by adopting following two methods:Reducing Government Expenditure. Raising proper financial resources (funds) for productive purposes.

A. Reduce Government Expenditure : Suggested ways by which government's expenditure can be reduced are :1. Reduction in Interest Burden : Over the years, there has been
considerable increase in Government borrowings. As a result, the interest payment of the Government has increased considerably. The interest payment has been the single major component of revenue expenditure of both the state and central government. For instance, the interest payment of the central government of India has increased from Rs.21,500 crores in 1990-91 to Rs.1,39,823 crores in 2005-06, which works out as 33% of the total revenue expenditure. Therefore, there is a need to reduce government borrowings so as to reduce interest burden, which in turn would reduce Government expenditure.

2. Reducing Subsidies : The government of India has been providing subsidies

on a number of items such as food, fertilizers, education, interest to priority section, and so on. Because of the massive amounts of subsidies, the government expenditure has increased over the years. Therefore there is need to reduce government subsidies.

3. Reduction in Government Overheads : The public sectors and

government departments are subject to high overheads. There is often overstaffing due to poor manpower planning. Also, there are huge overheads in respect of maintenance of machines, consumption of energy, and so on. Some of the overheads can be easily reduced. Therefore, there is a need to reduce overheads, wherever possible, in order to reduce Government expenditure.

4. Closure of Sick Units : The government needs to close down the sick public
sectors or disinvest them. Closing down non-viable sick units would enable the government to save their valuable resources which otherwise would have been used for such sick units. Disinvestment would generate additional revenue to the government. In India, the disinvestment process was started in 1991-92. However, the process of disinvestment is very slow in India due to political compulsion.

B. Raise Government Funds :

Suggested ways by which government's funds can be raised are :-

1. Collection of user charges : The government should take adequate

measures to collect user charges from the consumer in respect of public utilities like water supply, electricity, irrigation, transport, etc. The user charges are subsidized in case of certain services.

2. Improvement in Performance of PSUs : Due to poor performance of

PSUs, the government loses a good amount of revenue by way of dividends. Therefore, the government should make every effort to improve efficiency and performance of public sector units (PSUs), which in turn would enable the government to obtain more funds for productive expenditure.

3. Proper Mobilization of Tax Resources : In India there is a good deal of

tax evasion both of direct and indirect taxes. The tax evasion is due to the following reasons :High tax rates,

Too many formalities and documentation work, Inefficient and corrupt tax administration. Therefore, the government should make proper efforts to simplify the tax procedures, and at the same time take appropriate measures to reduce tax evasion.

4. Market oriented development: Market oriented development will

stimulate demand and encourage growth. Incentives are given through the fiscal policy to encourage the private sector investments. The areas of operation of public sector enterprises have been reduced. This will reduce governments borrowing and its dependence on household savings.

New Fiscal Policy of India :

In view of the economic liberalization in the recent years, certain themes have been emphasized in the New Fiscal Policy of India. They are :Simplification of tax structure and laws. Reasonable direct taxes and better administration. Stable tax policy environment. Weightage to resource allocation and equity consequences of taxation. More reliance on fiscal and financial instrument in managing the economy. Better links between fiscal and monetary policy. Strengthening methods of expenditure control.

Final Conclusion : The Fiscal measures adopted by the Govt of India would
reduce the inflation, reduce the deficit in balance of payments and promote growth and unemployment. The effects of the new fiscal policy are likely to be favourable to the indian economy.

What is a Budget ? Components of Government Budget

What is a Budget ? Meaning and Concept
Government has several policies to implement in the overall task of performing its functions to meet the objectives of social & economic growth. For implementing these policies, it has to spend huge amount of funds on defence, administration, and development, welfare projects & various other relief operations. It is therefore necessary to find out all possible sources of getting funds so that sufficient revenue can be generated to meet the mounting expenditure. Planning process of assessing revenue & expenditure is termed as Budget. The term budget is derived from the French word "Budgette" which means a "leather bag" or a "wallet". It is a statement of the financial plan of the government. It shows the income & expenditure of the government during a financial year, which runs generally from 1stApril to 31st March. Budget is most important information document of the government. One part of the government's budget is similar to company's annual report. This part presents the overall picture of the financial performance of the government. The second part of the budget presents government's financial plans for the period upto its next budget. So, every citizen of a nation from the common man to the politician is eager to know about the budget as they would like to get an idea of the :Financial performance of the government over the past one year. To know about the financial programmes & policies of the government for the next one year. To know how their standard of living will be affected by the financial policies of the government in the next one year.

Definitions of Budget
According to Tayler, "Budget is a financial plan of government for a definite period". According to Rene Stourm, "A budget is a document containing a preliminary approved plan of public revenues and expenditure".

Components of Government Budget

The main components or parts of government budget are explained below.

1. Revenue Budget

This financial statement includes the revenue receipts of the government i.e. revenue collected by way of taxes & other receipts. It also contains the items of expenditure met from such revenue.

(a) Revenue Receipts :

These are the incomes which are received by the government from all sources in its ordinary course of governance. These receipts do not create a liability or lead to a reduction in assets. Revenue receipts are further classified as tax revenue and non-tax revenue.

i. Tax Revenue :Tax revenue consists of the income received from different taxes and other duties levied by the government. It is a major source of public revenue. Every citizen, by law is bound to pay them and non-payment is punishable. Taxes are of two types, viz., Direct Taxes and Indirect Taxes. Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden can not be shifted to some one else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes. There is no direct benefit to the tax payer. Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person through their consumption expenditure. Here the burden can be shifted to some other person. E.g. Custom duties, sales tax, services tax, excise duties, etc. are indirect taxes. ii. Non-Tax Revenue :Apart from taxes, governments also receive revenue from other non-tax sources. The non-tax sources of public revenue are as follows :-

Fees : The government provides variety of services for which fees have to be paid. E.g. fees paid for registration of property, births, deaths, etc. Fines and penalties : Fines and penalties are imposed by the government for not following (violating) the rules and regulations. Profits from public sector enterprises : Many enterprises are owned and managed by the government. The profits receives from them is an important source of nontax revenue. For example in India, the Indian Railways, Oil and Natural Gas Commission, Air India, Indian Airlines, etc. are owned by the Government of India. The profit generated by them is a source of revenue to the government. Gifts and grants : Gifts and grants are received by the government when there are natural calamities like earthquake, floods, famines, etc. Citizens of the country, foreign governments and international organisations like the UNICEF, UNESCO, etc. donate during times of natural calamities. Special assessment duty : It is a type of levy imposed by the government on the people for getting some special benefit. For example, in a particular locality, if roads are improved, property prices will rise. The Property owners in that locality will benefit due to the appreciation in the value of property. Therefore the government imposes a levy on them which is known as special assessment duties. iii. India's Revenue Receipts :The tax revenue provides major share of revenue receipts to the central government of India. In 2006-07 tax revenue (direct + indirect taxes) of central government was Rs. 3,27,205 crores while non-tax revenue was Rs. 76,260 crores.

(b) Revenue Expenditure :

i. What is Revenue Expenditure ? Revenue expenditure is the expenditure incurred for the routine, usual and normal day to day running of government departments and provision of various

services to citizens. It includes both development and non-development expenditure of the Central government. Usually expenditures that do not result in the creations of assets are considered revenue expenditure.

ii. Expenses included in Revenue Expenditure :In general revenue expenditure includes following :Expenditure by the government on consumption of goods and services. Expenditure on agricultural and industrial development, scientific research, education, health and social services. Expenditure on defence and civil administration. Expenditure on exports and external affairs. Grants given to State governments even if some of them may be used for creation of assets. Payment of interest on loans taken in the previous year. Expenditure on subsidies. iii. India's Defence Expenditure :In 2006-07, Defence expenditure of the central government of India was Rs. 51,542 crores.

2. Capital Budget
This part of the budget includes receipts & expenditure on capital account projected for the next financial year. Capital budget consists of capital receipts & Capital expenditure.

(a) Capital Receipts :

i. What are Capital Receipts ? Receipts which create a liability or result in a reduction in assets are called capital receipts. They are obtained by the

government by raising funds through borrowings, recovery of loans and disposing of assets. ii. Items included in Capital Receipts :The main items of Capital receipts (income) are :Loans raised by the government from the public through the sale of bonds and securities. They are called market loans. Borrowings by government from RBI and other financial institutions through the sale of Treasury bills. Loans and aids received from foreign countries and other international Organisations like International Monetary Fund (IMF), World Bank, etc. Receipts from small saving schemes like the National saving scheme, Provident fund, etc. Recoveries of loans granted to state and union territory governments and other parties.

(b) Capital Expenditure :

Any projected expenditure which is incurred for creating asset with a long life is capital expenditure. Thus, expenditure on land, machines, equipment, irrigation projects, oil exploration and expenditure by way of investment in long term physical or financial assets are capital expenditure.

Conclusion On Budget :Thus, we see that the budget mirrors projected

receipts and expenditures.

Types of Government Budget - Balanced and Unbalanced

Different Types of Government Budget Diagram

A. Balanced Budget :
Balanced budget is a situation, in which estimated revenue of the government during the year is equal to its anticipated expenditure. Government's estimated Revenue = Government's proposed Expenditure. For individuals and families, it is always advisable to have a balanced budget. Most of the classical economists advocated balanced budget, which was based on the policy of 'Live within means'. According to them, government's revenue should not fall short of expenditure. They also favoured balanced budget because they believed that government should not interfere in economic activities and should just concentrate on the maintenance of internal and external security and provision of basic economic and social overheads. To achieve this, government has to have enough fiscal discipline so that its expenditures are equal to revenue.

B. Unbalanced Budget :
The budget in which income & expenditure are not equal to each other is known as Unbalanced Budget.

Unbalanced budget is of two types :Surplus Budget Deficit Budget

1. Surplus Budget
The budget is a surplus budget when the estimated revenues of the year are greater than anticipated expenditures. Government expected revenue > Government proposed Expenditure. Surplus budget shows the financial soundness of the government. When there is too much inflation, the government can adopt the policy of surplus budget as it will reduce aggregate demand. Increase in revenue by levying taxes on people reduces their disposable incomes, which otherwise could have been spend on consumption or saved and devoted to capital formation. Since government spending will be less than its income, aggregate demand will decrease and help to reduce the price level. However, in modern times, when governments have so many social economic & political responsibilities it is virtually impossible to have a surplus budget.

2. Deficit Budget :
Deficit budget is one where the estimated government expenditure is more than expected revenue. Government's estimated Revenue < Government's proposed Expenditure. According to Prof. Hugh Dalton, "If over a period of time expenditure exceeds revenue, the budget is said to be unbalanced". Such deficit amount is generally covered through public borrowings or withdrawing resources from the accumulated reserve surplus. In a way a deficit budget is a liability of the government as it creates a burden of debt or it reduces the stock of reserves of the government.

In developing countries like India, where huge resources are needed for the purpose of economic growth & development it is not possible to raise such resources through taxation, deficit budgeting is the only option. In Underdeveloped countries deficit budget is used for financing planned development & in advanced countries it is used as stability tool to control business & economic fluctuations.

At the Point E, budget is balanced. To the left of point E the government budget is in deficit and to the right of point E, the budget is in surplus. When the government incurs a budget deficit it is financed by borrowing. The government borrows from the public by issuing government bonds. This gives rise to government debt or public debt.

What is Budget Deficit ? Types of Budgetary Deficit - India Trends

What is a Budget Deficit ?
When the government expenditure exceeds revenues, the government is having a budget deficit. Thus the budget deficit is the excess of government expenditures over government receipts (income). When the government is running a deficit, it is spending more than it's receipts. The government finances its deficit mainly by borrowing from the public, through selling bonds, it is also financed by borrowing from the Central Bank.

Types of Budgetary Deficit :

The different types of budgetary deficit are explained in following points :-

1. Revenue Deficit
Revenue Deficit takes place when the revenue expenditure is more than revenue receipts. The revenue receipts come from direct & indirect taxes and also by way of non-tax revenue. The revenue expenditure takes place on account of administrative expenses, interest payment, defence expenditure & subsidies. Table below indicate revenue deficit of the central government of India.

From the above table it is clear that revenue deficit was Rs. 18,562 crores in 199091 and Rs. 94,644 crores in 2005-06. As proportion of GDP, revenue deficit increased from 1.5% in 1980-81 to 3.3% in 1990-91 and declined to 2.7% in 200506. The decline is due to the passing of the Fiscal Responsibility and Budget Management Act in 2002.

2. Budgetary Deficit
Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called deficit financing by the government of India. This deficit adds to money supply in the economy and, therefore, it can be a major cause of inflationary rise in prices. Budgetary Deficit of central government of India was Rs. 2,576 crores in 1980-81, it went up to Rs. 11,347 crores in 1990-91 to Rs. 13,184 crores in 1996-97. The concept of budgetary deficit has lost its significance after the presentation of the 1997-98 Budget. In this budget, the practice of ad hoc treasury bills as source of finance for government was discontinued. Ad hoc treasury bills are issued by the government and held only by the RBI. They carry a low rate of interest and fund monetized deficit. These bills were replaced by ways and means advance. Budgetary deficit has not figured in union budgets since 1997-98. Since 1997-98, instead of budgetary deficit, Gross Fiscal Deficit (GFD) became the key indicator. 3. Fiscal Deficit

Fiscal Deficit is a difference between total expenditure (both revenue and capital) and revenue receipts plus certain non-debt capital receipts like recovery of loans, proceeds from disinvestment. In other words, fiscal deficit is equal to budgetary deficit plus governments market borrowings and liabilities. This concept fully reflects the indebtedness of the government and throws light on the extent to which the government has gone beyond its means and the ways in which it has done so. in 1980-81, fiscal deficit was Rs. 7,733 crores. Between 1980-81 and 1990-91 it increased 5 times to Rs. 37,606 crores. Since the introduction of economic reforms in 1991-92, the government has tried to restrict the growth of fiscal deficit. As percentage of GDP fiscal deficit declined from 6.2% in 2001-02 to 4.1% in 2005-06. 4. Primary Deficit The fiscal deficit may be decomposed into primary deficit and interest payment. The primary deficit is obtained by deducting interest payments from the fiscal deficit. Thus, primary deficit is equal to fiscal deficit less interest payments. It indicates the real position of the government finances as it excludes the interest burden of the loans taken in the past. Table below indicate primary deficit as a Percentage of GDP.

Primary deficit of the central governent of India was 16,108 crores in 1990-91, it reduced to 14,591 crores in 2005-06.

5. Monetised Deficit

Monetised Deficit is the sum of the net increase in holdings of treasury bills of the RBI and its contributions to the market borrowing of the government. It shows the increase in net RBI credit to the government. It creates equivalent increase in high powered money or reserve money in the economy.

Conclusion :
All these budgetary deficit reveal fiscal imbalance. Fiscal imbalance & budget deficit result in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affect the growth of the economy. The government must introduce fiscal correction policies to overcome the deficit budget and fiscal crisis.

Fiscal Responsibility and Budget Management FRBM Act 2003

Concerned over the worsening of fiscal situation, in 2000, the Government of India had set up a committee to recommend draft legislation for fiscal responsibility. Based on the recommendations of the Committee, Government of India introduced the Fiscal Responsibility and Budget Management (FRBM) Bill in December 2000. In this Bill numerical targets for various fiscal indicators were specified. The Bill was referred to the Parliamentary Standing Committee on Finance. The Standing Committee recommended that the numerical targets proposed in the Bill should be incorporated in the rules to be framed under the Act. Taking into account the recommendations of the Standing Committee, a revised Bill was introduced in April 2003. The Bill was passed in Lok Sabha in May 2003 and in Rajya Sabha in August 2003. After receiving the assent of the President, it became an Act in August 2003. The FRBM Act 2003 was further amended. The FRBM Bill / Act provides rules for fiscal responsibility of the Central Government. The FRBM Act 2003 (as amended) became effective from July 5, 2004. Under this Act, Rules are framed relating to fiscal responsibility of the Central Government, which came into force on 5th July 2004.

Objectives of FRBM Act 2003 :

The main objectives of FRBM Bill / Act are :To reduce fiscal deficit To adopt prudent debt management. To generate revenue surplus.

Features of FRBM Act 2003

1. Revenue Deficit The first important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of revenue deficit. Measures relating to reduction of revenue deficits are:The government should reduce revenue deficit by an amount equivalent to 0.5 percent or more of the GDP at the end of each financial year, beginning with 2004-2005. The revenue deficit should be reduced to zero within a period of five years ending on March 31, 2009. Once revenue deficit becomes zero the central government should build up surplus amount of revenue which it may utilised for discharging liabilities in excess of assets. 2. Fiscal Deficit The second important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of fiscal deficit. Measures relating to reduction of fiscal deficits are:The government should reduce Gross fiscal deficit by an amount equivalent to 3.3% or more of the GDP at the end of each financial year, beginning with 20042005. The central government should reduce Gross Fiscal deficit to an amount equivalent to 2% of GDP upto March 31 2006. 3. Exceptional Grounds The third important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it clearly stated that the revenue deficit and fiscal deficit of the government may

exceed the targets specified in the rules only on the grounds of national security or national calamity faced by the country. 4. Public Debt The fourth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should ensure that the total liabilities (including external debt at current exchange rate) should not exceed 9% of GDP for the financial year 2004-2005. There should be progressive reduction of this limit by atleast one percentage point of GDP in each subsequent year. 5. Borrowing from the RBI The fifth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with borrowings done by central government from R.B.I. The Amended FRBM bill 2000 or FRBM Act 2003 clearly states that the central government shall not normally borrow from the R.B.I. However the central government may borrow from R.B.I. by way of advances to meet temporary excess of cash payments over the cash receipts during any financial year in accordance with the agreements which may entered into by the government with the R.B.I. 6. Fiscal Transparency The sixth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with fiscal transparency. The Amended FRBM bill 2000 or FRBM Act 2003 clearly stated two important measures to ensure greater transparency in fiscal operations of the government. These two important features are as follows :The central government should minimize as far as possible secrecy in preparation of annual budget. The central government at the time of presentation of the annual budget shall disclose the significant changes in accounting standards, policies and practices likely to affect the computation of fiscal indicators. 7. Limit On Guarantees

The seventh important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it restricts the guarantees given by the central government to 0.5% of GDP in any financial year beginning with 2004-2005. 8. Medium term fiscal policy statement The eighth important feature of amended FRBM bill 2000 or FRBM Act 2003 is that the central government should present medium term fiscal policy statement in both houses of parliament along with annual financial statement. The medium term fiscal policy statement should project specifically for important fiscal indicators. These fiscal indicators are as follows :Revenue deficit as percentage of GDP. Fiscal deficit as percentage of GDP. Tax revenue as percentage of GDP. Total outstanding liabilities as percentage of GDP. 9. Compliance of rules Finally the ninth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with measures to enforce compliance of rules. These measures are as follows :The FRBM bill clearly states that the Finance Minister shall review every quarter, the trends in receipts and expenditure in relation with the budget and place it before both houses of parliament the outcome of such reviews. The finance minister shall also make statement in both houses of parliament if there is any deviations in meeting the obligations of the central government. If deviations are substantial then the Finance Minister will declare the remedial measures which the central government proposes to take in future period of time.

The rules mandate the central government to take appropriate corrective action in case of revenue & fiscal deficit exceeding 45% of the budget estimates or total non-debt receipts falling short of 40% of the budget estimates at the end of first half of the financial year. 10. Task force on implementation of FRBM Act Following the enactment of FRBM Act, Government constituted a Task Force headed by Dr. Vijay Kelkar for drawing up the medium term framework for fiscal policies to achieve the FRBM targets. The task force proposed the following measures :Widening the tax base through removal of exemptions. An All-India goods and service-tax (GST) on the basis of a "grand bargain" with States, whereby States will have the concurrent powers to tax service, subject to certain principles that will help foster a national common market. Income tax exemption limit to be increased to Rs.1,00,000. A two-tire rate structure of 20 percent tax for income of Rs. 1,00,000 to Rs. 4,00,000 and 30% for income above Rs. 4,00,000 for individuals and elimination of standard deduction available to the salaried taxpayer. A reduction in the corporate income tax to 30% for domestic companies and the reduction in depreciation rates from 25 to 15%. A 3-tier custom duty rates of 5, 8 and 10% to bring down tariffs to ASEAN levels. Allocation of greater portion of expenditure to legitimate public goods by revisiting the classification of expenditure. Empowering panchayats / local bodies through reserve transfer. The task force stated that under the reforms measures recommended by it, tax GDP ratio of the central government should be raised from 9.2% in 2003 to 13.2% of GDP in 2008-09. A revenue surplus of 0.2% of GDP is estimated to emerge in

2008-09. Fiscal deficit estimated to fall from 4.8% of GDP in 2003-04 to 2.8% of GDP in 2008-09. The above features of Amended FRBM bill 2000 or Fiscal Responsibility and Budget Management Act 2003 clearly points out that the government intends to create a strong institutional mechanism to restore fiscal discipline at the level of the central government. Similarly the government wants to introduce greater transparency in fiscal operations of the central government.

Criticism / Limitations of FRBM Act 2003 :

Though the Fiscal Responsibility and Budget Management Act 2003 or Amended FRBM bill 2000 is a credible effort by the government to fix responsibility on the government to reduce fiscal deficit and bring transparency in fiscal operations of the government it has certain limitations. These limitations of Amended FRBM Bill 2000 or FRBM Act pointed out by various economists are as follows :1. Target regarding GFD very stringent The Bill stipulates that by March 31, 2006, the Gross Fiscal Deficit (GFD) as a proportion of GDP must be 2%. This, of course, means that the government can borrow from the economy only to the extent of 2% of GDP, whatever be the level of savings. Given the present need of government borrowings, 2% limit is very low. The increase in public investment helps to increase the level of effective demand and increases private investment in the economy. According to Dr. Raja Chelliah the ratio of Gross Fiscal Deficit (GFD) to GDP should be 4% to 5% of GDP as public investment on infrastructure sector is essential to boost economic growth. 2. Neglect of equity and growth According to critics the Amended FRBM Bill 2000 or FRBM Act 2003 is heavily loaded against investment in both human development and infrastructure sector. One of the major ommission of amended FRBM Bill 2000 or FRBM Act 2003 was

complete absence of any target for time bound minimum improvement in areas of power generation, transport, etc. which is very important both from the point of equity and higher economic growth. 3. Non-Coverage of State Governments The provisions of the bill impose restrictions on only the central government but state governments are out of its scope. But, deficits of state governments are as much or even a greater problem. For instance, the State of Maharashtra has already crossed the deficit of Rs. 1 lakh crore as on December 2004 (the second State after Up to cross deficit of Rs. 1 lakh crore). Therefore, there is a need for fiscal responsibility legislation for the State Governments as well. 4. Neglect of Development Needs Today, the levels of capital expenditures by the government are miserably low in India. These capital expenditures increase the efficiency and productivity of private investment and thus contribute to the development process in the country. If Revenue Deficit is to be reduced to zero and GFD to be 2% of GDP as per the requirement of FRBM Bill, it is the capital expenditure which will be sacrificed and thus will hinder further development of the country. 5. Need to Increase Revenue Revenue deficits are determined by the interplay of expenditure and revenues, both tax and non-tax. Too often, attention gets focused only on the expenditure side of the identity to the neglect of the revenue side. Increasing non-tax revenue requires that public sector services be appropriately priced, which may be difficult as the present society has got used to the subsidised education, health, food items, etc. 6. Neglect of Social Sector The FRBM bill does not mention anything relating to social sector development. However, investment in social sector such as health, education, etc is very vital for the economic development of the nation.

7. Problem of Subsidies The government may be able to reduce revenue deficit by reducing subsidies. However, it is quite likely that the government will be under severe pressure to continue the subsidies. It means the expenditure on the productive areas may be reduced due to subsidies. 8. Stable Growth Deficit Chelliah points out that given the household financial savings in India, the overall fiscal deficit termed as stable growth deficit of the government sector as a whole should be pegged at 6% of GDP with revenue deficit being gradually phased out. Thus, the target of 2% of fiscal deficit GDP ratio stated in FRBM bill is not desirable from the point of view of productive investment according to Chelliah. 9. False Assumptions The FRBM Bill is based on the following assumptions :Lower fiscal deficit lead to higher growth. Larger fiscal deficit lead to higher inflation Larger fiscal deficit increase external vulnerability of the economy. These assumptions have been rejected by C.P. Chandrashekhar and Jayanti Ghosh who have given the following arguments :If the deficit is in the form of capital expenditure it would contribute to future growth. Fiscal deficit is not only the cause for higher inflation. During the late 1990s the rate of inflation has fallen even when the fiscal deficit was as high as 5.5% of GDP. Higher fiscal deficit need not necessarily cause external crisis. The external vulnerability depends more on capital and trade account convertibility. In India we have managed to build large foreign exchange reserves, though fiscal deficit has not come down.

Conclusion on FRBM Act 2003 :

The Amended FRBM Bill 2000 or FRBM Act 2003 despite above criticism can play a very important role in controlling fiscal deficit and in bringing transparency in fiscal operation of the government if it is implemented effectively in letter and spirit by the concerned government.

What is Public Expenditure ? Meaning and Classification

Public expenditure refers to Government expenditure i.e. Government spending. It is incurred by Central, State and Local governments of a country. Public expenditure can be defined as, "The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure." Throughout the 19th Century, most governments followed laissez faire economic policies & their functions were only restricted to defending aggression & maintaining law & order. The size of pubic expenditure was very small. But now the expenditure of governments all over has significantly increased. In the early 20th Century, John Maynard Keynes advocated the role of public expenditure in determination of level of income and its distribution. In developing countries, public expenditure policy not only accelerates economic growth & promotes employment opportunities but also plays a useful role in reducing poverty and inequalities in income distribution. Classification of Public Expenditure Classification of Public expenditure refers to the systematic arrangement of different items on which the government incurs expenditure. Different economists have looked at public expenditure from different point of view. The following classification is a based on these different views.

1. Functional Classification

Some economists classify public expenditure on the basis of functions for which they are incurred. The government performs various functions like defence, social welfare, agriculture, infrastructure and industrial development. The expenditure incurred on such functions fall under this classification. These functions are

further divided into subsidiary functions. This kind of classification provides a clear idea about how the public funds are spent.

2. Revenue and Capital Expenditure

Revenue expenditure are current or consumption expenditures incurred on civil administration, defence forces, public health and education, maintenance of government machinery. This type of expenditure is of recurring type which is incurred year after year. On the other hand, capital expenditures are incurred on building durable assets, like highways, multipurpose dams, irrigation projects, buying machinery and equipment. They are non recurring type of expenditures in the form of capital investments. Such expenditures are expected to improve the productive capacity of the economy.

3. Transfer and Non-Transfer Expenditure

A.C. Pigou, the British economist has classified public expenditure as :Transfer expenditure Non-transfer expenditure Transfer Expenditure :Transfer expenditure relates to the expenditure against which there is no corresponding return. Such expenditure includes public expenditure on :National Old Age Pension Schemes, Interest payments, Subsidies, Unemployment allowances, Welfare benefits to weaker sections, etc.

By incurring such expenditure, the government does not get anything in return, but it adds to the welfare of the people, especially belong to the weaker sections of the society. Such expenditure basically results in redistribution of money incomes within the society. Non-Transfer Expenditure :The non-transfer expenditure relates to expenditure which results in creation of income or output. The non-transfer expenditure includes development as well as non-development expenditure that results in creation of output directly or indirectly. Economic infrastructure such as power, transport, irrigation, etc. Social infrastructure such as education, health and family welfare. Internal law and order and defence. Public administration, etc. By incurring such expenditure, the government creates a healthy conditions or environment for economic activities. Due to economic growth, the government may be able to generate income in form of duties and taxes.

4.1 Productive and Unproductive Expenditure

This classification was made by Classical economists on the basis of creation of productive capacity. Productive Expenditure :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. Unproductive Expenditure :-

Expenditures in the nature of consumption such as defence, interest payments, expenditure on law and order, public administration, do not create any productive asset which can bring income or returns to the government. Such expenses are classified as unproductive expenditures.

4.2 Development and Non-Development Expenditure

Modern economists have modified this classification into distinction between development and non-development expenditures. Development Expenditure :All expenditures that promote economic growth and development are termed as development expenditure. These are the same as productive expenditure. Non-Development Expenditure :Unproductive expenditures are termed as non development expenditures.

5. Grants and Purchase Price

This classification has been suggested by economist Hugh Dalton. Grants :Grants are those payments made by a public authority for which their may not be any quid-pro-quo, i.e., there will be no receipt of goods or services. For example, old age pension, unemployment benefits, subsidies, social insurance, etc. Grants are transfer expenditures. Purchase prices :Purchase prices are expenditures for which the government receives goods and services in return. For example, salaries and wages to government employees and purchase of consumption and capital goods.

6. Classification According to Benefits

Public expenditure can be classified on the basis of benefits they confer on different groups of people. Common benefits to all : Expenditures that confer common benefits on all the people. For example, expenditure on education, public health, transport, defence, law and order, general administration. Special benefits to all : Expenditures that confer special benefits on all. For example, administration of justice, social security measures, community welfare. Special benefits to some : Expenditures that confer direct special benefits on certain people and also add to general welfare. For example, old age pension, subsidies to weaker section, unemployment benefits.

7. Hugh Dalton's Classification of Public Expenditure

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

Effects of Public Expenditure On Economy Production Distribution :

1. Effects on Production The effect of public expenditure on production can be examined with reference to its effects on ability & willingness to work, save & invest and on diversion of resources. Ability to work, save and invest : Socially desirable public expenditure increases community's productive capacity. Expenditure on education, health, communication, increases people's productivity at work and therefore their incomes. With rise in income savings also increase and this in turn has a beneficial effect on investment and capital formation. Willingness to work, save and invest : Public expenditure, sometimes, brings adverse effects on people's willingness to work and save. Government expenditure on social security facilities may bring such unfavourable effects. For e.g. Government spends a considerable portion of its income towards provision of social security benefits such as unemployment allowances old age pension, insurance benefits, sickness benefit, medical benefit, etc. Such benefits reduce the desire to work. In other words they act as disincentive to work. Effect on allocation of resources among different industries & trade : Many a times the government expenditure proves to be an effective instrument to encourage investment on a particular industry. For e.g. If government decides to promote exports, it provides benefits like subsidies, tax benefits to attract investment towards such industry. Similarly government can also promote a particular region by providing various incentives for those who make investment in that region.

2. Effects on Distribution

The primary aim of the government is to maximise social benefit through public expenditure. The objective of maximum social welfare can be achieved only when the inequality of income is removed or minimised. Government expenditure is very useful to fulfill this goal. Government collects excess income of the rich through income tax and sales tax on luxuries. The funds thus mobilised are directed towards welfare programmes to promote the standard of poor and weaker section. Thus public expenditure helps to achieve the objective of equal distribution of income. Expenditure on social security & subsidies to poor are aimed at increasing their real income & purchasing power. Public expenditure on education, communication, health has a positive impact on productivity of the weaker section of society, thereby increasing their income earning capacity.

3. Effects on Consumption
Public expenditure enables redistribution of income in favour of poor. It improves the capacity of the poor to consume. Thus public expenditure promotes consumption and thereby other economic activities. The government expenditure on welfare programmes like free education, health care and housing certainly improves the standard of the poor people. It also promotes their capacity to consume and save.

4. Effects on Economic Stability

Economic instability takes the form of depression, recession and inflation. Public expenditure is used as a mechanism to control instability. The modern economist Keynes advocated public expenditure as a better device to raise effective demand & to get out of depression. Public expenditure is also useful in controlling inflation & deflation. Expansion of Public expenditure during deflation & reduction of public expenditure during inflation control money supply & bring price stability.

5. Effects on Economic Growth

The goals of planning are effectively realised only through government expenditure. The government allocates funds for the growth of various sectors

like agriculture, industry, transport, communications, education, energy, health, exports, imports, with a view to achieve impressive growth. Government expenditure has been very helpful in maintaining balanced economic growth. Government takes keen interest to allocate more resources for development of backward regions. Such efforts reduces regional inequality and promotes balanced economic growth. Conclusion Modern economies have all experienced 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 for the Growth of Public Expenditure In India

Introduction - Rise in Government Expenditure Public expenditure is also referred as Government expenditure. It is incurred by the government to provide public goods & services, and to service debts. The expansion in government activities during the planning period has resulted in a huge rise in the public expenditure.

Growth of the Public Expenditure :

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 table shows the rapid rise in public expenditure over the years. 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 a sizeable proportion of population is living below the poverty line. Many people fail to obtain even necessaries for human survival. They hardly derive any benefit from the public expenditure Causes for Increase In Government Expenditure

1. 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 population requires 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 Survey 2006-07 the defence expenditure of central government was Rs.10,874 crores in 1990-91 which has increased significantly to Rs.51,542 crores in 2006-07. The defence expenditure has increase tremendously due to modernisation of defence equipment used by army, navy and airforce. India cannot postpone modernisation in defence specially when its neighbouring countries are buying the latest defence 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 not only 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 priority sector, 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.9581 crores 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 the domestic market and from foreign sources, to meet its expenditure. As a result of which, the government has to make huge amounts 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 also economic development. Heavy expenditure is to be incurred on administrative machinery in respect of police, tax administration, 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 in urbanization 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 government which 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 industrial sector by investing huge capital. The government has not only improved the rail, air and sea transport but has also expanded them manifold.

10. 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.

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 Tata Statistical Outline 2004-2005 the Grant in aid to states and Union Territories was Rs.3982 crores in 1990-91 which has increased to Rs.15,669 crores in 2003-2004. The grant in aid 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.

12. New Responsibilities

Several new responsibilities have been assumed by the Indian Government in the post independence period. In a Complex Multi Caste Indian Society there are frequent occasions of social tensions which require greater amount of public services like 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 is necessary condition for the success of democracy. The state has made attempts to create various types of educational facilities. In order to meet growing demand for skilled labours. Government has also set up specialised institutes for medical & technical education which involves heavy expenditure. Conclusion : There is a tremendous rise in total public expenditure in India during the period 1961-2007 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.