me 210 deepak prasad sectiond assignment 1

8/3/2019 ME 210 Deepak Prasad SectionD Assignment 1

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MacroeconomicsAssignment 1

Submitted By :

Deepak PrasadPGP/14/210

Section D


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Classify the central government expenditure and explain the trends in

the pre and post reform period (from 91-92 to latest)

Years Revenue Expenditure Capital Expenditure Total Expenditure1950-51 350 180 530

1980-81 14,540 9,630 24,170

2001-02 3,01,610 60,840 3,62,450

2008-09(Budget) 6,58,120 92,765 7,50,885

There has been tremendous increase in the expenditure of the central government particularly

in revenue expenditure financed through current taxation and other current non- tax revenue.

Before 1987-88 the revenue expenditure of the central government was broadly classifiedinto three types viz. civil expenditure (which included general services, social and community

services and economic services), defence expenditure and grants in aid to states and union

territories. At the same time the Central government also had adopted another classification

of expenditure, viz., development expenditure, defence expenditure and other expenditure.

(a) Under development expenditure, the Central government included: expenditure on

social and community services, on economic services and grants-in-aid to the States and

Union territories for development purposes.

(b) Defence expenditure of the central government was on armed forces and it included

pensions given to the retired armed personnel.

(c) Other expenditure of the central government consists of collection of taxes and duties,

administrative services, interest payments, pensions and other retirement benefits, other

grants to states, etc.

If we add defence expenditure and other expenditure together we could obtain non-

development expenditure.

New classification of expenditure:

The Central government adopted a new classification of public expenditure from 1987-88

budgets. Under this new classification all public expenditure is classified into

(a) Non-planned expenditure

(b) Planned expenditure

Non- planned expenditure:

Non-planned expenditure of the central govt. is further divided into revenue expenditure and

capital expenditure. Revenue expenditure is financed out of revenue receipts, both tax

revenue and non tax revenue. Under revenue expenditure we include:

(a) Interest payments, defence revenue expenditure, major subsidies (food, fertilizers and

export promotion), other subsidies, debt relief to farmers, postal deficit, police, pensions,

other general services (organs of state, tax collection, external affairs, etc.)

(b) Social services (education, health, broadcasting, etc.)(c) Economic services (agriculture, industry, power, transport, communications, science and


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technology, etc.)

(d) Grants to states and union territories and grants to foreign governments.

Capital non-planned expenditure includes such items as defence capital expenditure, loans to

public enterprises, loans to states and union territories and loans to foreign governments

Planned Expenditure:

The second major item of Central government expenditure is planned expenditure which is

composed of:

(a) Central plans such as on agriculture, rural development, irrigation and flood control,

energy, industry and minerals, transport, communications, science and technology and

environment, social services and others.

(b) Central assistance for plans of the states and union territories.

Capital expenditure of the central govt. consists of planned expenditure and non-planned

expenditure and it is financed out of capital receipts. The capital expenditure consists of:

(a) Loans to states and union territories for financing plan projects, and loans to foreign

governments.

(b) Capital expenditure on economic development

(c) Capital expenditure on social and community development

(d) Capital expenditure on defence

(e) Capital expenditure on general services

1 TRENDS IN CENTRAL GOVERNMENT EXPENDITURE

Year Revenue expenditure Capital expenditure Total expenditure

1950-51 350 180 530

1980-81 14540 9630 24170

2001-02 301610 60840 362450

2008-09 658120 92765 750885

Government expenditure in India has been growing very rapidly after 1950-51. Before

independence, there was no planning in India and no effort on the part of government to

establish a welfare state. Public expenditure was, therefore, comparatively small. In the postwar period introduction of planning and the provision by the government of welfare services

on a large scale caused public expenditure, both at the centre and in the states to increase

rapidly. Since independence, increasing participation of the government in economic life has

caused the proportion of development expenditure to the total expenditure to increase rapidly.

Defence expenditure has also been rising rapidly due to threat to Indias security.

The first major trend in public expenditure which we observe in India is the growing revenue

expenditure of the government from over Rs. 350 crores in 1950-51 the revenue expenditure

of the government of India is over Rs. 6,58,120 crores in 2008-09. Increased defence

commitments, expansion of administration, the working of democratic institutions like the

parliament, the governments international commitments, increase in governments


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participation in nation building activities like education and public health, rise in prices, etc.

All these are responsible for increased revenue expenditure of the central government.

Non-development expenditure still continues to be a large proportion of the total expenditure.

Defence, debt services and administrative expenses are so large and so significant that they

are responsible for keeping non-development expenditure at a high level.Non-planned expenditure has been rising very fast in recent years- in the 1980s the annual

increase in non-planned expenditure was about Rs. 5000 crores and in the 1990s the annual

increase was over Rs. 10,000 crores. Interest payments, defence expenditures, subsidies and

is really general services- these put to together form over 90% of non-planned expenditure.

Defence expenditure is increasing because of growing tensions in the region and the use of

highly expensive technology in war equipments- defence expenditure on the revenue account

has increased from Rs. 10,870 crores to Rs. 57,590 crores between 1991 and 2009.

Subsidies on food, fertilizers and on export promotion, have become an integral part of

Central government and despite governments frequent promise to reduce them, they are

continuing to rise, year after year. Total subsidies rose from Rs. 4,900 crores in 1985-86 to Rs.

12,160 crores in 1990-91 and will be over Rs. 71,430 crores in 2008-09. The expenditure on

general service of the Central government consisting of expenditure on organs of state, tax

collection, external services, police, pensions etc. rises every year with wage revisions and

periodic increase in dearness allowance. Besides, the Centre has to assist States and Union

Territories with grants assistance for national calamities.

2 Pulic Expenditure as a % of GDP

YEARS TOTAL EXP AS % OF GDP

1980s 17.6%

1991-96 16%

1996-97 16-17%

2004-05 14%

In the 1980s the central government expenditure stood at around 17.6% of GDP. It fell to

16% as soon as the macroeconomic stabilization programs were put in place during the

reforms in 1991, following the BOP crisis. However, there was a sharp rise in salaries and

pensions after the Fifth Pay Commission was accepted in 19961997, which pushed the

expenditure level back to the 1617% level the following year and was maintained until

20042005.

Central government's total expenditure fell to 14% of GDP between 2004-05 and 2006-07

with the passing of the FRBM. Capital expenditure fell sharply while revenue expenditure

showed only a marginal decline. Thus, revenue expenditure continued to account for about

80% of total expenditures which has always been a source of concern.


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Calculate and compare the inflation rate based on the wholesale price

index and the consumer price index for industrial workers from 1994-95 to

2006-07.

3 Inflation Based on CPI

YEAR CPI INFLATION

1993-94 258

1994-95 284 9.15

1995-96 313 9.27

1996-97 342 8.48

1997-98 366 6.56

1998-99 414 11.59

1999-2000 428 3.27

2000-01 444 3.60

2001-02 463 4.102002-03 482 3.94

2003-04 500 3.60

2004-05 520 3.85

2005-06 542 4.06

2006-07 579 6.39

4 Comparison of CPI & Inflation Calculated using CPI

0

100

200

300

400

500

600

700

0

2

4

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8

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INFLATION

CPI


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5 Inflation Based on WPI

YEAR WPI INFLATION

1993-94 100

1994-95 112.6 11.19

1995-96 121.6 7.401996-97 127.2 4.40

1997-98 132.8 4.22

1998-99 140.7 5.61

1999-2000 145.3 3.17

2000-01 155.7 6.68

2001-02 161.3 3.47

2002-03 166.8 3.30

2003-04 175.9 5.17

2004-05 187.3 6.09

2005-06 195.5 4.19

2006-07 206.1 5.14

6 Comparison of WPI & Inflation Calculated using WPI

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INFLATION

WPI


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7 Inflation Rates - CPI vs WPI

References :

http://www.planningcommission.nic.in

www.rbi.org.in/

www.worldbank.org/

Ministry of finance (GOI) website

RBI website

Central Statistical Organisation

0

2

4

6

8

10

12

14

INFLATION Calculated by CPI

INFLATION Calculated by WPI

me 210 deepak prasad sectiond assignment 1

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