Get the answer of: What is the Place of Public Expenditure in a Developing Country like India?
Public expenditure as a proportion of GNP has been increasing in modem mixed economies since World War II. However, the problems of developing countries are of a different nature and thus fiscal policy has a more important role to play in such countries.
The primary economic goal of these countries is to raise very sharply the level of per capita real income and to bring it in line with the levels of developed countries.
Such an increase requires:
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(a) a rapid improvement in levels of education and technical and organisational skills, and
(b) a much higher rate of capital formation which will increase the stock of capital goods and permit introduction of modern technology.
Governments have to play a major role in accomplishing these changes.
It is felt that, with economic development, government expenditure has to increase faster than GNP not only to provide wider educational opportunities to the masses but an integrated infrastructure as well. Infrastructure refers to those economic activities which enhance, directly or indirectly, output levels or efficiency in production.
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Essential elements are systems of transportation, power generation, communications and banking, education and health facilities and a well-ordered government and political structure conducive to material progress.
As income rises, consumer demand for services increases more rapidly than consumer expenditures and more rapidly than consumer incomes. This tendency extends to government services.
One can separate basic government expenditures from those of defence public debt and agricultural subsidies. In the post Second World War period there was hardly any change in the percentages of national income spent for the ‘basic’ purposes in developed countries of the world. But there was a change in total general government expenditures.
But in developing countries general government expenditure as a percentage of GDP continued to increase during the last thirty years or so. This is so because there has been a secular change in the role that government is expected to play. It seems that if there is significant increase in GDP in less develop countries (LDCs), a larger portion of it will be devoted to government consumption expenditures than is being done in high-income countries.
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The major cause of increased government expenditure in LDCs is the demand for services such as education, medical care and health care. One of urgently needed programmes in any such countries is increased education. In general, increased educational levels are accompanied by rapid economic development.
Moreover, a major obstacle to increased production in many LDCs is the prevalence of endemic diseases, which greatly reduce work capacity. Governmental health programmes may be really beneficial to the workers and may pay very high dividends in the form of increased output.
Again the development of transportation and communication facilities is essential for economic development. For improving rail and highway facilities the government has to spend a huge amount of money. The integration of the different regions of the LDCs facilitates economic development by making production for the market really meaningful.
The government also spends money on agriculture in such countries. The object is to reduce dependence on subsistence production. The government provides assistance in the form of improved extension work, eradication of the sources of livestock disease, research for improved crops suitable to the areas, improved land tenure systems and establishments of agricultural cooperatives, if necessary.
Finally, the government has to spend a huge amount of money for setting up public sector enterprises which convey important secondary benefits to economy. Alternatively, the government encourages the private enterprise by providing various forms of assistance such as provision of a portion of the capital, granting of tax concessions, outright subsidies, and the like.