Composition of public expenditure and growth of per capita income in Indian states: a political perspective

Abstract

This paper has analysed the composition of public expenditure and its impact on per capita income in major states of India. The study finds that the share of revenue expenditure in total spending of the government has increased in all the states although its effect on growth is negative. The share of capital expenditure, government spending on infrastructure, agricultural productivity, gross capital formation and share of service sector in net state domestic product have significant positive impact on per capita income. The paper has explained the political economy of public expenditure and contributed to the literature by using theoretical framework in growth process and incorporating other factors as control variables in panel regression. It has tried to explain why the government spends more on the unproductive or less productive heads in the revenue account at the cost of long-run growth. This paper argues that the government in a democratic set-up allocates a greater share of funds to distributive purposes to strengthen its support base. The results of panel regression show that if the government remains in power for a long period, the share of revenue expenditure will be higher in total spending. The effect of coalition government is, however, uncertain.