Changes in Public Expenditure Centralization

As long as attention focusses on the Indian national economy,

"the government" tends to be thought of as a homogeneous institution with a single set of objectives and a single set of policy instruments for their realization, »The assumption of a homogeneous government is a considerable simplification even for states, like the United Kingdom, where government is highly centralized. But for India, where a geographically fragmented civil society compelled the adoption

of federal government as colonial rule was brought to an end, to imagine that government is homogeneous is wholly inappropriate, A study of India’s state accumulation policy, therefore, which failed to come to terms with the different kinds of governments which operate in a federation would have rather little to recommend it.

This elementary proposition needs emphasis only because the majority of economists who have written about India have a marked preference both for the use of nationwide data and for the careful avoidance of any explicit consideration of politics. 1 Because of

the numerous data problems involved in making a worthwhile state-level analysis, and because the subject of public expenditure falls in the curious no-man1s-land between economics and politics as they are conventionally treated, public spending under a federal government is a subject where beaten paths are few, and not always very reliable.

1 Franda (1970), pp,206-7.

Perhaps the most thorough recent study of Indian states1 finances has been described by its author himself as "an exercize which makes one familiar with all the landmarks . but which is obviously inadequate for those keen to go into details"

It is indeed vital to go into details. If there is one theme which recurs in the more critical recent contributions to the debate

on the "determinants" of public expenditure, it is the need to

disaggregate public spending data by level of government, as well as by economic category and function,v 2 In what follows, the data

has been disaggregated as far as this can be done. Data difficulties have been described, to allow the reader to make his own judgements of its reliability. Overall, the aim is to set out fully what seems to be the fiscal facts, and then to assess alternative interpretations of them.

It should be emphasized at the outset that we are not concerned here with public finance in the context of regional economics. In the

first place that would require a prolonged discussion of the criteria for defining economic regions. When the Planning Commission attempted a regional division of India, based on topography, soils, climate, geologic; formations, land resources, irrigation and cropping patterns and availability of mineral resources, they produced a map quite different from the map of state-wise political divisions. In only four instances (Assam, West Bengal, Gujarat and Punjab) did the Planning Commission's proposed economic regions coincide or nearly coincide, with state boundaries. 3 Of course, one might quarrel with

the chosen criteria, arguing that greater weight should have been given to indicators of human, as opposed to indicators of physical geography.

1 Venlcataraman (19&8), p.216.

2 E.g. Bird (1 9 7 0 ), pp.192-3 .

3 Planning Commission (196^), Map 1 .

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But even so, it remains doubtful if a case could be made for regarding the states as economic regions* The present writer has argued for the weakiproposition that statewise analysis is likely to be a better guide to regional differences than zonal analysis, that is, breakdown by groups of three or four states.“** But this argument, though

plausible, cannot be proved as a general proposition, since it is quite possible to construct imaginary cases which show the opposite. Whether it holds good in the specific case of India can only be known by

actually comparing the coefficients of variation of key indicators for both statewise and regionwise data, and then for zonal and regionwise data. This wotild involve the use of district-by-district figures of the chosen indicators for the whole of India, Their absence is

probably the reason why such an elaborate exercize never seems to have been done and why economists helplessly continue to identify 11 statewise"

and "regional".2

But, even if the states are rather arbitrarily accepted as

surrogate regions, a second problem remains. To measure the statewise distribution of total public expenditure requires a measure of the statewise distribution of central government spending. In part this is possible: for example, it is clear that central Plan outlay on industry has been concentrated in Bihar, -Orissa, Madhya Pradesh and West Bengal. 3 But to get much beyond this, it is necessary to make assumptions such as that central Plan outlay on agriculture and social services are shared by states according to population, and that non-Plan expenditure has no spatial dimension at all. h To assume that expenditure has no spatial dimension is the same as assuming that it is purchasing pure public goods. But both the proponents and the 1 Toye (1973), p.262.

2 Lakdawala, Alagh and Sarma (197*0, PP**0 6 5 . 3 Nath (1970), pp.247-59.

k

critics of public goods theory agree on its very limited empirical significance. 1 Further, the production of even pure public goods, as opposed to their consumption, does have a spatial significance, through secondary effects on incomes in the area where production is located.

No fresh attempt has been made here to attack the twin problems of the definition of regions and the distribution by regions of central government spending, because they are not relevant to our central

theme. That theme is the spending behaviour of the different governments that coexist in the Indian federal scheme, during the period i960 to 1970. The related question of the impact of their combined spending operations on the different regions of the country is one which, for the reasons indicated, cannot be taken up at this point.

Once the discussion is limited in this way, there remain two different perspectives from which the role of state governments in a federation may be viewed. Firstly, they may be seen as a group of roughly similar units jointly engaged in some form of interaction with

the federal (central) government. Secondly, individual states may be seen in relation to other individual states, so that the contrasts

that exist within the framework of rough similarity are identified.

These two different perspectives, when applied to the study of public expenditure, raise two quite distinct questions. The first is the question of the degree of expenditure centralization, that is, whether the spending of the central government has grown relative to that of the states as a group, or vice versa. The second is the question of differences between states in the level and growth of their 1 Head (1973), p.21; Margolis (195*0» p.185.

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expenditure, To the first of these two questions we now turn. The second is examined in the following chapter.

It is a common textbook proposition that economic growth is

accompanied by an expenditure "concentration process", which increases the central government's share in total public expenditure. n This is really a vulgarisation of a theory developed by Peacock and Wiseman from an examination of long-run expenditure trends in the U.K. It supposes that improvements in transport and communication during economic growth operate both to create a potential demand for more uniform

standards of public provision and to alter the supply conditions for the provision of collective goods by creating potential economies of scale. These potentials are not realized until "catastrophes" like major wars oE depressions change the political landscape so drastically that local pressures for autonomy can be overridden.

a

However one may judge this theory as an explanation of expenditure centralization in the U.K., the question here is its relevance to India.

Its fundamental assumption seems to be that the process of expenditure concentration arises from the transfer of responsibilities from the lower to the higher level of government. The theory is an elaboration of the mechanism whereby such transfers occur. Of course, one may also doubt the relevance of the details of this mechanism. Why is evidence of economies of scale in government activities so hard to find in today's poor countries? 3 Is the defence of local autonomy in the provision

of public services really an important political value for them? But the prior question, if the Peacock and Wiseman theory is to be

accepted, is surely, "do such upward transfers of responsibility actually 1 E.g. Burkehead and Miner (1971), p.255.

2 Peacock and Wiseman (1967), pp.29-50.

5 Gandhi (1970), p.158.

talce place?n

K.N. Reddy has recently attempted to explore the fruitfulness of