Question

Trends and impact of public expenditure in india

Answer 1

Answer:

Explanation:

Here the public expenditure and fiscal policy negatively affect the output growth that mainly occurs through what is known as ‘crowding out’ effect. One way through which crowding out results is by affecting the cost of loanable funds. That is, when excess of public expenditure is financed through borrowings, the increased government demand for credit puts upward pressure on interest rates and crowds out private investors competing for the same funds. Therefore in the long run, it reduces private capital stock, lowers economic growth and future standards of living. This negative effect of public expenditure, however, depends on the composition of public expenditure, i.e., whether the borrowed funds are utilised to meet the current or capital expenditure. If it is in favour of the latter, like infrastructure investment, the burden on the future generations is reduced (provided the public expenditure is more productive than the displaced private sector investment). However, deficits in most developing countries do not appear to have contributed in a consistent and significant way to such investments (Ibid). If the borrowed funds instead are used for the revenue or current expenditure, i.e., to meet the current expenses (especially if borrowed from abroad, i.e., external debt), the debt servicing and other requirements impose costs on the future generations. If the financing of the excessive public expenditure happens by way of monetisation of the deficit-the resultant money supply increase - leads to increase in inflation that has been a fairly common experience of many developing countries including India.