Review of public finance in India over a quarter century period

• Published date: 01 May 2022
• Author: Minimol M. C.
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2422

ACADEMIC PAPER

Review of public finance in India over a quarter century period

Minimol M. C.

Rajagiri College of Social Sciences

(Autonomous), Kochi, Kerala, India

Correspondence

Minimol M. C., Rajagiri College of Social

Sciences (Autonomous), Rajagiri Valley,

Kakkanad, Kochi, 682 039, Kerala, India.

Email: minimol@rajagiri.edu

Public finance deals with the finances of governments. With the objective of ensuring

social welfare and economic development, the governments raise money through

revenue and capital sources and spend it on various social welfare activities and asset

creation. In India, the economic reforms were implemented to usher in faster eco-

nomic development through global competitiveness. This article intends to identify

whether the economic reforms have created a visible effect on Government of

India's finances. The study period of four decades is divided into four segments,

namely, pre-reforms, post-reforms phase 1, phase 2, and phase 3. Though the tests

show that the finances significantly varied over the three periods, there was no sig-

nificant variation in the annual growth rates of these figures. The outcome of the cur-

rent study is expected to bring about innovative policy interventions to accelerate

the receipts, to control the expenditures and to contain the government deficits at

aggregate level. The study also reveals the need for further studies to analyse it at

decomposed level to get more conclusive results and to suggest policy interventions.

1|INTRODUCTION

Public finance is the study of government's role in the economy. A

branch of economics that studies the revenue and expenditure of gov-

ernment, public finance, deals with the ways in which the state

acquires and expends its means of subsistence (Plehn, 1902). It is the

method with which a government achieves its objectives of improving

economic efficiency, stabilizing economic conditions through macro-

economic policies, and ensuring an equitable distribution of economic

resources. Keynes considered public finance as an instrument to

achieve economic and social objectives. In short, public finance is lim-

ited to the study of funds raised by the government to meet the

expenses of government activities and responsibilities. Thus, the

major components of public finance are public receipts and public

expenditures. This explanation may be reflecting a very narrow per-

spective, since it has to be acknowledged that the function of public

finance is not just to collect and spend finance. Since public finance

affects every activity of a country and is a tool to encourage economic

development, the component of financial administration also becomes

important.

Government revenue and expenditure are important from pol-

icy perspective since across the globe, it is seen that the needs for

government investments are increasing constantly, whereas there

is a difficulty to maintain revenues at a higher level

(Lojanica, 2015). Effectiveness of fiscal policies depends on the

trends and interaction among the government expenditures,

incomes and deficits, where there are evidences that there exist a

positive association between government finances and economic

growth (Easterly & Rebelo, 1993). Misallocation of government

expenses in developing countries can create a negative relation

between government investments and economic growth

(Devarajan, Swaroop, & Zou, 1996). Modern theory of public

finance, evolved from Keynesian economic theory is the theoretical

framework, within which the current study is undertaken. Keynes-

ian theory proposed three different ways to increase employment,

such as increase in government expenditure and resu ltant increase

in deficit, reduction in tax leading to higher deficit, and a balanced

budget leading to higher government expenditure (Doyle, n.d.).

Theories of public expenditure like maximum social advantage the-

ory, normative theory, positive theory, and applied theory of publ ic

expenditure are also considered for this study. Maximum social

advantage theory assumes that public expenditure should be spent

in such a way that maximises the people's satisfaction. Normative

theory talks about the composition of public expenditure, while

positive theory of public finance explains the level and pattern of

government expenditure (Bird, 1970). Applied theory of public

Received: 30 October 2019 Revised: 20 August 2020 Accepted: 21 August 2020

DOI: 10.1002/pa.2422

J Public Affairs. 2022;22:e2422. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of13

https://doi.org/10.1002/pa.2422