Public Financing of Human Development in India: A Review

Abstract

Role of public financing of human development (HD) is inevitable, especially for developing countries like India where access to resources and economic opportunities are not equitably distributed among people. Governments aim to achieve equity in distribution of resources through allocative and redistributive policies whereas macroeconomic stabilisation policies aim to achieve higher economic growth and stability in the price level. Expenditure policies of the governments envisage in delivering larger public goods and services to enable people to take part in economic activities by investing in human capital and infrastructure developments. Progressivity of the tax system helps in achieving equity by redistribution of resources among people. Being merit goods, expenditures on education, health, and poverty eradication make it a case for public investment which empowers people to improve human capital. The benefit of universal economic participation is expected to contribute in larger mobilisation of public resources over time. Lack of economic opportunities and earning a respectable income may increase dependence on public transfers which may reduce fiscal space of the governments to finance programmes to promote overall economic growth. The objective of this article is to review existing studies on public financing of HD in India and highlight emerging challenges.

Keywords

Public finance human development political economy fiscal decentralisation inter-governmental fiscal transfers COVID-19 pandemic

Introduction

There are two sides of public finance—mobilisation of public resources (tax and non-tax revenue mobilisation) and public expenditures. Fiscal decentralisation and inter-governmental fiscal transfers are the other dimensions of public finance which could help sub-national (state and local) governments in their efforts to improve human development (HD) in general and eradicate poverty in particular. There are two ways to move up the ladder of HD—government interventions in terms of delivery of social services to those who cannot participate in the market to secure access to basic ingredients of HD (e.g., food, education, health) and facilitate consistently high economic growth which could help to reduce income inequality and therefore improving living standards for as much people as possible (trickle-down effect). Therefore, public expenditure programmes and growth strategy of the government are interdependent. Studies have also shown that translating government programmes into HD achievement also depends on governance and quality of institutions (state and non-state actors) involved in the effective delivery of public goods and services to people (Bhanumurthy et al., 2018; Rajkumar & Swaroop, 2008). Furthermore, the size and composition of public spending on various programmes and growth strategies also depend on political factors. There exists a strand of literature which explores political factors influencing the structure and composition of public financing of HD in India. But before jumping into the political economy dimensions of public financing of HD, it is important to assess the findings of the existing studies on the role of public finance in achieving economic growth, eradicating poverty, reducing inequalities and achieving higher HD.

In the next section, we explore the role of public finance in economic growth, reducing poverty and inequalities from Indian perspectives. In the third section, we discuss issues related to public financing of HD and it is followed by a discussion on political economy of development financing in the fourth section. In the fifth section, we provide some insights of the role of public finance in securing public health by controlling environmental pollution as social-protection (or social-insurance). In the sixth section, we discuss emerging challenges of public financing of HD posed by the ongoing COVID-19 pandemic. We draw our conclusions in the seventh section.

Poverty, Human Development and Public Expenditure

Poverty, HD and public expenditure are closely related. Lack of human capital and inability to access physical capital may result in low-level of productivity and lower-earning opportunities for vulnerable section of our society. Inequality in access to natural resources (e.g., agricultural land, water) often reduces ability of the people to earn a subsistence level of income. This shortfall in access to capitals (human, physical, and natural) and low-income earning opportunities pushes people into poverty which in turn increases inequality. Hence to reduce poverty, inequality and fill the gap in human and physical capital, direct and indirect policies of the government play important roles.

Indirect Policy Measures

The indirect policy measures comprise of growth-oriented policies to accelerate the economic growth. According to Dreze and Sen (1989) this “growth-oriented strategy” is often referred as “growth-mediated security” which will effectively ensure allocation of resources. It is expected that “growth-oriented strategy” of government could increase economic activities of an economy which in turn could help in increasing general income level. Hence, it can be argued that economic growth through public spending policies may have a “trickle-down effect” which eventually could help people of lower-income groups.

There are empirical and theoretical studies which explore the link between government expenditures and economic growth (e.g., Ahuja & Pandit, 2020; Marjit et al., 2020; Sasmal & Sasmal, 2016; Seshaiah et al., 2018; Srinivasan, 2013). In a recent study, Ahuja and Pandit (2020) find unilateral relationship between government spending and Gross Domestic Product (GDP) in the context of 59 developing countries. The causality runs from government spending to GDP (national income) from 1990 to 2019. Mukherjee et al. (2016) find a positive relationship between HD and per capita income along with a positive relationship between economic growth and HD within the context of Indian states. The study by Marjit et al. (2020) explores the relationship between composition of government expenditure and per capita income in majority of Indian states. They find a positive relationship between government expenditure (capital spending) and economic growth. Sasmal and Sasmal (2016) explore the impact of government spending on economic growth and poverty alleviation. Their results indicate that government spending on infrastructure such as irrigation, road, transport, power, communication, and so on has positive impact on per capita income which helps in alleviation of poverty in India. The study also shows the importance of public finance and public policy instruments in poverty alleviation. Similarly, the study by Srinivasan (2013) finds long-run equilibrium relationship between government spending and economic growth in India. The study by Seshaiah et al. (2018) examines the impact of general public spending on GDP growth during 1980–1981 to 2015–2016 in India. The study finds positive impact of general public expenditure on economic growth. Similarly, the study by Gangal and Gupta (2013) also finds positive relationship between public expenditure and GDP in India. There are several other studies which examine the role of public expenditure in economic growth (e.g., Afonso & Furceri, 2010; Dogan & Tang, 2006; Ebaidalla, 2013; Govindaraju et al., 2011; Loizides & Vamvoukas, 2005; Marrero, 2010; Zhang, 2015).

To sum up, available literature shows that public expenditure is very important to enhance income or GDP growth for a developing country like India which in turn may help in better access to human or physical capital for a large section of the population and therefore could help in reducing poverty and inequality through “trickle-down effect”.

Direct Policy Measures

Direct policy measures include anti-poverty interventions by the government through public expenditure programmes on various social services which help in improving consumption level of vulnerable section of the population. This direct anti-poverty intervention is often referred as “support-led security” which helps in improving human capital (Dreze & Sen, 1989). The role of public finance is very important in alleviating poverty, as it enables the poor to enhance capabilities, productivity, and income-earning opportunities. Access to food, education, and basic healthcare are the building blocks of HD. Hence, it is often argued that public expenditures on social services improve welfare of the poor directly and indirectly (Rao, 2002a). For example, financial support from the government to various education institutions helps in serving students from disadvantaged backgrounds and low-income households which can further help in reducing income inequalities. The state appropriation or spending by the government has positive short-run as well as long-run effects on students’ outcomes (Chakrabarti et al., 2020). Chakrabarti et al. (2020) suggest that schools serving students from the lower-income groups are mostly affected by state expenditure cuts, which further lead to rising inequalities and poor student outcomes. The study also finds that an increase in the state spending leads low-income background students to benefit more, have better credit scores in future with lower rates of debt defaults, and achieve better living condition in more affluent areas by the age of 35. Not only on education but public expenditures on social services such as healthcare, sanitation, housing, drinking water, nutrition not only help poor population to overcome deficiency in their incomes to meet basic needs but also have positive externalities which help the society in large (Rao, 2002a). East Asian economies such as Indonesia, Malaysia, China, and South Korea show impressive success in alleviating poverty through persistent investment in human capital formation (education and health) and rural infrastructure developments (e.g., irrigation, electricity, roads, bridges). Investment in human capital and physical infrastructure created the base for economic growth of these countries which eventually led to a decline in poverty levels (Ranis, 1995). Therefore, taking cue from the experience of development and transformation of East Asian countries, it will be important for India to promote rapid industrialisation, education, health, and technological innovation (Nayyar, 2019a, 2019b). Nayyar (2019a) argues that industrial policies aiming promotion of growth by export promotion, opening up the economy to trade and investment (both for domestic and foreign investors) and availability of superior human resources and capabilities of the governments helped Asian transformation from poverty to prosperity during the last 50 years.

In a recent study by Bhattacharya et al. (2020) indicate that investment in infrastructure such as in education, health, electricity, and roads helps in achieving growth of the economy along with reduction of poverty. However, these direct or indirect policy interventions of the government depend upon the multi-level fiscal system in a democratic federal country like India and therefore fiscal decentralisation plays an important role.

Fiscal Decentralisation

Both the Union (Central/ federal) and sub-national governments are responsible to implement anti-poverty measures along with the allocation and redistribution of available resources. Therefore, one more dimension of public finance is fiscal decentralisation which could help the states and local governments to eradicate poverty and improve HD (Rao, 2002a). Rao (2002a) argues that governments at the very local level are more close to the people as compared to government at the Central level (Centralised authority), hence resources could be distributed efficiently by the local governments. The major responsibility of macroeconomic stabilisation and resource redistribution lies in the hand of the Central government. However, provincial governments could also play an important role in implementing strategies of poverty alleviation (Brown & Oates, 1987; Rao, 2002a). Moreover, Rao (2002a) argues that poor citizens belong to the poor regions/localities; hence, it is the responsibility of the government to reallocate financial resources from the richer regions to the poorer regions in the form of inter-governmental fiscal transfers which could help in offsetting fiscal disabilities of poorer regions. However, if decentralisation is not properly implemented it may lead to negative impacts that could undermine efficiency, increase disparities, and jeopardise stability (Prud’homme, 1994).

The dangers of fiscal decentralisation in terms of rising inequality are addressed by some studies (e.g., Litvack et al., 1998; Prud’homme, 1994). Litvack et al. (1998) highlight that decentralisation is not always good for bringing efficiency, equity and macro-economic stabilisation in developing countries. The concerns of rising inequality through fiscal decentralisation depends upon the kind of institutional framework one country has. Therefore, designing of fiscal decentralisation policies should focus on institutions, enhancing accountability, capacity and governance so that the concerns of equity, efficiency and macro-economic stabilisation could be resolved. The study by Prud’homme (1994) also argues that decentralisation can increase disparities in a country which in turn can have adverse implications for HD. The study identifies some criteria for services or sectors that could be decentralised based on the three characteristics of public services, those are, externality, chargeability and technicity. Services having smaller externality are easier to decentralise as compared to services with more spill over and important network effects. Similarly, services with greater chargeability and lower technicity are easier to decentralise.¹ However, it is not the case that decentralisation should not be adopted, perhaps it is like a medicine that should be taken at the right time, for the right illness and in the right dose.

Available studies show that fiscal federalism in India is yet to take into account rising inequalities appropriately. According to Rao (2002b), there are increasing inter-state differences in per capita spending on economic and social services. According to Chakraborty et al. (2010), states’ ability to spend more on social and physical infrastructure is subject to offsetting their fiscal disabilities by the Central transfers. However, inability of the Central transfers to offset fiscal disabilities (e.g., low tax capacity) of states has resulted in low per capita expenditure on economic and social services. In another study Chakraborty et al. (2009) find that sub-national fiscal space has decreased in India mainly after post-economic liberalisation because of a sharp decline in the vertical transfers to states and increased cost of debt servicing due to debt accumulation.

Hence, to provide fiscal autonomy to the states, Fourteenth Finance Commission (FC-XIV) awarded the larger share of tax devolution to states (from 32% to 42% of divisible pool of taxes) which led to the higher inflow of ‘untied funds’ or ‘general-purpose transfers’ to states. However, the increase in devolution of “untied funds” is followed by reduction in Central plan grants by the Central government in the form of “tied funds” or “specific purpose transfers”. On the recommendations of the sub-group of Chief Ministers on rationalisation of Centrally Sponsored Schemes (CSS) (NITI Aayog, 2015), the Government of India has consolidated the numbers of CSS into three categories—Core of the Core Schemes (6 schemes), Core Schemes (19 schemes) and Optional Schemes (3 schemes), and also changed the cost-sharing patterns of CSS. From 2015–2016 onwards, only Core of the Core Schemes are solely financed by the Central Government. For the Core Schemes, the cost-sharing pattern between the Union and state government is in the ratio of 90:10 in case of North Eastern and Hilly states, and 60:40 for all other states. Due to change in the cost sharing pattern of CSS, general category states need to shell out 40% instead of 25% which these states used to expend earlier to implement any scheme falling under the Core Scheme.

There is no doubt that aftermath of the FC-XIV’s award and restructuring of the CSS, a larger responsibility has been bestowed on the states to chart out their development path depending on structure and composition of the economy. However, the new cost-sharing pattern of CSS limits the fiscal space of states to prioritise expenses according to their needs (Mukherjee, 2019a). States need to keep a provision of additional 15% of the cost of CSS under the Core Scheme in their budgets to implement the CSS.

In this context, Amarnath and Singh (2019) argue that “[h]igher transfers through devolution and more autonomy to States is an illusion and is offset by the fact that States contribution towards CSS expenditures increased from 25% to 40% and States had to continue committed expenditures under CSS which have been withdrawn.” By changing the cost-sharing pattern of the Core Schemes under CSS, the Union government has increased state’s contribution (share) and takes away a substantial part of the fiscal space provided by the FC-XIV in terms of higher share in the divisible pool of taxes. According to Rao (2017a) additional fiscal space provided to states in the FC-XIV award is only 2% of divisible pool of taxes whereas the restructuring of CSS and change in the cost-sharing pattern of CSS have reduced fiscal space available to states to pursue expenditure programmes of their choice. The study by Chattopadhyay (2018) finds that the change in the fiscal relationship between the Central and state governments has implications for the public financing of social services. A decline in proportion of social sector spending in 2015–2016 has been noticed as compared to 2014–2015 for most of the states (Chattopadhyay, 2018). The analyses indicate that most of the states are not prioritising the social sector in their expenditure programmes which may adversely affect HD achievements in the time to come. Rao (2019) observes that inter-governmental fiscal transfers (general and specific purpose) by the Central government to states have been able to offset the cost and revenue disabilities partially as a consequence of which the richer states are able to spend more on economic and social services. This has led to rising inequalities in financing the economic and social services and divergence in development outcomes across Indian states. According to the study, there are several loopholes in the schemes funded by the specific purpose grants due to which the relatively poor states are not able to ensure minimum standards of social services.

To sum up, the change in inter-governmental fiscal relationship may have some implications in public financing of HD in India and we present major findings of the existing studies above.

Issues in Public Financing of Human Development

The country which aspires to accelerate its development has to substantially augment its public spending on physical infrastructure and human development.

—Rao (2017b)

In India, government spending on healthcare and family welfare during 2015–2016 was only 1.42% of GDP whereas the global norm is 3%. Similarly, spending on education was 3.45% of GDP during 2015–2016 which was less than the global norm of 6% (Rao, 2017b). This low level of public expenditure on social services clearly shows fiscal constraints of the government in providing adequate education and health facilities. The major issues in public financing of HD arise through the composition or size of the government budgets and other through the political economy of public financing of HD which we will discuss in the next section. Now the question is how the composition and size of public finance influence HD? Public finance can be seen through two-dimensions, that is, tax and non-tax revenue mobilisation and public expenditures (revenue as well as capital). Hence, the issues related to public finance can be understood through the revenue and expenditure sides of the government budget.

Revenue Side of the Budget

Despite several tax reforms, India has not been able to generate enough public resources to finance public expenditures. The gap between revenue and expenditure of the government has resulted in accumulation of public debt. According to Rao (2017b), the tax-GDP ratio was found to be much lower than the Lower Middle Income group countries. Also, the revenue-raising capacity of the Indian tax system has not shown any improvement over the years, despite growth in per capita income. The presence of fragmented Constitutional assignment of taxation power, tax avoidance by multinational companies (e.g., base erosion and profit shifting), the inefficiency of the tax administration, and complications in the tax laws give rise to tax avoidance and tax evasions (Rao, 2017b). Several studies explore issues related to broadening of tax base, tax compliance, tax capacity and tax efforts in India (e.g., Mukherjee, 2019b; Rao & Kumar, 2017; Tax Research Cell, 2015). Perhaps the presence of high unaccounted income and wealth and informal activities are eroding the tax base in India (NIPFP, 2013). In this context, it is also important to highlight that the presence of informal taxes and transfers in a country may influence fiscal incidence and therefore redistributive effects of policies on poverty and inequality (Evans et al., 2020).² If household liabilities to pay informal tax and/or make informal transfers to other households are considerable and persistent, increasing the burden of formal taxation may be unaffordable (Shome, 1995).

Lack of revenue of the government raises the question of potential of the government in raising additional revenue to finance social services in India (Rao, 2017b). The National Institute of Public Finance and Policy (NIPFP) conducted a series of studies covering eight Indian states, namely Himachal Pradesh (Sen et al., 2010a), Chhattisgarh (Sen et al., 2010b), Madhya Pradesh (Sen et al., 2007), Maharashtra (Sen et al., 2010c), Odisha (Sen, Amarnath, Choudhury, & Kundu, 2008), Rajasthan (Sen, Amarnath, Choudhury, & Das, 2009), Tamil Nadu (Sen, Amarnath, Choudhury, & Mukherjee, 2008), and West Bengal (Sen, Amarnath, Choudhury, & Kundu, 2009) to assess the gaps in achievement of HD vis-à-vis neighbouring states (and within a state across districts), estimate the costs of achieving stated HD goals (state specific goals or millennium development goals) and explore ways of bridging gaps in financial resources by suggesting scope for additional resource (revenue) mobilisation. In a recent study, Gupta and Sarma (2014) explore various revenue sources through which additional resources could be raised to finance HD in Delhi. The study suggests that raising revenues from non-tax revenue sources, finding and plugging loopholes in the existing tax system, utilising the information and technology, public–private partnership (PPP) may help in augmenting public resources (Gupta & Sarma, 2014). The importance of PPP for public infrastructure projects has been also highlighted by Patnaik and Pandey (2019) and they argue that PPP helps the government to focus more on businesses and outcomes as construction and maintenance risks completely shifted to the private sector. Similarly Lakshmanan (2008) highlights the reasons behind limited success of PPP model of infrastructure financing in India. Some of the reasons include cost and time overruns, inadequate transparency of procedures, overlapping of regulatory independence, inappropriate risk allocation, lack of good governance, and so on. These hurdles need to be resolved to attract private investment in public infrastructure projects. Being developing country, India needs investments in physical infrastructure where substantial investment deficits exist, such as water supply, roads, ports, electricity, railways, sanitation systems, and so on. With large and persisting deficits in public finance, we cannot depend only on government investments and therefore there is need for PPP to meet infrastructure bottlenecks.

Sengupta et al. (2015) argue that due to positive externalities associated with some public infrastructure projects, it often makes difficult for private investors to capture all the benefits that accrue to the society within their prospective revenue stream and therefore the financial return on investments as compared to the real social return is found to be low. Social benefits that accrue to the society at large warrant often government interventions particularly in PPP projects. Possible mechanism of capturing social benefits within the prospective revenue stream could be through a levy of betterment charge or development fee (in terms of higher property tax, registration fee of immovable properties, etc.). Successful capturing of the land value/real estate price appreciation, due to infrastructure developments in transport sector, could possibly supplement the prospective revenue stream of the projects. The issue of capturing the co-benefits of infrastructure development through simultaneous development of real estate, shopping centres, business centres could potentially be integrated within the road infrastructure projects to garner financial resources to finance (self-financing) the infrastructure developments.

Expenditure Side of the Budget

Public expenditure is broadly classified into revenue and capital expenditures. The former includes recurrent expenditures on subsidies, interest payments on debts, salaries and wages, pensions, and so on, and the latter mostly constitute of long-run investments such as spending on social and physical infrastructures. There are some studies which explore the trends and patterns of social sector expenditures in India during pre- and post-reform periods (Guhan, 1995; Joshi, 2006; Mooij & Dev, 2004; Panchamukhi, 2000; Prabhu, 1994). In a recent study, Chattopadhyay (2018) analyses the trends and patterns of revenue and capital expenditures on social services between 2000 and 2014. As per this study, the investment in productive assets is comparatively low in India as capital expenditure from 2005–2006 to 2013–2014 remained stagnant at around 15% of total public expenditure. The social sector expenditure³ (revenue and capital) as percentage of GDP is hovering around 6.30% to 8.19% during 2000 to 2014 (Chattopadhyay, 2018). The combined Central and state expenditures on education, art and culture remained around 2.54% to 3.11% of GDP whereas expenditures on medical and public health, water supply and sanitation was around 1.04% to 1.17% of GDP during 2000–2001 to 2013–2014. The spending by the Indian government on social services remained lower as compared to the period of the late 1980s (Chattopadhyay, 2018). Similarly, Rao (2017b) analyses the trends of public expenditures in India during 1990–1991 to 2015–2016. According to the study, the development expenditure combined of education, healthcare, total of social services and total of economic services was hovering around 12% to 13% of GDP during the period.

Furthermore, according to Marjit et al. (2020) there has been a continuous increase in the share of revenue expenditure in total public expenditure in India. The expenditures on revenue account are considered as unproductive, as according to this study the revenue expenditure has a negative impact on per capita income whereas expenditures on capital account have positive impacts in increasing economic growth for Indian states. Similarly, Rao (2015, 2017b) argues that rising interest payments, subsidies, wages and salaries, and transfers proliferating crowding out of investments in HD and physical infrastructure. On a similar note, the expenditure side of public finance is discussed by Gupta and Sarma (2014) and according to them restructuring of loss-making state Public Sector Undertakings (PSUs) could release some resources for both growth-promoting and HD activities. Subsidies on petroleum products such as LPG, kerosene, fertilisers, and so on, serve as the major component of the Union government expenditure and if the government can minimise the subsidies then additional resources could be released for financing HD. For example, Gupta and Sarma (2014) find that in Delhi, the subsidies on public water supply and electricity discourage resource conservation, hence minimising such expenditures could release revenues to finance HD. Mundle and Sikdar (2019) explore issues related to rationalisation of non-merit subsidies to create fiscal space for investing in physical and social infrastructures to make the growth more inclusive. Subsidies given only on education, health, food, water supply, and sanitation are considered as merit subsidies whereas all other subsidies are non-merit subsidies (Mundle & Sikdar, 2019). The study finds that merit subsidies given on education and health lead to positive education as well as health outcomes in terms of increasing life expectancy and reduced infant mortality rate. Hence, they suggested for continuation of merit subsidies which account for 4.5% of GDP in 2015–2016 and reduction of non-merit subsidies as it accounts for 5.7% of GDP in 2015–2016.

To sum up, public expenditures play important role in reducing inequalities by investing in HD. However, many studies show that government spending on HD could be enhanced in India. Also the composition of public expenditures plays crucial roles in achieving economic growth, HD, and reducing poverty and inequalities. There are various channels (revenue enhancement and/or expenditure managements) through which additional resources for HD could be raised/released. One important aspect that influences revenue mobilisation as well as expenditure management (including size and composition of the public expenditure) of the budget is the “political factors”. The issue of rising inequalities, rising revenue expenditure as compared to capital expenditure, low-level of spending in social, physical infrastructures, and so on, could be seen through a political economy dimension.

Political Economy of Public Financing of Human Development in India

Political systems of a country, especially in a democratic country, could influence size and composition of government spending, including spending on subsidies, servicing debts, public investment, and government consumption (de Haan & Sturm, 1994; Harrinvirta & Mattila, 2001; Perotti & Kontopoulos, 2002; Roubini & Sachs, 1989). Indian Constitution assigns sources of revenue and expenditure responsibilities between the Union and state governments. The 73rd and 74th Constitution Amendment Acts lay down rules regarding the organisational structure/ powers, functions and finances of the institutions of Rural Local Government and Urban Local Government, respectively. There is a multi-level governance system in India where functions (responsibilities) are distributed across various levels of governments. Political parties take part in elections either independently or in a coalition with other political party(ies) to form a government. Available studies show that high political competition in elections facilitates emergence of special interest group politics which may influence decisions of allocation of budgetary resources according to the priority of the special interest group(s) (Marjit et al., 2020). To strengthen electoral base, governments spend more on unproductive expenditure heads (Marjit et al., 2020). This is often referred in literature as “political clientelism” where political parties or elected officials trade benefits to individual or groups of voters/citizens in lieu of their political support to incumbent political party or alliance (Hicken, 2011). According to Bardhan et al. (2020), political clientelism has several implications and it may lead to under provisions of public goods, rising corruptions, and inequalities.

Existing literature shows that infrastructure projects in general are not well suited for political clientelism as compared to expenditures on welfare and salary payments (Khemani, 2010). According to Bardhan et al. (2020) political clientelism prevails in India where voters respond to the private benefits as compared to the public benefits. It is because of the presence of institutional difference, that is, the presence of multi-level government at each level which makes the clientelism easily operate in each Indian states. The analyses are based on the different kinds of private benefits received by households in rural West Bengal such as low-income housing, employment, farm inputs, subsidised loans, and sanitation and food items. The results indicate that private benefits overweigh the infrastructure projects (roads, irrigation, water programmes, etc.) for voters in India. Similarly, the study by Winer et al. (2019) explores the factors affecting the government spending on private targeted goods (welfare payments, subsidies for agriculture and power supply, food and nutrition, etc.) vis-à-vis public goods (capital expenditure net of loans and advances, that is, expenditure on creation of physical assets such as bridges, roads, hospitals, schools, etc.). According to them, as political competition increases in a state; expenditure on public goods increases vis-à-vis expenditure on targeted private goods. However, the finding is only confirmed for the richer states where expenditure on public goods increases with rise in real income and political competition. The importance of increasing expenditure on private targeted goods is found for the poorer states, that is, government spends relatively more on private targeted goods in the lower-income states. Lahiri and Magnani (2008) explore the link between inequality and the expenditure on mechanisms of redistribution (e.g., education, health, transfers) and they find that it depends on the nature of the mechanism relative to the alternatives that are available. They argue that “in the presence of higher inequality, a median voter faced with the choice of the proportion of expenditure between two mechanisms is likely to choose in favour of public goods that are more efficient mechanisms of redistribution.” Dash and Mukherjee (2015) indicate that political competition positively influences HD outcomes and helps in creating pressure on the government to provide better public goods and services. Their study finds positive and significant influence of political competition on HD performance across Indian states. Also they find that a government ruling for a longer period has positive and significant impacts on HD achievements in both urban and rural areas. The per capita development expenditure of the government contributes in improving the HDI of Indian states.

Furthermore, many studies have explored the political factors associated with the allocation of public expenditure across Indian states (Chaudhuri & Dasgupta, 2006; Dash & Raja, 2013; Marjit et al., 2020). The study by Dash and Raja (2013) has examined the role of several political, economic, and demographic variables in determining the size and composition of the government expenditure in 14 Indian states during 1980–1981 to 2006–07 (i.e., 27 fiscal years). The study considers five political factors (determinants), namely fragmented government (effective number of parties in the ruling government), fragmented opposition (effective number of parties in the opposition), electoral cycle, the ideology of the government (a left-wing political party or any other), and type of majority of the government (simple vs. supermajority). As per their study, ideology and fragmented government (captures the presence of coalition government) are significant variables influencing revenue expenditure of the government, whereas for capital expenditure fragmented government and majority of the government are the major factors. They have found that as the ideology of a government shifts from right-wing to left-wing, the per capita revenue expenditure by the government increases by 1.8%. Similarly, as number of additional party increases in the government, revenue expenditure increases by 2.5%. The study by Sáez and Sinha (2010) examines the impacts of political institutions and political cycles on government expenditure mainly on health, education, social security, and agriculture and irrigation across Indian states. They have considered political factors such as ideology of government, election year, effective number of parties (state assembly), margin of victory, etc. As per their results, political factors play very significant role in determining the public expenditure. For example, increased competition in terms of number of political parties competing elections induces more expenditure on education, whereas the ideology of the government founds to be insignificant in determining the education expenditure by the government. Furthermore, during the time of elections, government expenditure on health, social security, and investment on agriculture decreases (Sáez & Sinha, 2010). According to their analyses, the institutional (political) and cyclical (election) variables are more significant as compared to the ideology of the government.

Marjit et al. (2020) find that government expenditure for distributive purposes (on revenue account) are more at the cost of capital expenditure to strengthen the political base of the political party in power and if it is a coalition government then chances of spending on revenue account would be more. Coalition governments are considered as the weaker government because of lack of majority of a single party to form government, multiple party interest prevails, etc., due to which such governments end up with short-term vision as compared to the policies desirable for long term perspective. However, the study by Chaudhuri and Dasgupta (2006) argues that state government expenditures on capital account (majorly development expenditure on social and economic services) are higher during the scheduled election years. During the scheduled election years, the per capita education expenditure on capital account is on average 15% higher than in all remaining years. The study also found that political factors influences the size of revenue collected by the state government and coalition government generates fewer revenues as compared to single-party governments. With specific to capital expenditures of the state governments, Ferris and Dash (2019) argue that political budget cycle, that is, increase in public expenditures near the election year, is related to depreciating memories of the voters. To meet pre-election promises to electorates, governments often embrace austerity throughout the life (i.e., five years) of a government and reallocate composition of budgetary expenditures to some specific expenditure heads which better demonstrate the contribution of the incumbent government. They claim that “incumbent politicians use differences in the degree of visibility to the voting public of certain types of government output together with voters’ imperfect memory to systematically change the composition of its expenditures over the governing cycle in order to maximise voter support.”

The influence of political factors on government spending can also be seen within the context of the Centre–State transfers of funds. Some studies estimate the political influences on inter-governmental transfers with the help of theoretical as well as empirical models (e.g. Arulampalam et al., 2009; Biswas & Marjit, 2000; Rao, 1979; Rao & Singh, 2002). These studies analyse the different categories of transfers as dependent variables and measure of political and economic power as explanatory variables. The degree of political stabilities and ideological leanings of the parties in power (Rao, 1979), the number of cabinet ministers from each state, the proportion of ruling party’s Members of Parliament, a dummy variable which captures the difference in the political party in power at the Central and state level, and so on, are the examples of the political influence variables which affects the pattern of Centre–State transfers in India (Rao & Singh, 2002). Rao and Singh (2007) observe that increasing inequalities mainly after the market-oriented reforms put more burdens on the effectiveness of the Centre–State transfers system in India. The empirical findings on the Centre–State transfers through the political economy perspective suggest that regional inequality has been growing in India, and political-economic factors have the potential to hamper the fiscal equalisation across the states through the inter-governmental transfers (Rao & Singh, 2002).

Environment and Human Development: Role of Public Finance

Discussions on policies or public spending on economic growth and HD often ignore environmental protection. Integration of the concept of sustainable development in policies and programmes of the government is one of the objectives of the National Environmental Policy 2006. In this section we will discuss the needs for public financing of environmental protection and provide some insights on how environmental degradation impacts HD achievements. Given the public goods nature of environment, the likelihood of market failure cannot be ignored and need for government interventions for internalisation of environmental costs plays a key role.⁴ Public financing of environmental protection (e.g., improve air and water quality, develop sustainable food systems, preserve biodiversity, reduce greenhouse gas emissions, encourage carbon sinks) is important for protection of public health and livelihoods of a large section of the population.

A strand of literature explores the linkages between environment and HD (Costantini & Monni, 2008; Mayes & Lewis, 2012; Mukherjee & Chakraborty, 2009). All these studies indicate the impacts of environment on HD and economic growth and ask policymakers to internalise the cost of environmental degradation in various policies and programmes of the government. Ideal revenue sources for environmental programmes of the government could be eco-taxes on polluting inputs and outputs (Chelliah et al., 2007), pollution charges, pollution permits, non-compliance pollution charges and payments for ecosystem services, etc. Expenditures for policies from preservation to conservation and sustainable use of natural resources include strengthening indigenous people’s rights, creating jobs for them as guardians of wild life, and strengthening institutions for value creation and addition.

Increasing vulnerability of the poor due to environmental degradation is also well discussed in the HD Reports (UNDP, 2007/2008; UNDP, 2019). As per the reports, climate change could make the scenario of low opportunities and low outcomes for the disadvantaged people (poor), that is, the effects of climate change could harm vulnerable people more. This will eventually increase the inequalities. The impact of land degradation on future poverty levels in developing countries is explored by Barbier and Hochard (2016). Their study argues that the degradation of agricultural land is the major hurdle in alleviating poverty, especially in developing countries as it reduces the productivity of land on which the poor depend more. Hence, environmental degradation can perpetuate poverty and inequality.

Rising anthropogenic pressures on the Earth Systems in general and agri-environment (land, water, biogeochemical cycle, and biodiversity) in particular may result in abrupt global environmental change (Rockström et al., 2009). Growing pressures on agri-environment due to unsustainable agricultural practices may not only diminish the country’s ability to produce sufficient food in the future (Damerau et al., 2020) but also transgress “planetary boundaries” (e.g., climate change, rate of biodiversity loss, changes to the nitrogen cycle) (Rockström et al., 2009). A comprehensive assessment of agri-environmental sustainability (AES) of Indian agriculture is lacking and Mukherjee (2020) argues that encouraging adoption of agricultural best-management practices through public funded agricultural extension services could help to achieve AES.

According to the UNDP (2019), environmental degradation (particularly climate change) could impact food security, the ability to pay for schooling and healthcare which can impede HD. Lack of access to safe drinking water and sanitation often increases burden on women and children in collecting water from distant sources and also expose them to various water borne diseases. Therefore, progress in HD is only possible when the negative consequences of the environment on poverty, inequality, health, education, and so on are taken care of.

However, the current government expenditure or budgetary allocation to support environmental protection has not been satisfactory in several Asian countries (Chakraborty & Mukherjee, 2018). Chakraborty and Mukherjee (2018) argue that given the limited fiscal space of the governments of several South, East and Southeast Asian countries, it is unlikely that the government’s budgetary allocation for environmental protection will increase drastically in the coming years. For example, government’s budgetary allocation for environmental protection is not enough to tackle the climate change (Financial Express, 2020). The study by Pollin and Chakraborty (2015) indicates that India needs to increase annual investment (public and private) in energy efficiency and clean renewable energy sources by 1.5% of GDP to reduce CO₂ emissions drastically. Kaur and Chakraborty (2020) find that targeted expenditures on climate change programmes are 5% to 6% of total expenditure of the Union budgets. However, there is much deviation in the budget estimates and the actual expenditure by the government on these heads. Hence, there is need for macroeconomic policy framework on climate financing in India, as this is highly fragmented at sectoral levels (Kaur & Chakraborty, 2020). Another study by Lo et al. (2019) analyses the rationale for public investing in environmental common goods for public health. The study indicates that government spending on environmental goods does not crowd out other expenditures (particularly public spending on health). The study also finds strong linkage between political/governance regime and environmental performance, therefore, there is a clear role for government action to preserve environment. The actions by government need not to be expensive, indeed they are considered as cost-saving (Lo et al., 2019). However studies analysing issues related to public financing of environmental programmes and their implication on HD are sparse in India.

Impact of COVID-19 Pandemic on Human Development Financing

The Covid-19 pandemic has markedly disrupted the global economic system and daily life, sending countries into various degrees of economic recession. The pandemic has also further exacerbated poverty rates and global inequality.

Half of low-income countries were already in economic turmoil and at high risk of debt distress leading up to the pandemic, only to be overwhelmed by the economic contraction caused by both the pandemic and the health measures used to contain the virus (e.g., lockdowns, limits on movements). (The World Bank⁵)

The impact of COVID-19 pandemic on economic growth and therefore on revenue mobilisation will impact public finance management. In Monetary Policy Report of October 2020, the Reserve Bank of India (RBI) projects 9.5% contraction of the Indian economy in 2020–2021. This projection has been revised to −7.5% in the RBI’s Monetary Policy Report of November 2020. According to the World Bank, India’s GDP growth is likely to contract by 9.6% in 2020–2021. In October 2020 issue of the World Economic Outlook, the International Monetary Fund (IMF) projects 10.3% contraction of India’s real GDP during 2020–2021.

Revenue impact of COVID-19 pandemic would be different across different economies depending on duration and severity of the impact of pandemic in terms of mortality and morbidity, duration; stringency and spatial spread of the confinement measures adopted, structure of the economy, exposure to international flows including trade and tourism, structure and composition of government revenues, and measures taken to cushion firms and households from the impact of the pandemic (OECD, 2020a). Moreover, realisation of benefits of fiscal measures adopted by different economies to stimulate the economy may differ depending on speed of transmission/ adjustment. In addition, measures adopted by tax administrations to facilitate ease-of-tax compliance by allowing deferment of tax payments, extending deadlines of filing tax returns, tax holidays, and so on may delay in realisation of revenue.

The impact of the pandemic can be seen from three different spheres, that is, health, economic, and financial (IMF, 2020). It is also likely that all sources of government revenues will decrease due to fall in economic activities. Being most responsive to economic cycles, revenue from Corporate Income Tax (CIT) is likely to decrease more than the fall in economic activity. Any fall in employment and/or wages and salaries is likely to impact Personal Income Tax (PIT) collections. Tax from consumption like VAT/GST is also likely to fall due to the impact of lockdowns and lower consumer confidence, as well as a potential shift towards the consumption of staple goods and basic necessities, which are either exempted or taxed at lower rates (OECD, 2020a).

States may face revenue shortfall in 2020–2021 not only on account of their own tax collection but also due to lower devolution of states’ share in Central taxes, owing to ongoing revenue shortfalls in the Union taxes. State’s tax base depends on level of expenditures on goods and services (State GST as well as Integrated GST), consumptions of alcoholic beverages (State Excise Duties and State Sales Tax) and petrol, diesel, Aviation Turbine Fuel (ATF), natural gas and electricity (State Sales Tax), registration of immovable properties and agreements/contracts (Stamp Duty and Registration Fees), and land revenue. It is expected that except agricultural activities all other activities (including transportation of goods and passengers) are affected due to the ongoing COVID-19 pandemic. Fall in growth rate of GDP implies that there is a fall in incomes (wages and salaries, rents, interests and profits) and therefore corresponding impacts on expenditures. Revenue impacts of the pandemic will be different for different states depending on the severity of the COVID-19 pandemic in the state, duration; stringency and spatial spread of the confinement measures adopted to control the spread of the infections, and so on. On expenditure side of the state budgets, interest payments, salaries/wages, pensions and subsidies constitute a major share of total revenue expenditure and there is hardly any scope for cutting expenditures on these heads except reducing subsidies. Therefore, it is obvious that capital expenditures will be curtailed in the face of ongoing revenue shortfall. There is also possibility of expenditure switching from elsewhere to emergency healthcare and other activities to support livelihoods of the people. However, opportunities for fiscal manoeuvring to create additional fiscal space to manage the ongoing fiscal stress will differ across states depending on their overall revenue (budget) constraints as well as political obligations. Both rural and urban local governments may face revenue constraints due to less transfer of resources from the state government.

Shrinking fiscal space due to fall in the growth rate of the economy and high fiscal deficits are the major constraints for the governments to stretch the public expenditure programmes in India. According to Patnaik and Sengupta (2020), the fiscal deficit of the Union government will be 6.2% of GDP in 2020–2021 assuming the baseline scenarios of 5% and 14.4% contractions of real GDP and net tax revenue, respectively. Any cut in developmental finance and aids to Least Developing Countries (LDCs) and developing countries may throw millions of poor people to abject poverty and for nation it will hamper achieving Sustainable Development Goals (SDGs) (OECD, 2020b).

To sum up, the COVID-19 crisis has led to several economic as well as social implications such as shrinking employment opportunities, falling living standards, reverse migration, rising informality, contracting foreign direct investment, shutting down of schools, shocks to health, and pressure on international aid flows and public budgets (ILO and UNICEF, 2020). Now to overcome the challenges there is need to boost confidence of people to take part in economic activities without any fear of their life and/or health safety. To achieve that we need to enhance public investments in health infrastructure as well as opening up new economic opportunities for people by skilling and reskilling to cope up with the situation.

Conclusions

In market economies, allocative and redistributive functions of the government aim to achieve equity in distribution of resources among people, whereas macroeconomic stabilisation function aims to utilise available resources of the economy efficiently to achieve higher economic growth and stability in the prices.

Public expenditure is important to reduce poverty, inequality and fill the gap in human and physical capital for a developing country like India where access to resources (or capitals—human, physical, and natural) and economic opportunities are not equitably distributed among people. Expenditure policies of the governments envisage in delivering larger public goods and services efficiently to enable people to take part in economic activities by investing in human capital and infrastructure (economic and social) developments. Direct (“growth-oriented strategy”) and indirect (“support-led security”) policy measures of the government aim to alleviate poverty, reduce inequality and enhance economic opportunities. Available literature shows that public expenditure has positive and significant impact on income or GDP growth which in turn may help in providing access to resources and economic opportunities and therefore in reducing poverty and inequality over time through “trickle-down effect”. Public expenditures on social services help in improving human capital formation. However, efficiencies of these direct and indirect policy interventions of the government depend upon multi-level fiscal system, institutions involved in delivering public goods and services, and political system prevailing across level of governments.

The issues of public financing of HD could be addressed from both the revenue and expenditure sides of the budget. Progressivity of the tax system (direct as well in indirect taxes) helps in achieving equity by redistribution of resources among people. However, literature on tax incidence analysis for various taxes (direct as well as indirect) is sparse in India. Existing studies on Indian tax system aim to augment public resources by increasing tax capacity, tax efficiency and tax compliance without giving much thoughts on resulting tax incidence across different groups of people. On the expenditure side of the budget, it would be desirable to increase efficiency of public expenditure by reducing leakages, involving all stakeholders and reducing non-merit subsidies over time. Studies on impacts of public expenditures on different socio-economic groups are sparse in India. Lack of fiscal space often constraints governments to finance social and physical infrastructures and it may limit economic growth in the long-run.

The issues of rising inequalities, rising revenue expenditure vis-à-vis capital expenditure (or low-level of spending on social and physical infrastructure), and so on have been explained through political economy perspectives. Existing studies claim that the presence of high political competition facilitates the emergence of special interest group politics in which the political parties trade benefits to individual voters in lieu of their political support. However, some other studies find that political competition positively influences HD and helps in creating pressure on the government to provide better public goods and services. Some studies suggest that electorates overweigh private benefits over public goods (e.g., public infrastructure projects on roads, irrigation, water programmes, education, or health infrastructure). But overall, we found that political factors influence the composition and size of the government budget. Furthermore, fiscal decentralisation and inter-governmental fiscal transfers are other dimensions of public finance which could help state and local government to overcome their fiscal disabilities in financing HD in general and eradicating poverty in particular. However, existing studies indicate that various political factors influence inter-governmental fiscal transfers and therefore hamper fiscal equalisation across Indian states. Available evidence show that inter-governmental fiscal transfer system may not fully take into account the rising inequalities across states, which may have implications for public financing of HD in India.

Furthermore, financing HD without taking care of environmental degradation may not help in achieving sustainable development. Available literature suggests that environmental degradation could lead to more poverty and inequality as poor people are more vulnerable to environmental degradation. Hence, government budgeting should also consider controlling pollution and conservation of natural resources to protect the environment. Indian literature on public financing of environmental programmes and its implication on HD is sparse. It is expected that future research will address this important issue.

Moreover, financing HD has become more tedious in the wake of the COVID-19 pandemic. The COVID-19 crisis has led to several economic as well as social implications such as shrinking employment opportunities, falling living standards, reverse migration, rising informality, contracting foreign direct investment, shutting down of schools, shocks to health, pressure on international aid flows, and shrinking fiscal space of the government. Due to revenue shortfalls and rising fiscal deficit, there is possibility that larger share of public expenditure will be devoted to provide livelihood supports to people in terms of free foods, income support whereas expenditures on health (except emergency healthcare) and education infrastructure may be postponed or reduced. In India, we need persistent investments on HD to eradicate poverty and empower people to take part in economic activities.

Footnotes

Acknowledgements

We are grateful to Professor U. Sankar for detailed comments on an earlier draft of the paper. Usual disclaimer nevertheless applies.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

Notes

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