The 1970s was the era of big government and socialism in India, right?
So how is it that the share of government expenditure (centre plus states) in gross domestic product (GDP) has gone up from 25.12% in 1970-71 to 34.78% in 2007-08?
It’s also widely accepted that liberalisation started from the Rajiv Gandhi era in the early 1980s. But it was in 1986-87 that the share of total government expenditure to GDP reached its peak at 40.43%.
What has been the record since 1990-91, when the government made a decisive shift to relying on the private sector as the engine of growth?
In 1990-91, the percentage of total government expenditure to GDP was 38.13%. This went down to 31.75% by 1996-97 and then started to go up again, reaching 38.83% in 2003-04, even higher than what it was in 1990-91. Thereafter it went down again to 32.59% in 2005-06 before inching up again.
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Nevertheless, the Union government’s share in GDP has actually fallen since 1990-91. It was 20.44% in that year and was down to 15.39% in 2006-07, although that was still well above the 13.08% share of GDP that the Union government had way back in 1970-71, during the so-called “socialist” heydays. But state government expenditure as a percentage of GDP has not fallen and indeed has gone up a bit since 1990-91.
How do we reconcile these numbers with the undeniable fact that there has been a sea change in the Indian economy since 1990-91?
What seems to have happened is that there has been plenty of deregulation, the private sector has been allowed into many new sectors and a few privatizations have taken place, but subsidies too have gone up substantially and the net result is that there hasn’t been much of a difference in the total ratio of government expenditure to GDP. Moreover, a lot of the ups and downs in this ratio seem to be taking place because the denominator, ie GDP, goes up and down disproportionately—for instance, the ratio falls when GDP growth is strong.
How does India compare with other countries on this metric?
OECD data for 2007 show that “General government expenditure to GDP” was 37.4% for the US, 44.6% for the UK and 53.8% for Sweden. But comparisons may not be right, because of the different ways in which government expenditure has been computed—for instance, it includes local government expenditures also in the US.
It’s also worth noting that these countries also have extensive social security programmes, unlike in India. But if government expenditure is taken as an indicator of socialism, then we’re more socialistic than we were in 1970.
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