Impact of Goverment Expenditure on Standard of Living of People in India

8/10/2019 Impact of Goverment Expenditure on Standard of Living of People in India

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PROJECT REPORT ON

IMPACT OF GOVEMENT EXPANDITURE ON STANDARD OF

LIVING OF PEOPLE IN INDIA

IN PARTIAL FULFILLMENT OF

THE DEGREE AWARDED AT

M.COM PART-I (BANKING &FINANCE)

SEMESTER-I

SUBJECT NAME:ECONOMIC

SUBMITTED TO

UNIVERSITY OF MUMBAI

FOR ACADEMIC YEAR 20132014

SUBMITTED BY

NAME: SWATI M SONCHHTRA

ROLL NO: 56

VIVA COLLEGE OF ARTS,COMMERCE AND SCIENCEVIRAR (WEST)

40130


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DECLARATION

I hereby declare that the project titled IMPACT OF GOVEMENT

EXPANDITURE ON STANDARD OF LIVING OF PEOPLE IN INDIA

is an original work prepared by me and is being submitted to Universityof Mumbai in partial fulfillment of M.COM PART -I SEM -I

(ACCOUNTANCACY) degree for the academic year 2013-2014.

To the best of my knowledge this report has not been submitted

earlier to the University of Mumbai or any other affiliated college for the

fulfillment of M.COM degree

Date: 9.10.2013 Name: SWATI.M.SONCHHTRA

Place: VIRAR Sign:


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ACKNOWLEDGEMENT

I SWATI.M.SONCHHTRA the student of VIVA College pursuing my

M.COM I (ACCOUNTANCACY), would like to pay the credits, for

all those who helped in the making of this project.The first in accomplishment of this project is our Principal Dr. R.D

Bhagat, Vice-Principal Prof. PrajaktaParanjape, Course Co-ordinator

Prof. NilimaBhagwat and Guide Prof. PrajaktaParanjape & teaching &

non teaching staff of VIVA college.

I would also like to thank all my college friends those who influenced my

project in order to achieve the desired result correctly.


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Index1.Introduction

2.History and origin3.Features

4.Nature

5.Advantages and disadvantages

6.Role

7.Function

8.Objective

9.Conclusion


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IMPACT OF

GOVERNMENT

EXPENDITURE ON

STANDARD OF

LIVING PEOPLE IN

INDIA


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INTRODUCTIONSince the early 1950s, successive governments have implementedvarious schemes, underplanning,to alleviate poverty that havemet with partial success. Programmes like Food for

workand Nat ional Rural Emp loyment Programm ehave attemptedto use the unemployed to generate productive assets and buildrural infrastructure.[14]In August 2005, theIndianparliamentpassed the Rural Emp loym ent Guarantee Bi l l, thelargest programme of this type, in terms of cost and coverage,which promises 100 days of minimum wage employment to everyrural household in 200 ofIndia's 600 districts.The Indiangovernment is planning to bring in more economic reforms whichcan help farmers and unskilled labourers transition intoindustrialized sectors.

Life expectancy in India by States in year 2003

STATE Total MALE FEMALE

Andhra Pradesh 63.1 61.6 64.1

Assam 57.2 57.1 57.6

Bihar 60.2 60.7 58.9

Gujarat 62.8 61.9 63.7

Haryana 64.5 64.1 65.0

Himachal Pradesh 65.6 65.1 65.8

Karnataka 64.0 62.4 65.5

Kerala 73.5 70.6 76.1

Madhya Pradesh 56.4 56.5 56.2

Maharashtra 65.8 64.5 67.0

Odisha 57.7 57.6 57.8

Punjab 68.1 66.9 69.1

Rajastan 60.5 59.8 60.9

Tamil Nadu 64.6 63.7 65.7

Uttar Pradesh 58.4 58.9 57.7

West Bengal 63.4 62.8 64.3

India 61.7 60.8 62.5
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Physical infrastructure

Cheap and environment friendlypublic transportis seen as anecessity for India's crowded and polluted metros theNew DelhiMetro,operational since 2002 and seen as a model for other

metros.Since independence, India has allocated nearly half of the totaloutlay of the five-year plans forinfrastructuraldevelopment. Muchof the total outlay was spent on large projects in the area ofirrigation, energy, transport, communications and socialoverheads. Development of infrastructure was completely in thehands of the public sector and was plagued by corruption,bureaucratic inefficiencies, urban-bias and an inability to scaleinvestment.[16]Calcutta city was the first city in India to boast of ametro-system.Today the calcutta metro is considered among theworld's best in terms of service and infrastructure. India's lowspending on power, construction, transportation,telecommunications andreal estate,at $31 billion or 6% of GDP in2002 has prevented India from sustaining a growth rate of around8%. This has prompted the government to partially open upinfrastructure to the private sector allowing foreigninvestment.India holds second position in the world in roadways'construction.]

As of 31 December 2005, there were an estimated 835,000

broadband lines in India. Low tele-density is the major hurdle forslow pickup in broadband services. Over 76% of the broadbandlines were via DSL and the rest via cable modems.

A 2007 study by the Asian Development Bank showed that in 20cities the average duration of water supply was only 4.3 hours perday. No city had a continuous water supply. The longest durationof supply was 12 hours per day inChandigarh,and the lowest was9 hours per day inRajkot.

One of the critical problems facing India's economy is the sharp

and growing regional variations among India's different states andterritories in terms of per capita income, poverty, availability ofinfrastructure and socio-economic development. For instance, thedifference in growth rate between theforward and backwardstateswas 0.3% (5.2% & 4.9%) during 198081 to 199091, but hadgrown to 3.3% (6.3% & 3.0%) during 199091 to 199798.[22]PerCapita Income in India varies drastically. As of 2010, New Delhihad a Per Capita Income of $ 3,020 whereas Bihar's Per CapitaIncome was at a paltry $ 445.

The five-year plans have attempted to reduce regional disparitiesby encouraging industrial development in the interior regions, but
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industries still tend to concentrate around urban areas and portcities. Even the industrial townships in the interiors,Bhilaiforinstance, resulted in very little development in the surroundingareas.[23]After liberalisation, the disparities have grown despite

the efforts of the union government in reducing them. Part of thereason being that manufacturing and services and not agricultureare the engines of growth. The more advanced states are betterplaced to benefit from them, with infrastructure like welldeveloped ports, urbanisation and an educated and skilledworkforce which attract manufacturing and service sectors. Theunion and state governments of backward regions are trying toreduce the disparities by offering tax holidays, cheap land, etc.,and focusing more on sectors like tourism, which although beinggeographically and historically determined, can become a source

of growth and is faster to develop than other sectors.

What have we learned about money in a free society? We havelearned that allmoney has originated, and must originate, in auseful commodity chosen by the free market as a medium ofexchange. The unit of money is simply a unit of weight of themonetary commodity--usually a metal, such as gold or silver.Under freedom, the commodities chosen as money, their shapeand form, are left to the voluntary decisions of free individuals.

Private coinage, therefore, is just as legitimate and worthwhile asany business activity. The "price" of money is its purchasingpower in terms of all goods in the economy, and this isdetermined by its supply, and by every individual's demand formoney. Any attempt by government to fix the price will interferewith the satisfaction of people's demands for money. If peoplefind it more convenient to use more than one metal as money, theexchange rate between them on the market will be determined bythe relative demands and supplies, and will tend to equal the

ratios of their respective purchasing power. Once there is enoughsupply of a metal to permit the market to choose it as money, noincrease in supply can improve its monetary function. An increasein money supply will then merely dilute the effectiveness of eachounce of money without helping the economy. An increased stockof gold or silver, however, fulfills more non-monetary wants(ornament, industrial purposes, etc.) served by the metal, and istherefore socially useful. Inflation (an increase in moneysubstitutes not covered by an increase in the metal stock) isnever socially useful, but merely benefits one set of people at the
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"due process" seizure of land under eminent domain, quarteringof troops in an occupied country, and especially compulsoryconfiscation of labor service (e.g., military conscription,compulsory jury duty, and forcing business to keep tax records

and collect withholding taxes).

To gauge the economic effects of inflation, let us see whathappens when a group of counterfeiters set about their work.Suppose the economy has a supply of 10,000 gold ounces, andcounterfeiters, so cunning that they cannot be detected, pump in2000 "ounces" more. What will be the consequences? First, therewill be a clear gain to the counterfeiters. They take the newly-created money and use it to buy goods and services. In the wordsof the famous New Yorkercartoon, showing a group ofcounterfeiters in sober contemplation of their handiwork: "Retailspending is about to get a needed shot in the arm." Precisely.Local spending, indeed, doesget a shot in the arm. The newmoney works its way, step by step, throughout the economicsystem. As the new money spreads, it bids prices up--as we haveseen, new money can only dilute the effectiveness of each dollar.But this dilution takes time and is therefore uneven; in themeantime, some people gain and other people lose. In short, thecounterfeiters and their local retailers have found their incomes

increased before any rise in the prices of the things they buy. But,on the other hand, people in remote areas of the economy, whohave not yet received the new money, find their buying pricesrising before their incomes. Retailers at the other end of thecountry, for example, will suffer losses. The first receivers of thenew money gain most, and at the expense of the latest receivers.

Inflation, then, confers no general social benefit; instead, itredistributes the wealth in favor of the first-comers and at theexpense of the laggards in the race. And inflation is, in effect, a

race--to see who can get the new money earliest. The latecomers--the ones stuck with the loss--are often called the "fixed incomegroups." Ministers, teachers, people on salaries, lag notoriouslybehind other groups in acquiring the new money. Particularsufferers will be those depending on fixed money contracts--contracts made in the days before the inflationary rise in prices.Life insurance beneficiaries and annuitants, retired persons livingoff pensions, landlords with long term leases, bondholders andother creditors, those holding cash, all will bear the brunt of theinflation. They will be the ones who are "taxed."[2]
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Inflation has other disastrous effects. It distorts that keystone ofour economy: business calculation. Since prices do not allchange uniformly and at the same speed, it becomes very difficultfor business to separate the lasting from the transitional, and

gauge truly the demands of consumers or the cost of theiroperations. For example, accounting practice enters the "cost" ofan asset at the amount the business has paid for it. But if inflationintervenes, the cost of replacing the asset when it wears out willbe far greater than that recorded on the books. As a result,business accounting will seriously overstate their profits duringinflation--and may even consume capital while presumablyincreasing their investments.[3]Similarly, stock holders and realestate holders will acquire capital gains during an inflation thatare not really "gains" at all. But they may spend part of these

gains without realizing that they are thereby consuming theiroriginal capital.

By creating illusory profits and distorting economic calculation,inflation will suspend the free market's penalizing of inefficient,and rewarding of efficient, firms. Almost all firms will seeminglyprosper. The general atmosphere of a "sellers' market" will lead toa decline in the quality of goods and of service to consumers,since consumers often resist price increases less when theyoccur in the form of downgrading of quality.[4]The quality of

work will decline in an inflation for a more subtle reason: peoplebecome enamored of "get-rich-quick" schemes, seemingly withintheir grasp in an era of ever-rising prices, and often scorn sobereffort. Inflation also penalizes thrift and encourages debt, for anysum of money loaned will be repaid in dollars of lower purchasingpower than when originally received. The incentive, then, is toborrow and repay later rather than save and lend. Inflation,therefore, lowers the general standard of living in the very courseof creating a tinsel atmosphere of "prosperity."

Fortunately, inflation cannot go on forever. For eventually peoplewake up to this form of taxation; they wake up to the continualshrinkage in the purchasing power of their dollar.

At first, when prices rise, people say: "Well, this is abnormal, theproduct of some emergency. I will postpone my purchases andwait until prices go back down." This is the common attitudeduring the first phase of an inflation. This notion moderates theprice rise itself, and conceals the inflation further, since thedemand for money is thereby increased. But, as inflationproceeds, people begin to realize that prices are going upperpetually as a result of perpetual inflation. Now people will say:
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And yet this is precisely one of the chief problems that must befaced. Is it really "progressive" to rob widows and orphans and touse the proceeds to subsidize farmers and armament workers?

[3]This error will be greatest in those firms with the oldest

equipment, and in the most heavily capitalized industries. Anundue number of firms, therefore, will pour into these industriesduring an inflation. for further discussion of this accounting-costerror, see W.T. Baxter, "The Accountant's Contribution to theTrade Cycle," Economica(May, 1955), pp. 99-112.

[4]In these days of rapt attention to "cost-of-living indexes" (e.g.,escalator-wage contracts) there is strong incentive to increaseprices in such a way that the change will not be revealed in theindex.

[5]On the German example, see Costantino Bresciani-Turroni, The Econ om ics of Inf lat ion(London: George Allen andUnwin, Ltd., 1937).

[6]For a further discussion, see Murray N. Rothbard, America'sGreat Depressio n(Princeton: D. Van Nostrand Co., 1963), Part I.

The Impact of an Ageing Population on the Economy

One of the great achievements of the twentieth century is adramatic rise in life expectancy. For examples, life expectancy inthe US has increased from 45 in 1902 to 75.7 in 2004(link).However, increased life expectancy combined with declining birthrates have caused many to worry about the cost of an ageingpopulation. Frequently, we hear about demographic time bombs

and the fear future generations will struggle to meet an everincreasing number of retired workers and pension commitments.

But, are we correct to be worrying about an ageing population?

Firstly, in the UK, the ratio of people of working age to peopleover 65 could fall from 3.7to 1 in 1999 to 2.1 to 1 in 2040. (BBC)This suggests a very big increase in the dependency ratio and isconsequently a cause for concern because with current spending

pension commitments, it will place a higher burden on theshrinking working population.However, others argue it is a mistake to base calculations solelyon a fixed retirement age of 65. If life expectancy increasesdramatically, you would expect a sensible policy is to allow someincrease in the retirement age, e.g. keeping the same % of yourworking life for retirement. The UK government has already madetentative steps to raise the retirement age and increase privatesector pensions. These policies will make an ageing population

more manageable and so it could be something we can celebraterather than fear.
http://www.infoplease.com/ipa/A0005140.htmlhttp://www.infoplease.com/ipa/A0005140.htmlhttp://www.infoplease.com/ipa/A0005140.htmlhttp://news.bbc.co.uk/1/hi/health/395143.stmhttp://news.bbc.co.uk/1/hi/health/395143.stmhttp://news.bbc.co.uk/1/hi/health/395143.stmhttp://news.bbc.co.uk/1/hi/health/395143.stmhttp://www.infoplease.com/ipa/A0005140.html


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Main Impacts of an Ageing Population

Increase in thedependency ratio.If the retirement age remainsfixed, and the life expectancy increases, there will be relativelymore people claiming pension benefits and less people working

and paying income taxes. The fear is that it will require high taxrates on the current, shrinking workforce.

Increased government spending on health care and pensions.Also, those in retirement tend to pay lower income taxes becausethey are not working. This combination of higher spendingcommitments and lower tax revenue is a source of concern forWestern governmentsespecially those with existing debt issuesand unfunded pension schemes.

Those in work may have to pay higher taxes. This could createdisincentives to work and disincentives for firms to invest,therefore there could be a fall in productivity and growth.

Shortage of workers. An ageing population could lead to ashortage of workers and hence push up wages causing wageinflation. Alternatively, firms may have to respond by encouragingmore people to enter the workforce, through offering flexibleworking practices.

Changing sectors within the economy. An increase in thenumbers of retired people will create a bigger market for goodsand services linked to older people (e.g. retirement homes)

Higher savings for pensions may reduce capital investment. Ifsociety is putting a higher % of income into pension funds, itcould reduce the amount of savings available for more productiveinvestment, leading to lower rates of economic growth.

Evaluation of an Ageing Population

A declining birth rate also means a smaller number of youngpeople. This will save the government money because youngpeople require education and pay little, if any, taxes.

It depends on health and mobility of an ageing population. Ifmedical science helps people live longer, but with poor mobility,there will be less chance to work. If people live longer and canremain physically active for longer, the adverse impact will beless.

Immigration could be a potential way to defuse the impact of anageing population because immigration is often from youngerpeople.

Increasing the retirement age is one solution to an ageing

population. But, the effect of a higher retirement age will not be
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felt equally. Those with private savings may be able to still retireearly, those with low income paid jobs are more likely to have tokeep working. Also, the impact of longer working life will be feltmore by manual workers who will find it harder to keep working.

Population demographics have been shifting for the past fewcenturies. This is not the first time we have had shifts in the ageprofile of the population.

A big issue is whether spending commitments are funded orunfunded. Many western governments fund their pension plansthrough pay as you go, rather than saving national insurancecontributions.

Part of the problem is that there is currently a strong incentive forpeople to retire early. The effective marginal tax rate imposed onearnings resulting from delayed retirement has in many systemsbeen in excess of 60 per cent (link)These incentives haveencouraged many to take early retirement. Also, there is often arule prohibiting people working longereven if they wanted to. Ifthese incentives can be changed, we could increase the numberof people working for longer and reduce the dependency burden.

Forecast for Dependency Ratios in Different Countries
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2781842/http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2781842/http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2781842/http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2781842/


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HISTORY AND ORIGIN

With one of the fastest growing economies in theworld,clockedat agrowth rateof 8.3% in 2010, India is fast on its way to

becoming a large and globally importantconsumer economy.TheIndianmiddle classwas estimated to be 250 million people in2007, byMcKinsey & Company.[1]It will reach 600 million by 2030.

According to Deutsche Research the estimates are nearly 300million people for all Middle Class.[2]If current trends continue,Indian per capitapurchasing power paritywill significantlyincrease from 4.7 to 6.1 percent of the world share by 2015.[3]In2006, 22 percent of Indians lived under the poverty line. India aimsto eradicate poverty by 2020.[4]

According to NCAER, India's middle class population to touch 267million in 5 yrs. Further ahead, by 2025-26 the number of middleclass households in India is likely to more than double from the2015-16 levels to 113.8 million households or 547 millionindividuals. .[5]

The standard of living in India shows large disparity. For example,rural areas of India exist with very basic (or even non-existent)medical facilities, while cities boast of world class medicalestablishments. Similarly, the very latest machinery may be used

in some construction projects, but many construction workerswork without mechanisation in most projects.[6]

In 2010, the per capita PPP-adjusted GDP forIndiawasUS$3,608.[7]

Contents

[hide]

1 Poverty

2 Physical infrastructure

3 Regional imbalance

4 See also5 Notes

Poverty[edit]

Main art icle:Poverty in India

A 24.3% of the population earned less than US$1 (PPP, aroundUS$0.25 in nominal terms) a day in 2005, down from 42.1% in1981.[8][9]41.6% of its population is living below the newinternational poverty line of $1.25 (PPP) per day, down from 59.8%in 1981.[8]The World Bank further estimates that a third of the

global poor now reside in India.
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On the other hand, thePlanning Commissionof India uses its owncriteria and has estimated that 27.5% of the population was livingbelow thepoverty linein 20042005, down from 51.3% in 19771978, and 36% in 1993-1994.[10]The source for this was the 61st

round of the National Sample Survey (NSS) and the criterion usedwas monthly per capita consumption expenditure below 356.35for rural areas and 538.60 for urban areas. 75% of the poor are inrural areas, most of them aredaily wagers,self-employedhouseholders and landless labourers.

Although Indian economy has grown steadily over the last twodecades, its growth has been uneven when comparing differentsocial groups, economic groups, geographic regions, and ruraland urban areas.[11]Between 1999 and 2008, the annualisedgrowth rates forGujarat(8.8%),Haryana(8.7%), orDelhi(7.4%)

were much higher than forBihar(5.1%),Uttar Pradesh(4.4%),orMadhya Pradesh(3.5%).[12]Poverty rates in ruralOdisha(43%)and ruralBihar(41%) are higher than in the world's poorestcountries such asMalawi.[13]

Since the early 1950s, successive governments have implementedvarious schemes, underplanning,to alleviate poverty, that havemet with partial success. Programmes like Food forworkand Nat ional Rural Emp loyment Programm ehave attemptedto use the unemployed to generate productive assets and build

rural infrastructure.[14]In August 2005, theIndianparliamentpassed the Rural Emp loym ent Guarantee Bi l l, thelargest programme of this type, in terms of cost and coverage,which promises 100 days of minimum wage employment to everyrural household in 200 ofIndia's 600 districts.The Indiangovernment is planning to bring in more economic reforms whichcan help farmers and unskilled labourers transition intoindustrialized sectors.

Life expectancy in India by States in year 2003[15]


Andhra Pradesh 63.1 61.6 64.1

Assam 57.2 57.1 57.6

Bihar 60.2 60.7 58.9

Gujarat 62.8 61.9 63.7

Haryana 64.5 64.1 65.0

Himachal Pradesh 65.6 65.1 65.8
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Life expectancy in India by States in year 2003[15]


Karnataka 64.0 62.4 65.5

Kerala 73.5 70.6 76.1

Madhya Pradesh 56.4 56.5 56.2

Maharashtra 65.8 64.5 67.0

Odisha 57.7 57.6 57.8

Punjab 68.1 66.9 69.1

Rajastan 60.5 59.8 60.9

Tamil Nadu 64.6 63.7 65.7

Uttar Pradesh 58.4 58.9 57.7

West Bengal 63.4 62.8 64.3

India 61.7 60.8 62.5

Physical infrastructure[edit]

Cheap and environment friendlypublic transportis seen as anecessity for India's crowded and polluted metros.[Pictured here,

is theNew Delhi Metro,operational since 2002 and seen as amodel for other metros.

Since independence, India has allocated nearly half of the totaloutlay of the five-year plans forinfrastructuraldevelopment. Muchof the total outlay was spent on large projects in the area ofirrigation, energy, transport, communications and socialoverheads. Development of infrastructure was completely in thehands of the public sector and was plagued by corruption,bureaucratic inefficiencies, urban-bias and an inability to scale

investment.[16]

Calcutta city was the first city in India to boast of ametro-system.Today the calcutta metro is considered among the
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world's best in terms of service and infrastructure. India's lowspending on power, construction, transportation,telecommunications andreal estate,at $31 billion or 6% of GDP in2002 has prevented India from sustaining a growth rate of around

8%. This has prompted the government to partially open upinfrastructure to the private sector allowing foreigninvestment.[14][17][18]India holds second position in the world inroadways' construction.[19]

As of 31 December 2005, there were an estimated 835,000broadband lines in India.[20]Low tele-density is the major hurdlefor slow pickup in broadband services. Over 76% of thebroadband lines were via DSL and the rest via cable modems.

A 2007 study by the Asian Development Bank showed that in 20cities the average duration of water supply was only 4.3 hours perday. No city had a continuous water supply. The longest durationof supply was 12 hours per day inChandigarh,and the lowest was9 hours per day inRajkot.[21]

Regional imbalance[edit]

Main art icle:Lis t of regions o f India

One of the critical problems facing India's economy is the sharpand growing regional variations among India's different states andterritories in terms of per capita income, poverty, availability ofinfrastructure and socio-economic development. For instance, the

difference in growth rate between theforward and backwardstateswas 0.3% (5.2% & 4.9%) during 198081 to 199091, but hadgrown to 3.3% (6.3% & 3.0%) during 199091 to 199798.[22]PerCapita Income in India varies drastically. As of 2010, New Delhihad a Per Capita Income of $ 3,020 whereas Bihar's Per CapitaIncome was at a paltry $ 445.

The five-year plans have attempted to reduce regional disparitiesby encouraging industrial development in the interior regions, butindustries still tend to concentrate around urban areas and port

cities. Even the industrial townships in the interiors,Bhilaiforinstance, resulted in very little development in the surroundingareas.[23]After liberalisation, the disparities have grown despitethe efforts of the union government in reducing them. Part of thereason being that manufacturing and services and not agricultureare the engines of growth. The more advanced states are betterplaced to benefit from them, with infrastructure like welldeveloped ports, urbanisation and an educated and skilledworkforce which attract manufacturing and service sectors. The

union and state governments of backward regions are trying toreduce the disparities by offering tax holidays, cheap land, etc.,
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and focusing more on sectors like tourism, which although beinggeographically and historically determined, can become a sourceof growth and is faster to develop than other sectors.[24][25]

TheUniversity of Mumbai,established 1857, is one of the three

oldest modernstate universitiesin India.Brahmin gurus imparted education by means of donations andnot through charging fees or funds from the students or theirguardians. Later, temples were also centres of education.Religious education was compulsory but secular subjects werealso taught. Students were required to be brahmacharis orcelibates. The knowledge in these orders was often related to thetasks a section of the society had to perform. The priest class,theBrahmins,were imparted knowledge of religion, philosophy,

and other ancillary branches while the warrior class,theKshat r iya,were trained in the various aspects of warfare. Thebusiness class, theVaishya,were taught their trade and theworking class of theShudraswas generally deprived ofeducational advantages. The book of laws, theManusmri t i,and thetreatise on statecraft theArthashast rawere among the influentialworks of this era which reflect the outlook and understanding ofthe world at the time.

Secular institutions cropped up along with Hindu temples, muttsandBuddhistmonasteries. These institutions imparted practicaleducation, e.g. medicine. A number of urban learning centresbecame increasingly visible from the period between 500 BCE to400 CE.The important urban centres of learning wereTaxila(inmodern dayPakistan)andNalandain Bihar, among others. Theseinstitutions systematically imparted knowledge and attracted anumber of foreign students to study topics such as Vedic andBuddhist literature, logic, grammar, etc. Chanakya, a Brahminteacher, was among the most famous teachers of Takshasila,associated with founding of Mauryan Empire.
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income credits) and reducing poverty. (For more on thegovernment use of taxes and spending, check outWhat TheNat ional Debt Means To Yo u.)

B. .TaxesWhen considering taxes, it is important to understand thedifference between marginal and average taxrates.Marginal ratesrefer to the tax rate in effect on the lastdollar earned, while the average tax rate is the product oftotal taxes paid divided by total taxable income.

There are three major types of taxes in the U.S. taxsystem.Progressive taxesresult in higher average rates asincome increases; personal income tax is a common

example.Regressive taxesresult in lower average tax ratesas income falls; sales tax is commonly used as anexample.Proportional taxesmaintain a constant rateirrespective of income. (To learn how taxes started in theUS, seeThe Histo ry Of Taxes In The U.S.)

Implications of Taxation and Government SpendingBroadly speaking,fiscal policyis the use of taxation andgovernment spending for the purposes of macroeconomic

goals. Fiscal policy can beexpansionary,that is aimed atgrowing the economy and increasing employment,orcontractionary(aimed at slowing the growth of theeconomy). Expansionary fiscal policy features increasedgovernment spending and/or decreases in the tax rates,while contractionary policy is the opposite (lowergovernment spending and/or higher tax rates).

Government economic actions are not withoutconsequences, however.

When governments increase their spending, crowding outcan occurgovernment spending reduces available fundsand increases the cost of capital, leading many businessesto abandon expansion projects. Likewise, when agovernment spends in excess of receipts (a deficit) andmust borrow funds to finance that deficit, crowding out canoccur.

Likewise, taxation causes problems of its own. Taxes shiftthe equilibrium for goods and services away from its
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optimal level, therefore reducingconsumerandproducersurpluses.This reduction is called the deadweight loss andit basically represents the net benefit that is beingsacrificed by society because of the presence of the tax.

(For more on government spending, readDo Tax CutsSt imulate The Econom y?)

Tariffsare levies charged by a government on importedgoods. Tariffs are not as significant to economies now as inyears past; prior to the implementation of personal incometaxes, tariffs were a major source of U.S. governmentrevenue. There are principally two kinds of tariffs. Revenuetariffs are taxes levied on goods that are not produceddomestically, while protective tariffs are levied on goods

that are produced domestically.

As tariffs are essentially just a type of tax, there isdeadweight loss here as wellconsumers pay higherprices and consume less, and lose some of their consumersurplus in the process. At the same time, domesticproducers increase their output.

There are definite trade-offs between government spending

and taxing. Dollar for dollar, government spending hasmore impact than reducing taxes. This occurs becauseconsumers almost never have a marginal propensity toconsume of "1" and almost always withhold a portion ofany tax cut and save it. (To learn more about tariffs, checkoutThe Basics Of Tari f fs And Trade Barr iers.)

C. Debt and DeficitsFrom a macroeconomic perspective, government debt canbe thought of as future spending brought forth into presenttime. Governments incur debt when their spending desiresexceed their receipts from taxes and other income sources,and that debt is ultimately repaid through a levy of taxes inexcess of current spending.

Government debt can become problematic through both acrowding-out effect and through thedeadweight lossoffuture taxation. When governments access debt markets,they effectively crowd out other would-be borrowers (like

corporations) and force them to pay higher interest rates to
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attract willing creditors. With the highercost of capitalthatresults, corporations abandon or reject expansion plansthat would otherwise have a positive expected economicreturn.

Governments have virtually no means of repaying debtother than through future taxation. While there is amultiplier effect to government spending, high levels ofgovernment debt essentially saddle future generations withthe deadweight loss of higher taxation with no offsettingmultiplier to the GDP from government spending (as thatspending occurred years early.
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NATURE

ACKGROUNDAlthough agriculture contributes only 21% of Indias GDP, itsimportance in the countrys economic, social, and political fabric

goes well beyond this indicator. The rural areas are still home tosome 72 percent of the Indias 1.1 billion people, a large numberof whom are poor. Most of the rural poor depend on rain-fedagriculture and fragile forests for their livelihoods.The sharp rise in foodgrain production during Indias GreenRevolution of the 1970s enabled the country to achieve self-sufficiency in foodgrains and stave off the threat of famine.Agricultural intensification in the 1970s to 1980s saw an increaseddemand for rural labor that raised rural wages and, together withdeclining food prices, reduced rural poverty.Sustained, although much slower, agricultural growth in the 1990s

reduced rural poverty to 26.3 percent by 1999/00. Since then,however, the slowdown in agricultural growth has become amajor cause for concern. Indias rice yields are one-thirdof Chinas and about half of those inVietnam and Indonesia. Withthe exception of sugarcane, potato and tea, the same is true formost other agricultural commodities.The Government of India places high priority on reducing povertyby raising agricultural productivity. However, bold action frompolicymakers will be required to shift away from the existingsubsidy-based regime that is no longer sustainable, to build asolid foundation for a highly productive, internationallycompetitive, and diversified agricultural sector.ISSUES AND CHALLENGESSlow Down in Agricultural and Rural Non-Farm Growth: Both thepoorest as well as the more prosperous Green Revolution statesof Punjab, Haryana and Uttar Pradesh have recently witnessed aslow-down in agricultural growth. Some of the factors hamperingthe revival of growth are:

Poor composition of public expenditures: Public spendingon agricultural subsidies is crowding out productivity-enhancing investments such as agricultural research and

extension, as well as investments in rural infrastructure,and the health and education of the rural people. In1999/2000, agricultural subsidies amounted to 3 percent ofGDP and were over 7 times the public investments in thesector.

Over-regulation of domestic agricultural trade: Whileeconomic and trade reforms in the 1990s helped to improvethe incentive framework, over-regulation of domestic tradehas increased costs, price risks and uncertainty,undermining the sectors competitiveness.

Government interventions in labor, land, and creditmarkets: More rapid growth of the rural non-farm sector isconstrained by government interventions in factor


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markets -- labor, land, and credit -- and in output markets,such as the small-scale reservation of enterprises.

Inadequate infrastructure and services in rural areas.Weak Framework for Sustainable Water Management andIrrigation:

Inequitable allocation of water: Many states lack theincentives, policy, regulatory, and institutional frameworkfor the efficient, sustainable, and equitable allocation ofwater.

Deteriorating irrigation infrastructure: Public spending inirrigation is spread over many uncompleted projects. Inaddition, existing infrastructure has rapidly deteriorated asoperations and maintenance is given lower priority.

Inadequate Access to Land and Finance: Stringent land regulations discourage rural

investments: While land distribution has become lessskewed, land policy and regulations to increase security oftenure (including restrictions or bans on renting land orconverting it to other uses) have had the unintended effectof reducing access by the landless and discouraging ruralinvestments.

Computerization of land records has brought to lightinstitutional weaknesses: State government initiativesto computerize land records have reduced transactioncosts and increased transparency, but also brought to lightinstitutional weaknesses.

Rural poor have little access to credit: While India has awide network of rural finance institutions, many of the ruralpoor remain excluded, due to inefficiencies in the formalfinance institutions, the weak regulatory framework, hightransaction costs, and risks associated with lending toagriculture.

Weak Natural Resources Management: One quarter of Indiaspopulation depends on forests for at least part of their livelihoods.

A purely conservation approach to forests is

ineffective: Experience in India shows that a purelyconservation approach to natural resources managementdoes not work effectively and does little to reduce poverty.

Weak resource rights for forest communities: The forestsector is also faced with weak resource rights andeconomic incentives for communities, an inefficient legalframework and participatory management, and poor accessto markets.

Weak delivery of basic services in rural areas: Low bureaucratic accountability and inefficient use of

public funds: Despite large expenditures in ruraldevelopment, a highly centralized bureaucracy with lowaccountability and inefficient use of public funds limit their


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impact on poverty. In 1992, India amended its Constitutionto create three tiers of democratically elected rural localgovernments bringing governance down to the villages.However, the transfer of authority, funds, and functionariesto these local bodies is progressing slowly, in part due to

political vested interests. The poor are not empowered tocontribute to shaping public programs or to hold localgovernments accountable.


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ADVANTAGES1. Higher living standardsi.e. an increase in real income per

head of population2. Employmenteffects - growth stimulates more jobs to help

new people as they enter the labour marketIn the long term ,an econom y grow s because techno logy gets better and w e get

better at produ cing thing s. In the short term, grow th is an

indication that the economy is producing as much as i t could be

and resourc es are not being n eedlessly w asted. With a grow ing

pop ulat ion and ris ing wages, the econom y has to grow to create

suff ic ient new job s.Professor J on Von Reenan, LSEFiscaldividendsustained GDP growth boosts tax revenues andprovides the government with extra money to improvepublic services such as education and healthcare. It makesit easier for a government to reduce the size of a budgetdeficit

1. Investment - the accelerator effect - rising demand andoutput encourages investmentthis sustains growth byincreasing long run aggregate supply

2. Consumer and business confidence - growth has a positiveimpact on businessprofits& confidence. A strongereconomy will help to persuade consumers that the time isright to make major purchases

3. Growth can also help protect the environment such as low-carbon investment, innovation andresearch anddevelopment, resulting in more efficient production

processes to reduce costs.Ethicalconsumerism and corporate social responsibility hasbecome important in recent years.
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Virtuous circle of growth


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DISADVANTAGESThere are economic and social costs of a fast-expandingeconomy.Inflation risk: If demand races ahead of aggregate supply thescene is set for rising prices. Many fast growing developingcountries have seen high rates of inflation in recent years, a goodexample is IndiaWorking hourssometimes there are fears that a fast-growingeconomy places increasing demands on the hours that peoplework and can upset work-life balanceStructural changealthough a growing economy will be creatingmore jobs, it also leads to structural changes in the pattern ofjobs. Some industries will be in decline whilst others will beexpanding. Structural unemployment can rise even though it

appears that a country is growingthe labour force needs to beoccupationally mobile.Environmentalconcerns:

Fast growth can create negative externalities for examplehigher levels of noise pollution and lower air quality arisingfrom air pollution and road congestion

Increased consumption of de-merit goods which damagessocial welfare

It can leads to a huge increase in household and industrialwaste which again creates external costs for society

Growth that leads to environmental damage may lowerthe sustainable rate of growth. Examples include the destructionof rain forests through deforestation, the over-exploitation of fishstocksand loss of natural habitat and bio-diversity createdthrough the construction of new roads, hotels, retail malls andindustrial estates.Deforestation releases more CO2 into the atmosphere each yearthan all of the world's planes, trains and automobiles put together.Globally, an area almost the size of England and Wales is cutdown every year releasing billions of tons of CO2 into theatmosphere.

Under this programme top priority has been assigned to the

people living below poverty line (BPL). The Government has

renewed its commitment to improve the standard of living

especially of the poors by assuring employment, ameliorating

poverty, increasing food grain production and reducing income

disparities
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ROLELeakageThe direct income for an area is the amount of tourist expenditurethat remains locally after taxes, profits, and wages are paidoutside the area and after imports are purchased; thesesubtracted amounts are called leakage. In most all-inclusivepackage tours, about 80% of travelers' expenditures go to theairlines, hotels and other international companies (who often havetheir headquarters in the travelers' home countries), and not tolocal businesses or workers. In addition, significant amounts ofincome actually retained at destination level can leave againthrough leakage.

A stu dy o f tourism ' leakage' in Thai land est imated that 70% of all

mon ey spent by tour is ts ended up leav ing Thai land (v ia fore ign-

owned tour o perators, air l ines, hotels, imp orted drink s and food ,

etc.) . Est imates for other Third Wo rld co untr ies rang e from 80% inthe Caribbean to 40% in India.Source:Sustainable Living

Of each US$ 100 spent on a vacation tour by a tourist from adeveloped country, only around US$ 5 actually stays in adeveloping-country destination's economy. The figure belowshows how the leakage happens.

There are two main ways that leakage occurs:Import leakageThis commonly occurs when tourists demand standards of

equipment, food, and other products that the host country cannotsupply. Especially in less-developed countries, food and drinksmust often be imported, since local products are not up to thehotel's (i.e. tourist's) standards or the country simply doesn't havea supplying industry. Much of the income from tourismexpenditures leaves the country again to pay for these imports.The average import-related leakage for most developing countriestoday is between 40% and 50% of gross tourism earnings forsmall economies and between 10% and 20% for most advancedand diversified economies, according toUNCTAD.

Even in developed regions , local prod ucers are of ten un able to

supply the tour ism indust ry appropr iately even i f good wi l l is
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present : the 64-room ho tel "Kaiser im Tirol" in Au str ia, an award-

winn ing leader in sustainable pract ices, canno t f ind organic food

suppl iers in the local farming networks in the appropr iate

quant i ty , qual i ty and rel iabi l i ty , as product ion cycles and

processes are not compat ible with i ts needs.

Source: Austrian Preparatory Conference for the InternationalYear of Ecotourism, September 2001

Export leakageMultinational corporations and large foreign businesses have asubstantial share in the import leakage. Often, especially in poordeveloping destinations, they are the only ones that possess thenecessary capital to invest in the construction of tourisminfrastructure and facilities. As a consequence of this, an exportleakage arises when overseas investors who finance the resortsand hotels take their profits back to their country of origin.

A 1996 UN report evaluat ing the contr ibut ion of tourism tonat ional income, gross levels of incomes or gross fore ign

exchange, found that net earnings o f tourism , af ter deduc t ions

were made for al l necessary foreign exchang e expenditures, were

much more s igni f icant for the indust ry . This repor t found

sign i f icant leakage associated with: (a) imp orts o f mater ials and

equipment for const ruc t ion; (b) imports of consumer goods,

part icular ly food and d rinks ; (c) repatr iat ion o f prof i ts earned by

foreign inv estors; (d) overseas prom ot ional expend itures and (e)

amort izat ion of external debt incurred in the development of

hotels and resorts. The impact of the leakage varied great ly

across coun t r ies , depending o n the st ruc ture of the econom y andthe tour ism indu st ry . From the data presented in th is study on the

Caribbean, St. Lucia had a foreign exc hange leakage rate of 56%

from its gross tourism receipts, Aruba had 41%, Ant igua and

Barbuda 25% and Jamaica 40%.

Source:Caribbean Voice

Enclave tourismLocal businesses often see their chances to earn income fromtourists severely reduced by the creation of "all-inclusive"vacation packages. When tourists remain for their entire stay at

the same cruise ship or resort, which provides everything theyneed and where they will make all their expenditures, not muchopportunity is left for local people to profit from tourism.The Organization of American States (OAS) carried out a surveyof Jamaica's tourist industry that looked at the role of the all-inclusives compared to other types of accommodation. It foundthat 'All-inclusive hotels generate the largest amount of revenuebut their impact on the economy is smaller per dollar of revenuethan other accommodation subsectors.'It also concluded that all-inclusives imported more, and employedfewer people per dollar of revenue than other hotels. This

information confirms the concern of those who have argued that
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all-inclusives have a smaller trickle-down effect on localeconomies. (Source:Tourism Concern)The cruise ship industry provides another example of economicenclave tourism. Non-river cruises carried some 8.7 millioninternational passengers in 1999. On many ships, especially in the

Caribbean (the world's most popular cruise destination with 44.5%of cruise passengers), guests are encouraged to spend most oftheir time and money on board, and opportunities to spend insome ports are closely managed and restricted.Other negative impactsInfrastructure costTourism development can cost the local government and localtaxpayers a great deal of money. Developers may want thegovernment to improve the airport, roads and other infrastructure,and possibly to provide tax breaks and other financialadvantages, which are costly activities for the government. Publicresources spent on subsidized infrastructure or tax breaks mayreduce government investment in other critical areas such aseducation and health.Increase in pricesIncreasing demand for basic services and goods from tourists willoften cause price hikes that negatively affect local residentswhose income does not increase proportionately. ASanFrancisco State University study of Belizefound that, as aconsequence of tourism development, the prices for localsincreased by 8%.

Tourism development and the related rise in real estate demandmay dramatically increase building costs and land values. Notonly does this make it more difficult for local people, especially indeveloping countries, to meet their basic daily needs, it can alsoresult in a dominance by outsiders in land markets and in-migration that erodes economic opportunities for the locals,eventually disempowering residents. In Costa Rica, close to 65%of the hotels belong to foreigners. Long-term tourists living insecond homes, and the so-called amenity migrants (wealthy orretired people and liberal professionals moving to attractivedestinations in order to enjoy the atmosphere and peaceful

rhythms of life) cause price hikes in their new homes if theirnumbers attain a certain critical mass.Economic dependence of the local community on tourismDiversification in an economy is a sign of health, however if acountry or region becomes dependent for its economic survivalupon one industry, it can put major stress upon this industry aswell as the people involved to perform well. Many countries,especially developing countries with little ability to explore otherresources, have embraced tourism as a way to boost theeconomy.

In The Gambia, for instance, 30% of the workforce dependsdirectly or indirectly on tourism. In small island developing states,
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percentages can range from 83% in the Maldives to 21% in theSeychelles and 34% in Jamaica, according to the WTO. Over-reliance on tourism, especially mass tourism, carries significantrisks to tourism-dependent economies. Economic recession andthe impacts of natural disasters such as tropical storms and

cyclones as well as changing tourism patterns can have adevastating effect on the local tourism sector.

Malta has on ly 380,000 residents, bu t received 1.2 mil l ion to urists

in 1999. As 25% o f GDP (and ind irect ly 40% ), tourism generated

mo re than $650 mil l ion in foreign exch ange earnings. Malta's hig h

dependence on tour ism and a l imi ted numb er of expor t products

makes its trade performance vu lnerable to shif ts in in ternat ional

demand.Source:Washington Times

Other industry impacts affecting tourism

Economic crises, like the Asian crisis that hit Thailand, Malaysiaand Indonesia a few years ago, can be devastating to inboundtourism flows. The financial turmoil triggered a sharp fall intourism flows to affected countries during 1997 and 1998. In thePhilippines, the crisis and the temporary closure of PhilippineAirlines affected inbound arrivals significantly as there was adecline of almost 3.3% in 1998.Source:Hotel-online
http://www.internationalspecialreports.com/archives/00/malta2000/index.htmlhttp://www.internationalspecialreports.com/archives/00/malta2000/index.htmlhttp://www.internationalspecialreports.com/archives/00/malta2000/index.htmlhttp://www.hotel-online.com/Neo/News/PressReleases1999_2nd/May99_NTOsPATA.htmlhttp://www.hotel-online.com/Neo/News/PressReleases1999_2nd/May99_NTOsPATA.htmlhttp://www.hotel-online.com/Neo/News/PressReleases1999_2nd/May99_NTOsPATA.htmlhttp://www.hotel-online.com/Neo/News/PressReleases1999_2nd/May99_NTOsPATA.htmlhttp://www.internationalspecialreports.com/archives/00/malta2000/index.html


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OBJECTIVE

1. Removal of Poverty:-For eradication of poverty assured

employment at the local level under the NREGA will be

provided by strengthening and involving the different levels

of PRIs and cooperative institution. It is aimed to provide

shelter to shelterless households, necessary agricultural

infrastructure support and Kisan Credit Cards to farmers

and cover all BPL and PTGs under Jan Shree Bima Scheme.

2. Quality Improvement in Living Standard:-Emphasis is laid

on important programmes like potable drinking water in

rural areas, health services, immunization, two children

planned family, extension of mother-child welfare centres,

development of slums by providing facilities envisaged in

Seven Point Charter. plantation, solid and liquid waste

management etc.

3. Social Programmes:-Proper justice to the people belonging

to Scheduled Castes and Scheduled Tribes, Jan Shree Bima

Coverage to each PTG family, ensure non transfer of land

belonging to STs, participation of women in Panchayati

Raj/Local Self Bodies, youth welfare, rural sports, NSS

camping, development of cultural based programmes etc.have been included in this category. Nutrition to children

upto 6 years of age, pregnant women and lacting mothers is

being provided through Aanganwadis, primary education

under Education for All is also being ensured.

4. Welfare Programmes:-Simplification of Govt. procedural

rules and make the administration more responsive and

accountable, keep vigilance on the implementation of

schemes at different levels and quick redressal of publicgrievances is the aim of this program. To make available

information pertaining schemes under E-Governance and

ensure coverage of other Backwards and Minority

Communities is also aimed at.

5. Sanitation Programme:-Under this, individual and

community latrines in rural areas, urban based

infrastructural facilities under JNNURM in urban areas,

solid and liquid based management and siver and lakedevelopment programmes, are being implemented.


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6. Scope of the Programme:-The Programme envisages

extension of facilities like education, health, sanitation,

cultural development. In short, this is a further

improvement over 20PP, 1986 thus making it more balanced

for inclusive development justifying the goal of

Development with Social Justice.


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CASE STUDYPopulation growth has long been a concern of the government,and India has a lengthy history of explicit population policy. In the1950s, the government began, in a modest way, one of the earliestnational, government-sponsored family planning efforts in the

developing world. The annual population growth rate in theprevious decade (1941 to 1951) had been below 1.3 percent, andgovernment planners optimistically believed that the populationwould continue to grow at roughly the same rate.Implicitly, the government believed that India could repeat theexperience of the developed nations where industrialization and arise in the standard of living had been accompanied by a drop inthe population growth rate. In the 1950s, existing hospitals andhealth care facilities made birth control information available, butthere was no aggressive effort to encourage the use ofcontraceptives and limitation of family size. By the late 1960s,many policy makers believed that the high rate of populationgrowth was the greatest obstacle to economic development. Thegovernment began a massive program to lower the birth rate fromforty-one per 1,000 to a target of twenty to twenty-five per 1,000 bythe mid-1970s. The National Population Policy adopted in 1976reflected the growing consensus among policy makers that familyplanning would enjoy only limited success unless it was part ofan integrated program aimed at improving the general welfare ofthe population. The policy makers assumed that excessive familysize was part and parcel of poverty and had to be dealt with as

integral to a general development strategy. Education about thepopulation problem became part of school curriculum under theFifth Five-Year Plan (FY 1974-78). Cases of government-enforcedsterilization made many question the propriety of state-sponsoredbirth control measures, however.During the 1980s, an increased number of family planningprograms were implemented through the state governments withfinancial assistance from the central government. In rural area

Impact of Goverment Expenditure on Standard of Living of People in India

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