Underdeveloped nations are keen on rapid economic development which requires huge expenditure to be incurred in the various sectors of the economy.
The private sector is either unable to find and invest these huge amounts or it is unwilling because the return from such investments may be uncertain or long delayed.
Hence, economic development has to depend almost entirely on public expenditure. Public expenditure, therefore, plays capital role in economic development of an under-developed economy.
Public expenditure promotes economic development in the following ways:
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Social and Economic Overheads:
Economic development is handicapped kin underdeveloped countries on account of the lack of the necessary infrastructure. Economic overheads like the roads and railways, irrigation and power projects are essential for speeding-up economic development. Social overheads like hospitals, schools, and colleges and technical institutions too are essential. Money for these things cannot come out of private sources. Public expenditure has to build up the economic and social overheads.
Balanced Regional Growth:
It is considered desirable to bring about a balanced regional growth. Special attention has to be paid to the development of backward areas and underdeveloped regions. This requires huge amounts for which reliance has to be placed on public expenditure.
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Development of Agriculture and Industry:
Economic development is regarded synonymous with industrial development but agricultural development provides the base and has to be given top priority. Government has to incur lot of expenditure in the agricultural sector, e.g., on irrigation and power, seed farms, fertilizer factories, warehouses, etc., and in the industrial sector by setting up public enterprises like the steel plants, heavy electrical, heavy engineering, machine-making factories, etc. All these enterprises are calculated to promote economic development.
Exploitation and Development of Mineral Resources:
Minerals provide a base for further economic development. The government has to undertake schemes of exploration and development of essential minerals, e.g., coal and oil. Public expenditure has to play its role here too.
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Subsidies and Grants:
The Central Government gives grants to State governments and the State governments to local authorities to induce them to incur some desirable expenditure. Subsidies have also to be given to encourage the production of certain goods especially for export to earn much-needed foreign exchange.