I. INTRODUCTION
I
nvestment in generating human capital is
the engine of economic growth for which
expenditure on health, education, social
security, and welfare is the cornerstone of
economic policy. Social sector development
sets the foundation for raising income and
employment opportunities, productivity
growth, technological advancement and hence,
helps to enhance the quality of life of people.
Development of the social sector is one of the
most important components of economic
grow th. This economic thought was
engendered by Hobbes (1651) who argued for
the vitality of government spending on public
goods that is infrastructure, defence, and
education for economic development. This
thought was improved by Wagner (1883) and
Keynes (1936). Wagner (1883) proposed that
public expenditure is a function of national
output or GDP, and the fast-growing states are
expected to spend more on the social sector.
Wagner's law states that national income
causes public expenditures. Keynes (1936)
emphasized that government spending could
enhance economic growth and help to
converge economic stability in the economy.
But at the same time, very high government
expenditures can crowd out private investment
that may hamper the process of economic
growth. Schultz (1961) considers education a
cornerstone of economic growth to the extent
that it enhances productivity, innovation, and
output. Peacock and Wiseman (1961), in their
analysis of the growth of public expenditure in
the UK, concluded that Wagner's hypothesis
was valid. Musgrave (1969) linked public
expenditure to various stages of economic
growth and development. In the early stages of
economic growth and development, the public
s e c to r i s e x p e c te d to p rov i d e s o c i a l
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infrastructure overheads that include roads,
education, health, and sanitation to enhance
productivity and propel the economy to a
higher level of growth. Romer (1986) thought
that investment in health and education
facilitates the development of the human
capital that every country needs to achieve its
economic growth and development aspirations.
Human capital refers to the "knowledge, skills,
competencies, and attributes embodied in
individuals that facilitate the creation of
personal, social, and economic well-being." As
per the growth model of Lucas (1988), human
capital is regarded as the “engine of growth,?
and the social returns on the expenditure on
such sectors far exceed private returns. The
argument in favor of public expenditure in
provisioning of public social goods viz.
education and training, health and family
welfare, water supply, and sanitation is the
achievement of social optimum. Sen (1989)
established that the social sector development
had been considered as an essent ial
prerequisite for sustained human development
and economic growth of an economy where
human capabilities provide a firm basis for
evaluating living standard and quality of life.
Hence, careful attention to the enhancement of
freedoms and capabilities would help in the
process of economic development. Barro
(1990), in his endogenous growth theory,
concluded that an increase in government
spending on development activities fosters
growth, whereas spending on non-productive
activities impedes growth. Barro was the first
to include government expenditure as an
endogenous variable to define growth. Mankiw
et al. (1992) find that education plays an
important role in the process of innovation and
human capital accumulation, which helps to
increase labor productivity and hence boost
economic growth. Endogenous growth theory
Economic Challenger// ISSN 0975-1351/ Issue 84, July-Sept. 2019