Since the Global Recession which originated in US and, had its impact on the countries across globe including India, there is a growing tendency of the governments to cut back public expenditure. This phenomenon is referred to as “shrinking state”. The present paper discusses the trends in the public expenditure on education at various educational levels. It tries to determine the link between expenditure on education by the States and Centre and their respective GDP. The findings of the paper suggests that there is a negative correlation between the expenditure on education by the State and the respective state gross domestic product (SGDP) at nominal price whereas in case of gross domestic product (GDP) and total expenditure on education in India there is no such relationship. Moreover, the total budgetary provision on expenditure on education is declining although the total budgetary outlay of the Union Government is increasing in absolute terms.