State governments now bear nearly 90% of India's social sector spending, a sharp increase from earlier decades, as the central government's share has declined significantly. This shift is highlighted in a recent report by the Azim Premji University, which analysed fiscal trends from 2003-04 to 2021-22.
Centre's Share Drops by Half
The report reveals that the central government's contribution to social sector expenditure fell from about 20% in 2003-04 to just 10% by 2021-22. In contrast, state governments increased their share from 80% to 90% over the same period. This means states are now responsible for an overwhelming majority of spending on essential services like health, education, and social welfare.
According to the study, total social sector spending by both Centre and states rose from 5.6% of GDP in 2003-04 to 7.6% in 2021-22. However, the burden has increasingly shifted to states, which have less fiscal autonomy and rely heavily on central transfers.
Impact on Health and Education
The report notes that states' share of health spending increased from 69% in 2003-04 to 81% in 2021-22, while education spending by states rose from 85% to 90%. This trend raises concerns about regional inequality, as wealthier states can spend more on social services than poorer ones.
"The central government's declining share in social sector spending has implications for equity and quality of services across states," said a researcher from Azim Premji University. "States with lower fiscal capacity may struggle to maintain adequate spending on health and education."
Fiscal Constraints on States
The study points out that states' own tax revenues have not kept pace with their growing expenditure responsibilities. The share of states' own tax revenue in GDP remained stagnant at around 6-7% over the period, while central transfers as a share of GDP also declined. This has forced states to rely more on borrowing or cut spending in other areas.
"The fiscal space for states is shrinking, even as they take on more social sector responsibilities," the report states. "This could lead to underinvestment in critical areas unless the Centre reverses the trend."
Need for Greater Central Support
The report recommends that the central government increase its share of social sector spending, particularly in health and education, to ensure minimum standards across states. It also calls for a review of the tax devolution formula to provide more resources to states with higher needs.
"Without corrective measures, the gap between states in social outcomes may widen," the report warns. "The Centre must step up its role in financing these essential services."
The findings come amid ongoing debates about fiscal federalism in India, with many states demanding a larger share of central taxes and greater autonomy in spending decisions.
