Centre’s Health Spending Paradox: Rising State Outlays, Shrinking Union Commitment

Why in News ?

Recent data show that while States have steadily increased health expenditure, the Union government’s health spending as a share of GDP has declined in the post-pandemic period. This divergence has raised concerns about the Centre’s fiscal prioritisation of health, especially in the context of national commitments to strengthen public healthcare and reduce out-of-pocket expenditure.

Significance of the Issue

• Public Health Outcomes: Central investment plays a critical role in financing national programmes, disease control, and health infrastructure. Declining Union spending risks weakening frontline healthcare delivery.
• Fiscal Federalism: Although health is primarily a State subject, States depend heavily on Union transfers. Reduced Central spending can strain State finances and widen regional disparities.
• Equity and Affordability: Lower public spending increases households’ out-of-pocket expenditure, exacerbating inequality and pushing vulnerable populations into poverty.
• Global Commitments: Insufficient investment undermines India’s progress towards Universal Health Coverage (UHC) and the Sustainable Development Goals (SDGs) related to health.

Key Components and Takeaways

1. Background: Health Financing Commitments in India

• Policy Commitments: The National Health Policy (NHP), 2017 committed to increasing total public health expenditure from 1.15% of GDP to 2.5% by 2025.
• Role of the Union Government: A key pillar of this commitment was enhancing the Union government’s contribution to 40% of total public health spending.
• Shortfall in Achievement: As of 2025–26, India remains significantly below these targets, raising concerns about whether health has been accorded adequate fiscal priority in national budgeting.

2. Trends in Public Health Spending in India

• Among the Lowest Globally: India’s public health expenditure remains among the lowest in the world.
• International Comparisons: Countries such as Bhutan, Sri Lanka, Thailand, and Malaysia spend several times more per capita on health. Even among BRICS nations, India’s per capita public health spending is markedly lower.
• Pandemic-Driven Spike: During the COVID-19 pandemic, public health spending as a share of GDP rose temporarily.
• State-Led Increase: However, this increase was driven largely by State governments, not by sustained expansion in Union government allocations.

3. Union Government Health Spending: Declining Priority

RBI Data Trends: According to Reserve Bank of India data, the Union government’s health expenditure declined from:

• 0.37% of GDP in 2020–21
  to
• 0.29% in 2025–26 (Budget Estimates).

Real-Term Decline: In real terms, the 2025–26 health allocation is 4.7% lower than actual spending in 2020–21 after adjusting for inflation.

Falling Budget Share: The share of health in the total Union Budget has also declined from 2.26% to 2.05%, signalling relative de-prioritisation.

Post-Pandemic Retrenchment: This indicates that the modest prioritisation of health during the pandemic has not been sustained in subsequent fiscal years.

4. State Governments Driving Health Expenditure Growth

• Consistent Increase by States: States and Union Territories have increased health spending steadily since 2017–18.
• GDP Share Rise: State health expenditure rose from 0.67% of GDP (2017–18) to 1.1% (2025–26).
• Budget Share Growth: The share of health in State budgets increased from 5% to 5.6%.
• Structural Imbalance: Despite health being a State subject, States rely heavily on Union transfers. Reduced Central spending directly affects frontline healthcare delivery, particularly in poorer States with limited fiscal capacity.

5. Health and Education Cess: Limited Impact on Health Budgets

• Purpose of the Cess: The Health and Education Cess (HEC), introduced in 2018–19 at 4% of taxable income, was intended to augment health spending.
• Utilisation Gap: In practice, cess collections have largely been absorbed into general revenues rather than earmarked for health.
• FY 2023–24 Data: Only about one-fourth of ₹71,180 crore collected through HEC was allocated to health.
• Real-Term Decline Excluding Cess: Excluding cess contributions, the Union government’s health spending declined by 22.5% in real terms between 2020–21 and 2023–24.

6. Cuts in Centrally Sponsored Health Schemes

Declining Transfers to States: The share of Union spending transferred to States through Centrally Sponsored Schemes (CSS) fell from:

• 75.9% in 2014–15
  to
• about 43% in 2024–25.

Impact on National Health Mission (NHM): Key schemes such as the National Health Mission, central to strengthening rural and urban health infrastructure since 2005, have seen stagnation or real-term funding declines.

Real-Term Reduction: During the second tenure of the NDA government, NHM spending declined by 5.5% annually in real terms, weakening public health system capacity.

7. Implications for Public Health Outcomes

• Rising Out-of-Pocket Expenditure: Lower public investment increases household spending on health, raising the risk of medical impoverishment.
• Strain on State Finances: States—especially poorer ones—face greater fiscal pressure to fund health services without adequate Central support.
• Weakened Preventive and Primary Care: Cuts in centrally sponsored schemes undermine primary healthcare, disease prevention, and early intervention systems.
• Reduced Emergency Preparedness: Lower sustained investment weakens readiness for future health crises and pandemics.
• Threat to UHC and SDGs: These trends undermine India’s ability to achieve Universal Health Coverage and meet SDG targets related to health and well-being.

Challenges and Way Forward

• Reaffirm Fiscal Commitment to Health: Align Union health spending with NHP targets by steadily increasing allocations towards 2.5% of GDP.
• Ring-Fence Health Cess Funds: Ensure transparent and mandatory allocation of Health and Education Cess revenues to the health sector. 
• Strengthen Centrally Sponsored Schemes: Restore real-term funding for NHM and other flagship programmes critical to primary and preventive healthcare.
• Enhance Centre–State Coordination: Adopt cooperative federalism approaches to align Union transfers with State health priorities and needs.
• Focus on Preventive and Primary Care: Prioritise investments in primary healthcare infrastructure, human resources, and disease surveillance to reduce long-term healthcare costs.