- Public Social Sector Expenditures: India vs Other Countries
Most developed countries have a very elaborate social security network for their citizens, including unemployment allowance, universal health coverage, free school education and free or cheap university education, old age pension, maternity benefits, disability benefits, family allowance such as child care allowance, allowances for those too poor to make a living, and much more. Governments spend substantial sums for providing these social services to their people. The average public social sector expenditures of the 34 countries of the OECD have been around 21% of GDP for the last many years, and for the EU–27 have been even higher at around 30% of GDP. In contrast, India’s social sector expenditures are less than 7% of GDP (see Chart 2).[1]
Since the per capita GDP of the developed countries is much more than India, so the per person social sector spending of the developed countries is many times more than that reflected by the above figures.
Chart 2: Social Sector Expenditures as % of GDP, 2022
Cut in Social Sector Expenditures
Despite the already abysmally low social sector expenditures of the country, the Centre has made huge cuts in its spending on the people to compensate for the huge increase in capex (and the meagre increase in budget outlay).
There are two important heads under which the government spends money on people:
- Subsidies: The most important subsidies given by the government as defined in its budget documents are food subsidy, fertiliser subsidy, and petroleum subsidy. (Note: the budget statement on subsidies also includes some other subsidies, we are excluding them from our discussion.)
- Budget outlay for social sector ministries that directly benefit the people.[2]
Budget documents reveal that the Modi Government has made huge cuts in budget outlay on both these heads, by huge amounts, to compensate for the increase in capex — or budget transfers to the rich!
The Subsidy Bill
The pandemic (2020–21) saw a significant rise in the government’s subsidy bill, especially because of the huge increase in distribution of free foodgrains to the people badly affected by the unplanned lockdown. Since then, the subsidy bill of the Modi Government has sharply declined. The total expenditure on food, fertiliser and petroleum subsidies for 2023–24, even in nominal terms, is significantly less than last year’s revised estimates. As compared to 2020–21, it has come down by nearly half in nominal terms, and as a percentage of budget outlay, by nearly 60%. As a percentage of GDP, the cut is even steeper — by two-thirds (see Table 18)!
The cut in the subsidy bill has been so sharp that as a total subsidies as a share of the total expenditure of the government is less than that for the pre-pandemic year 2019–20.
Table 18: Modi Government Expenditures on Subsidies, 2020–21 to 2023–24 (Rs cr)
| 2019–20 A | 2020–21 A | 2021–22 A | 2022–23 RE | 2023–24 BE | |
| Food subsidy | 108688 | 5,41,330 | 2,88,969 | 2,87,194 | 1,97,350 |
| Fertiliser subsidy | 81124 | 1,27,922 | 1,53,758 | 2,25,220 | 1,75,100 |
| Petroleum subsidy (LPG subsidy) | 38529 | 38,455 | 3,423 | 9,171 | 2,257 |
| Total Subsidies | 228341 | 7,07,707 | 4,46,150 | 5,21,585 | 3,74,707 |
| Total Subsidies as % of budget outlay | 8.50% | 20.16% | 11.76% | 12.46% | 8.32% |
| Total Subsidies as % of GDP | 1.14% | 3.57% | 1.89% | 1.91% | 1.24% |
Social Sector Expenditure
There is no standard definition of the ‘social sector’ or the ‘government’s social sector expenditures’, that is, which are the ministries whose total budget outlay can be called the government’s social sector expenditures. The most popular definition is that given by the Centre for Policy Research (CPR), a leading private think tank of India. The CPR does not specifically mention which are the ministries that it has included in its definition, it only says: ‘social sector’ refers to education, rural development, health, water and sanitation, nutrition, social security and social justice, food security, urban poor welfare, tribal and minority affairs, employment, skill development, women and child welfare, and sports and culture. So, we have drawn up a list of ministries which can be considered to be social sector ministries — the total budget outlay of these social sector ministries is very close to the CPR definition for GOI social sector expenditures.
The departments and ministries whose outlay we have included to draw up the list of social sector ministries are:
- Department of Health and Family Welfare
- Department of Food and Public Distribution
- Ministry of Ayush
- Ministry of Education
- Ministry of Jalshakti
- Ministry of Labour and Employment
- Ministry of Social Justice
- Ministry of Women and Child Development
- Ministry of Culture
- Ministry of Youth Affairs and Sports
- Ministry of Housing and Urban Affairs
- Ministry of Skill Development and Entrepreneurship
- Ministry of Tribal Affairs
- Ministry of Minority Affairs
- Ministry of Rural Development
- Ministry of Environment, Forests and Climate Change
Adding up the outlay for all the above ministries / departments, the Central government’s total social sector expenditures are given in Table 19.
Table 19: Modi Government’s Social Sector Expenditures, 2019–20 to 2023–24 (Rs cr)
| 2019–20A | 2020–21A | 2021–22 A | 2022–23 RE | 2023–24 BE | |
| Total Social Sector Exp. (1) | 5,24,957 | 10,45,797 | 8,94,780 | 8,79,395 | 8,23,607 |
| (1) as % of Budget Outlay | 19.54* | 29.80* | 23.59 | 21.00 | 18.29 |
| (1) as % of GDP | 2.61 | 5.28 | 3.78 | 3.22 | 2.73 |
*Our estimates for total social sector expenditures for 2019–20 and 2020–21 closely match the calculation of CPR. CPR estimates these to be 20% and 30% respectively.
As can be seen from the table, the Modi Government’s social sector expenditures have sharply fallen every year since 2020–21, even in nominal terms. The estimated social sector expenditure for 2023–24 is less than that for 2020–21 by more than 20%! But this figure does not reflect the true extent of the cut made by the Modi Government in its social sector outlay. As a share of the total budget expenditure, the social sector budget outlay for the coming financial year is less than that for 2020–21 by as much as 40%; and as a percentage of the GDP, it is less by nearly half!
That is not all. The major part of the country’s social sector expenditures are undertaken by the States, and the Modi Government’s policies is forcing the states to cut back on their social sector expenditures. Let us see how.
Reduction in Transfers to States
Increasing Violation of Federal Structure
The Constitution grants the Union government more revenue raising powers while the States are tasked to undertake most of the development and welfare-related responsibilities. In accordance with this schema, the Centre collects the bulk of the revenues in the country, the States do not have many sources of revenue. This has got further skewed after the imposition of GST, that has further restricted the sources of revenues of the States. (Presently, including the Centre’s borrowings, of the total revenues of the Centre and States, the Centre collects around 70%, and the States the remaining 30%; the States’ share has fallen to below 30% in recent years). On the other hand, of the total expenditures of the Centre and State governments, the States spend more than the Centre (including the borrowings of the States, this ratio is around 60:40).[3]
This allocation of revenue raising powers and expenditure responsibilities results in an imbalance, and so the Constitution has made a provision for the setting up of a Financial Commission to determine the sharing of revenues between the Centre and the States. Successive Finance Commissions (FC) have attempted to reduce this imbalance by increasing the States’ share in Central taxes. The 14th FC recommended that the share of States in gross taxes to be 42% (for the period 2015–20), while the 15th FC recommended lowered this to 41% (for the period 2021–26). The Modi Government accepted both these recommendations.
However, the Modi Government has resorted to a simple trick to deny the States their rightful share in Central revenues. Presently, as per the Finance Commission, the States are supposed to receive 41% of the ‘Divisible Pool’ of Centre’s tax revenues, defined as total tax revenue of the Centre minus the expenditure incurred for collecting taxes. But there is a loophole in this, which enables the Centre to transfer a lesser portion as taxes, and the Modi Government is blithely exploiting this. The loophole is, that taxes collected by the Centre in the form of cesses and surcharges are not included in the ‘Divisible Pool’ and therefore are not shared with the States.
- Divisible Pool of Centre’s revenues = [Gross Tax Revenues of Centre – Cesses and Surcharges – Expenses incurred for collecting taxes]
- States’ Share of Centre’s Tax Revenues = Divisible Pool of Centre’s Revenues x 41/100
The Centre has increasingly been resorting to collecting more and more of its taxes as surcharges and cesses, so that its transfers to the states reduces. The result of all these cesses and surcharges is that their share in the gross tax revenue of the Centre (excluding the GST compensation cess which is exclusively given to the States) has nearly doubled, from 9.3% in 2014–15 to 17.5% in this year’s budget estimate (Chart 3). [4]
Chart 3: Cesses and Surcharges as % of Gross Tax Revenues of Centre,
2014–15 to 2023–24
With the shrinking of the divisible pool, the share of the Centre’s Gross Tax Revenues (GTR) going to the States has stagnated, while the Centre’s kitty has continued to rise, because the increasing income from cesses and surcharges. This can be seen from Chart 4.[5] Note that even during the pandemic years, 2019–20 and 2020–21, when the GTR took a hit, the States share of GTR recorded a steep fall of 15% and 19% respectively, but the Centre’s revenues continued to rise because the Centre beefed up its revenues by hiking cesses and surcharges, which are not shareable with the States.
Chart 4: Distribution of Gross Tax Revenues Between Centre and States,
2014–15 to 2023–24 (Rs cr)
Consequently, the actual share of the States in the Gross Tax Revenues of the Centre has never reached the mandated level of 41–42%. After reaching a peak of 36.6% in FY19, States’ share has fallen and stagnated at around 29%. The gap between the share recommended by the FC and the actual devolution has widened to more than 11 percentage points, the highest in at least two decades.[6]
To get an idea of the revenue losses of the States due to this undemocratic behaviour of the Centre, which goes against the federal spirit of the Constitution, let us calculate the total revenue losses of the States because of cesses and surcharges for 2023–24.
- For 2023–24, total cesses and surcharges = Rs 5.88 lakh crore
- Total gross tax revenues = Rs 33.61 lakh crore
- 41% of this = Rs 13.78 lakh crore
- Actual Share of States in Gross Central Tax Revenues (as per Budget documents, Union Budget 2023) = Rs 10.21 lakh crore
This means that the States are going to lose Rs 3.57 lakh crore in revenues this year due to the reduction in the divisible pool due to the Centre resorting to collecting revenues through cesses and surcharges instead of taxes — implying that the States are going to suffer a loss of 26% in their share of Central tax revenues in FY 2023–24 as mandated by the FC!
Of the total Central transfers to States, around 60% is Central taxes devolved to States (that is, States’ share in GTR), which are untied funds and States can use them as they wish. The remaining is grants-in-aid for schemes and other programmes. So, if the Centre resorts to tricks to reduce the tax transfers to the States, they are pushed into a corner, and have to approach the Centre for special funding. This gives the power to the Centre to play favourites, and penalise those States which oppose it politically — affecting the federal structure of the country. This is precisely what the Modi Government is doing.
Impact on Social Sector Spending of States
We have mentioned above that of the total total revenues of all kinds collected by the Centre and States, including borrowings, the Centre collects roughly 70%, and the States’ own revenue is 30%. (we have excluded States’ borrowings in this calculation).
In contrast, the major part of the social sector expenditure in India is done by the States — around 70 to 80%.[7]
The total Central transfers to the States constitute around 40 to 45% of their total revenues (excluding their borrowings). The States spend around 50% of their revenues (excluding borrowings) on welfare expenditures.[8] So, if the Centre squeezes the States by reducing the transfers to them, then their social sector spending is obviously going to get hit.
This, plus the low Centre spending on the social sectors, is what is responsible for the abysmally low total social sector expenditures of India (Centre + States combined) — at just around 7% of GDP (as admitted by the Economic Survey of the GoI). This figure is one-third of the average for the OECD countries, and one-fourth of the social sector spending the EU-27!
Notes
1. Source for OECD: “Social Spending”, https://data.oecd.org, accessed on 16 May 2023; for EU: Government Expenditure on Social Protection, https://ec.europa.eu; for India: Economic Survey, 2021–22 and 2022–23. EU–27 figure includes general government expenditure on education, health and social protection (this includes sickness and disability, unemployment, old age, housing, etc). Note that for India, the 2022–23 Economic Survey projects the social sector spending to be above 8% for 2021–22 RE and 2022–23 BE. From the way the Modi Government has been exaggerating its expenditures in the Budget Estimates and Revised Estimates — subsequently, when the Actuals come out, it becomes clear that actual expenditure was much less — we can safely assume that when the Actuals for 2023–24 are made available 2 years later, this will turn out to be around 7% of GDP or less.
2. Note that here, our definition of government’s social sector expenditures is different from the definition of social sector expenditures given in the Economic Survey.
3. Our calculation. Calculated by us using data given here: figures for Centre’s expenditures and Centre’s transfers to States — taken from ‘Budget at a Glance’, Union Budget, various years; data for States own revenues taken from: Handbook of Statistics on Indian States (2021–22) and State Finances: A Study of Budgets 2023, both available at https://www.rbi.org.in; data for States fiscal deficit taken from: State Finances: A Study of Budgets 2023.
4. Source for Chart 3: “Walking the Tightrope: An Analysis of Union Budget 2023–24”, CBGA, Delhi, 2023, https://www.cbgaindia.org.
5. Source for Chart 4: Union budget documents, various years.
6. Jasmin Nihalani, “Data: How States’ Share in Centre’s Taxes Declined Due to Cesses, Explained in 5 Charts”, 25 August 2022, https://www.thehindu.com.
7. “Resource Sharing between Centre and States and Allocation across States: Some Issues in Balancing Equity and Efficiency, Institute of Economic Growth, July 2019, https://fincomindia.nic.in — this document gives the States’ share at around 80%. Our calculation, based on social sector expenditure of Centre as calculated above, and social sector expenditure of States taken from RBI document, “State Finances: A Study of Budgets”, shows that the share of States is around 70%.
8. Our calculation, based on figures for States revenues and social expenditures given in Handbook of Statistics on Indian States (2021–22) and State Finances: A Study of Budgets 2023, both available at https://www.rbi.org.in.
