Content
- Pushing Welfare Towards the States – Social Sector Budget Shift
- What the New Fiscal Rule Means for Growth and Spending
Pushing Welfare Towards the States – Social Sector Budget Shift
Context & Core Thesis
- Budget 2026–27 consolidates shift of welfare responsibility from Union to States, with Centre setting norms while States increasingly finance and implement social protection and human development programmes.
- No new flagship welfare schemes signals fiscal tilt toward capex and supply-side growth, despite persistent challenges of malnutrition, unemployment, and social vulnerability.
Relevance
GS-2 (Polity & Governance)
- Fiscal federalism, Centre–State financial relations, CSS design, cooperative federalism, welfare delivery architecture, Directive Principles (Art 38, 39, 41, 45, 47).
GS-2 (Social Justice)
- Welfare of vulnerable groups, nutrition, pensions, ICDS, PM POSHAN, social sector targeting and inclusion.
Practice Question
- “The shift of welfare responsibility from the Union to the States has significant implications for equity and human development.”Discuss in the context of recent budgetary trends. (250 words)
Social Sector Allocation Trends
Stagnant Welfare Allocations
- Allocations for vulnerable groups rose only 0.2% (NSAP) to 5.2% (Saksham Anganwadi), implying real decline after inflation and expanding beneficiary base.
- RE 2025–26 < BE 2025–26 across schemes shows systemic underutilisation, delayed releases, and low prioritisation of welfare spending.
Health & Education Spending
- Health and education allocations increased just 6.4% and 8.3%, inadequate against inflation, demographic growth, and pandemic-induced learning-health losses.
- RE shortfalls of 3.7% (health) and 5.2% (education) reflect inefficiencies in utilisation and weak human capital prioritisation.
Major Scheme Contractions (Value-Addition Focus)
- Jal Jeevan Mission (JJM) cut from ₹67,000 crore (BE) to ₹17,000 crore (RE) risks slowing progress toward Har Ghar Jal and SDG-6 (clean water) targets.
- PMAY-Grameen reduced from ₹54,832 crore to ₹32,500 crore, and PMAY-Urban from ₹19,794 crore to ₹7,500 crore, affecting affordable housing and urban inclusion goals.
- PM POSHAN (Mid-Day Meal), Saksham Anganwadi, and SAMARTHYA maternity benefits remain low-funded despite India’s high child stunting and anaemia prevalence (NFHS-5).
Centrally Sponsored Schemes (CSS) Underspending
- CSS outlay fell from ₹5.42 lakh crore (BE) to ₹4.20 lakh crore (RE), showing nearly ₹1.2 lakh crore underspending.
- BE 2026–27 at ₹5.49 lakh crore shows restoration on paper, but past trends question real absorptive and delivery capacity.
Fiscal Federalism Shift
Rising State Burden
- Schemes like VB-GRAM G use 60:40 cost-sharing, requiring States to mobilise ~₹56,000 crore alongside Centre’s ₹96,000 crore.
- Welfare delivery increasingly depends on State fiscal health, risking inter-state inequality in pensions, nutrition, and social security.
Limited Fiscal Space for States
- States’ effective tax share only 34%, below 41% Finance Commission norm, due to rising cesses and surcharges outside divisible pool.
- Finance Commission grants declined from ₹1,32,767 crore to ₹1,29,397 crore, reducing untied fiscal support.
Economic Implications
- Capex push of ₹12 lakh crore+ assumes job multipliers, yet India faces jobless growth, weak manufacturing absorption, and rising educated youth unemployment.
- Welfare spending supports consumption demand, critical when private investment and wage growth remain subdued.
Social Justice Implications
- Underfunding nutrition, pensions, and childcare disproportionately impacts women, children, elderly, and disabled, weakening social safety nets.
- India still hosts one of the world’s largest undernourished populations (FAO estimates), making nutrition spending economically and morally critical.
Constitutional Dimension
- Articles 38, 39, 41, 45, 47 obligate State to promote welfare, nutrition, and public health; declining real allocations dilute welfare-state commitments.
- Reflects tension between Keynesian welfare economics and fiscal conservatism.
Key Challenges
- Persistent BE–RE gaps show weak planning realism and administrative capacity.
- State-heavy welfare model without fiscal empowerment risks uneven human development outcomes.
- Supply-side bias overlooks demand constraints in a slowing economy.
Way Forward
- Increase untied tax devolution and rationalise cesses to restore fiscal federal balance.
- Adopt outcome-based budgeting linking funds to nutrition, health, and learning improvements.
- Treat welfare as human capital investment, not consumption, given links to productivity and demographic dividend.
What the New Fiscal Rule Means for Growth and Spending
Context & Fiscal Rule Shift
- Fiscal policy in FY27 guided by a “sound finance” rule, prioritising deficit and debt reduction, where borrowing targets shape expenditure decisions more than counter-cyclical growth considerations.
- India’s fiscal framework evolving from deficit-targeting (FRBM 2003) to debt-GDP targeting, making debt sustainability the primary fiscal anchor.
Relevance
GS-3 (Economy )
- Fiscal policy, FRBM framework, debt sustainability, fiscal consolidation, capex-led growth strategy.
GS-3 (Inclusive Growth)
- Distributional impact of fiscal consolidation, rural demand, agriculture expenditure.
Practice Question
- “India’s new debt-focused fiscal rule improves macro-stability but may constrain inclusive growth.”Critically examine. (250 words)
Nature of the New Fiscal Rule
From Deficit Target to Debt Target
- Earlier FRBM rule focused on fiscal deficit-GDP ratio; new framework prioritises debt-GDP ratio as core policy target.
- Government aims to reduce debt-GDP to around 50% by 2031, compared to FRBM’s earlier normative level near 40%.
Gradual Consolidation Path
- Fiscal deficit targeted to decline from 4.4% (FY26) to 4.3% (FY27), and primary deficit from 0.8% to 0.7%.
- Consolidation pace less severe than post-pandemic years, providing limited but real fiscal space.
How Fiscal Targets Are Being Met ?
Revenue Side Constraints
- Government’s non-debt receipts-GDP ratio falls from 9.5% (FY26) to 9.3% (FY27), reflecting slower tax buoyancy and moderation in GST/indirect tax shares.
- GST and indirect taxes both decline by 0.3 percentage points, limiting revenue-driven consolidation.
Expenditure Compression
- Total expenditure-GDP ratio reduced from 13.9% to 13.6%, indicating consolidation largely expenditure-led.
- Capital expenditure-GDP stable at 3.1%, implying adjustment burden falls on revenue and development expenditure.
Development Expenditure Cuts
Social & Economic Services
- Development expenditure share declines from 6.1% to 5.7% of GDP, showing squeeze on welfare and productive sectors.
- Cuts concentrated in rural development and agriculture, with share falling from 1.5% to 1.2% of GDP.
Rural Employment Impact
- Sharp reduction in revenue spending on rural employment reduces direct income support, weakening rural demand and consumption multipliers.
- Demand stimulus from lower indirect taxes offset by contraction in rural and agricultural spending.
Growth Implications
- Capex-led strategy assumes high multiplier effects, but weak private investment response limits crowding-in benefits.
- Corporate investment-capital ratio remains subdued amid weak global demand and export slowdown.
- Reduced rural expenditure risks depressing aggregate demand in a consumption-driven economy.
Distributional Concerns
- Fiscal consolidation burden disproportionately borne by development and agricultural sectors, affecting vulnerable populations.
- Corporate tax-GDP ratio largely unchanged from pre-COVID levels, suggesting limited burden-sharing from profitable sectors.
Constitutional & Policy Lens
- Directive Principles (Articles 38, 39, 41) require equitable growth and livelihood support; expenditure compression in welfare raises normative concerns.
- Reflects policy trade-off between macroeconomic stability and inclusive development.
Key Challenges
- Overemphasis on debt reduction may constrain counter-cyclical fiscal policy during global slowdown.
- Persistent low private investment questions effectiveness of supply-side fiscal strategy.
- Rural demand compression risks slowing GDP growth given agriculture’s large employment share.
Way Forward
- Adopt counter-cyclical flexibility within fiscal rules to protect development spending during slowdowns.
- Broaden tax base and improve compliance to raise non-debt receipts instead of cutting welfare.
- Balance fiscal prudence with growth-supportive and inclusive expenditure.
