Central govt funding spurs health spending by states, reveals CSEP study

Health spending by economically weaker states is determined solely by unconditional fiscal transfers from the central government, leading to growing horizontal inequalities after the National Health Mission (NHM) came into force, according to a working paper by the Centre for Social and Economic Progress (CSEP).

According to the study, this finding suggests that greater resource transfers from the central government to states will spur health spending. “Therefore, there is a need for a more flexible approach for centrally sponsored schemes (CSS) for states to innovate and adapt,” the paper stated.

Though health is a state subject, the central government has been playing an increasingly greater role in health financing. “With the launch of several CSSs such as the NHM, Ayushman Bharat, and schemes like the Pradhan Mantri Swasthya Suraksha Yojana (PMSSY), the central government has expanded its footprint in healthcare,” the paper said.

The study also states that health spending by most states has been around 5 per cent or lower of their total expenditure. This comes after the National Health Policy, 2017 asked state administrations to increase their health expenditure to 8 per cent of their total expenditure.

According to data from the Union Budget 2023-24, 55 per cent of the total expenditure on health by the central government is transferred to states under CSSs, while the rest is spent directly by the Centre, indicating a gradual decline in the share of the Centre’s health transfers to states.

The share of health transfers to states in total health spending by the Centre was 45.6 per cent in 2004, which shot up to 63 per cent in 2005 following the launch of the National Rural Health Mission (NRHM) and peaked at 70 per cent in 2009.

Thereafter, the share gradually declined, suggesting that the central government now allocates relatively more resources on health spending through central sector schemes rather than indirectly through CSSs.

While central sector schemes are 100 per cent funded by the Union government and implemented by the central government machinery, in CSSs such as NHM and Ayushman Bharat, a certain percentage of the funding is borne by the states, and the implementation is by the state governments.

“Currently, 99 per cent of total transfers under CSSs are under three main central schemes, namely the NHM, Pradhan Mantri Jan Arogya Yojana (PMJAY), and PM-Ayushman Bharat Health Infrastructure Mission (PM-ABHIM),” the paper stated.

The study also pointed out, however, that states’ own revenue was more significant than unconditional fiscal transfers in explaining health spending by economically well-off states.

This presents evidence of the growing horizontal inequalities post-implementation of NHM, with CSEP suggesting prioritising unconditional transfers and designing a differentiated strategy for economically richer and economically weaker states for better health outcomes in India.