Assessing public expenditure efficiency at the subnational level in India: Does governance matter?

The issue of public expenditure efficiency has drawn the attention of both policymakers and researchers globally. The paper attempts to measure the efficiency of government expenditures on the social sector, especially health and education, among the major Indian states using various data envelopment analysis. The paper also attempts to understand what drives public expenditure efficiency. The results suggest that there is a wide variation in the efficiency of public spending as well as scope for resource‐saving at the subnational level in India. It finds that states are spending their resources more efficiently on education than on health and the overall social sector spending. It also finds that quality of governance, economic growth, and mothers' schooling affects the efficiency of education, health, and social sector with governance to have a larger effect compared to other factors. Overall, the study suggests that improving governance could yield better outcomes from public expenditure. Highlights The paper looks at understanding the issue of public expenditure of efficiency of education, health, and overall social sector over the 15 year period since the year 2000, broadly covering the millennium development goal period at the subnational level in India. By using data envelopment analysis, the study derives the efficiency scores for major states for three‐time periods for input‐oriented, output‐oriented, and nonoriented conditions. The results broadly suggest that there is wide divergence in terms of efficiency levels across the states and also finds some spatial patterns. States in Western region appear to be more efficient than compared to other regions. Overall, the states appear to be spending efficiently on the education compared to health. In terms of what explains such divergences in efficiency levels, the study looks at broader determinants‐overall governance‐with conditional variables such as level of incomes and mothers' schooling. The econometric results suggest that it is the level of governance that affects the efficiency levels at the subnational level in India.