Fiscal asymmetry and subnational social spending: decoding India’s federal experience

This article examines how fiscal imbalances in India's federal system influence subnational governments' spending on health and education. We show that the disparity in budgetary allocations to social overheads largely emanates from the revenue-mobilizing capacity of states. While fiscal transfers from the Union government play a vital role in addressing these disparities, conditions such as matching contributions hurt state expenditures in the social sector. The efforts to revamp centrally sponsored schemes have yielded no positive effects. The mechanical compliance with fiscal consolidation norms has forced state governments to curtail revenue expenditure, thereby reducing the availability of trained professionals. The states' autonomy and social sector spending are equally influenced by the underlying political economy of federalism and an active welfare regime. Our analysis calls for prioritizing public expenditure on social sectors, granting states a greater autonomy in spending, and introducing performance-based incentives to address disparities in education and health outcomes.