Fiscal environment, GST: States struggle to raise health spending

Unable to eat, and depending solely on oral rehydration solutions, Ahmed* (40) spent the last 15 days of his life hoping to get an endoscopic procedure at the All India Institute of Medical Sciences in Delhi, 350 km away from his hometown in Farrukhabad, Uttar Pradesh. He died on July 21 this year of complications related to bile duct cancer.

This was preceded by three months of weekly trips to Delhi, which cost more than Rs 2,000 for him and his brother each time, each way--enough to deplete the savings of the former embroidery unit worker.

“We spent Rs 25,000 on all those trips, not to mention the Rs 2 lakh on treatment in the last three months, and I could not even make him comfortable in his last days; all he got by way of treatment were some antacids,” his brother complained, two days after Ahmed’s death.

Patients with this type of cancer can survive up to five years if diagnosed early.

Who has failed Ahmed?

As per the Constitution, health is a state subject. However, responsibilities in health and healthcare are distributed among the Union, the states, and local bodies. Over the years, these constitutional boundaries have become less distinct, with the Union government increasingly involved in healthcare through centrally sponsored schemes (CSSs) such as the National Health Mission (NHM).

Experts say that after the changes in Union-state government financial relations – with the introduction of the goods and services tax (GST) and the 14th Finance Commission, which increased the share of tax devolution to states from 32 percent to 42 percent – states are losing autonomy on their finances and becoming more dependent on the Union government. Earlier, states generated a higher proportion of their revenue, but after these changes, they are increasingly dependent on fiscal transfers, as we explain below. This in turn is affecting their ability to spend on sectors such as healthcare and education, which not only requires investment in setting up hospitals, buying equipment and medicines, but also needs doctors and nurses for them to be functional.

Little room to raise spending

The latest budget, presented by finance minister Nirmala Sitharaman in Parliament on July 23, had no major announcements on health. The allocation for the Ministry of Health and Family Welfare saw an increase of 0.3 percent as compared to 2023-24, and centrally-sponsored schemes saw an increase of 1.8 percent in the same period.

This is more or less the same as a percentage of gross domestic product (GDP), though in absolute terms it has increased, Janak Raj, senior fellow at the Centre for Social and Economic Progress (CSEP), an independent public policy think-tank based in New Delhi, said. “The allocation was 0.26 percent of GDP last year and it is 0.27 percent this year.”

Experts point out that poorer states especially lack their own sources of capital and have to depend on Union government support. “The central government’s support hasn't been substantial enough to make a significant difference to horizontal inequalities [across states] in health spending,” says Raj.

“We don't see much evidence that these efforts have reduced horizontal inequalities. Some states have shown improvement but overall, horizontal inequalities have not improved significantly,” he points out.

A new CSEP study from June 2024 showed that both states’ own revenue and unconditional transfers from the Union government impact health spending. With well-off states, every 1 percent increase in the state’s own revenue led to a 0.20 percent increase in health spending, while every 1 percent increase in unconditional transfers to economically weaker states leads to 0.28 percent increase in their per capita health spending.

The study also found that horizontal inequalities in health spending “widened somewhat” in the post-NHM period for all states, not merely for high-focus states.

Another CSEP study from May 2024 also says that fiscally weaker states like Madhya Pradesh and West Bengal rely more on transfers from the Union government, making them vulnerable to risks and uncertainties in fund flows. In contrast, states with stronger fiscal parameters, such as Haryana and Tamil Nadu, can generate higher revenues, granting them greater autonomy and stability in their expenditure decisions.

The June 2024 study from CSEP, which looked at state finances data from the Reserve Bank of India, found that states were more dependent on devolution from the Union government.

During the 13th Finance Commission years, that is 2010 to 2015, such transfers accounted for 22.1 percent of the states’ revenue, the paper found. In the next five years (2015-20), this increased to 26.6 percent. This is corresponding to an increase in tax devolution from the Union government from 32 percent to 42 percent in the 14th Finance Commission, to enable states to identify their priority areas for spending. During this period, the state’s own revenue as a share of their total revenue receipts decreased from 51 percent to 46.7 percent.

But things changed quickly thereafter. By 2020-21, the share of tax devolutions declined almost to the pre-award period of the 14th Finance Commission, the paper noted. The share of states’ own revenue in their revenue receipts (52.2 percent) and fiscal transfers (48.3 percent) almost converged in 2020-21.

Within those transfers from the Union government, the share of tax devolutions – or untied funds – remained “broadly unchanged” between 2014-15 and 2020-21, and that of tied transfers (CSS and others) increased sharply, which the 14th Finance Commission tried to reduce, the paper said. But, the share of health transfers in CSSs declined, “suggesting that health transfers did not keep pace with the overall CSS transfers”.

The problem--which came into focus during the pandemic years but has remained an area of concern for experts in the social sector--has been evident for some time now. Further, state finances post GST have been under pressure.

GST compensation for states – to compensate for losses from implementation of the uniform tax – ended in June 2022. But states’ component of GST continues to be lower than both the pre-GST period and the level of guaranteed revenue, an October 2023 discussion paper by PRS Legislative has found. Several states continue to budget revenue deficit, and with reduction in grants, these states may have to increase their revenue or cut expenditure in order to maintain revenue balance, the paper noted.

Despite recommendations to increase health spending to 8 percent, most states have consistently allocated only 3.5 percent to 5.5 percent of their budgets to health over the past 30 years, as per the study, with economically well-off states like Maharashtra and Karnataka spending less compared to poorer states. Even states with fiscal space like Delhi and Puducherry show that overall health prioritisation remains inadequate, partly due to committed liabilities like interest payments and pensions.

But experts like Raj agree that health spending has gone up compared to the 1990s, and the NHM has had a role to play in it. “State government health spending declined from the early 1990s until the NHM was launched,” says Janak Raj. “The NHM played a major role in reversing this decline, leading to an increase in health spending by states.”

National Health Mission helps growth in health spending

From 2000-01 to 2004-05, health expenditure grew more slowly than total expenditure of Union and state governments, the CSEP study from May 2024 says. This trend reversed after NHM's launch, with the average annual health expenditure in six sample states increasing at 17 percent from 2005-06 to 2013-14 compared to a 15 percent growth in total expenditure, the study found. However, from 2014-15 to 2020-21, the growth rate of health spending in these states decreased by 11 percent.

Recent changes in fiscal architecture have affected state financing, including health, with the 14th Finance Commission-XIV altering the tax devolution to states from 32 percent to 42 percent, aiming to provide more fiscal space. This change was matched by a shift in fund-sharing patterns for centrally sponsored schemes such as the NHM, reducing Union-state government cost-sharing from 75:25 to 60:40 for larger states and Union territories, the study noted.

The GST introduction has further affected state finances by limiting their taxation powers, reducing states' fiscal space and increasing their reliance on Union funding, as per a PRS Legislative paper from 2023.

As a result, as we said, the proportion of states’ own revenue in total receipts has decreased, making them more dependent on Union transfers. For health, while Union health expenditure grew between 2014-15 and 2020-21 at 17 percent, the share of health transfers to states declined from 62.7 percent in 2014-15 to 48.7 percent in 2022-23 as the Union increased direct funding through central sector schemes and medical institutions like AIIMS, as per the CSEP study.

This shift, combined with a constrained fiscal environment and increased dependence on Union funding, highlights the ongoing challenges that states face in managing and funding health.

The NHM impacted human resource management by shifting focus towards increasing contractual staff and reducing the proportion of spending on permanent salaries. States like Haryana and Meghalaya allocated significant NHM funds to human resources, while Tamil Nadu and West Bengal used funds for medicine procurement, the study found. The NHM's approach of funding contractual staff allowed for a reduction in permanent staff costs and provided support roles to help doctors focus on clinical duties.

As a result of this, there has been a shortage of not just doctors but also nurses and other medical health staff all across the country.

Lack of facilities, increasing vacancies

Experts point out that the shortage of resources with state governments is affecting their ability to recruit medical personnel. "Not just doctors but also pharmacists and nurses are in short supply, but states and the central government are passing the responsibility for hiring back and forth,” says Indranil Mukhopadhyay, professor of public health and health economics at the Jindal School of Government and Public Policy, OP Jindal Global University.

“This issue affects recruitment for doctors and nurses, which is managed by state governments,” Mukhopadhyay points out. “States often delay permanent recruitment due to limited resources and political will, resulting in long delays. The process is further complicated by increasing commercialisation and corporatisation of healthcare, which diverts doctors to the private sector. Consequently, recruiting specialists is challenging, and systemic changes are difficult due to these bottlenecks and political issues."

For instance, Uttar Pradesh – India’s most populous state – estimated that it needed 600 more specialist doctors such as surgeons, obstetricians-gynaecologists, physicians and paediatricians at community health centres (CHCs) than previously identified. To limit the shortfall, 847 positions were sanctioned and 434 positions were filled. As a result, the proportion of vacancies fell from 75 percent of sanctioned posts in 2019 to 69 percent in 2022, but in absolute terms, vacancies rose 25 percent from 1,615 in 2019 to 2,028 in 2022, data from the Rural Health Statistics 2022 show.

Across India, the proportion of such vacancies fell from 73 percent of sanctioned posts to 68 percent during the same period. In absolute terms, vacancies rose 2.1 percent during the same period – from 9,147 to 9,343.

Moreover, equipment at these CHCs was also lacking. In UP, less than half (48.7 percent) of functioning CHCs had a working X-ray machine in 2022, compared to 57.8 percent across India.

With the lack of healthcare facilities and professionals in government hospitals, many patients end up at private healthcare.

Half of households (51 percent) in India went to private facilities for healthcare, with 80 percent citing at least one quality concern, as IndiaSpend reported in September 2018. Poor care quality leads to more deaths than insufficient access to healthcare – 1.6 million Indians died due to poor quality of care in 2016, nearly twice as many as due to non-utilisation of healthcare services, we had reported.

Rising private expenditure

But access to private healthcare is expensive and burdens patients with additional expenses.

For instance, in 2019-20, Ahmed’s home state of Uttar Pradesh had the second lowest per capita government expenditure on health at Rs 951. On average, the out-of-pocket expenditure (OOPE) in the state is Rs 22,792, the National Health Profile 2022 shows, citing data from the 75th round of the National Sample Survey from 2018. Only Punjab and Daman & Diu have higher OOPE. In private hospitals, it increases to Rs 29,261.

For perspective, the state’s per capita income in 2021-22 was Rs 42,525, the government told Parliament in July 2023. This means, UP’s OOPE amounts to 54 percent and 71 percent of its per capita income in rural and urban areas, respectively. In private hospitals, this goes up to 69 percent and 87 percent of per capita income in rural and urban areas.

But this relation is not linear, our analysis of government data showed.

“States with the highest per capita health spending still fall short of covering OOPE. This indicates that government spending is insufficient to meet the requirements, forcing people to pay out of their pockets,” explains Janak Raj, senior fellow at the Centre for Social and Economic Progress (CSEP), an independent public policy think-tank based in New Delhi.

IndiaSpend has reached out to Ankit Jalan, additional private secretary to the finance minister, Sushant Sudan, private secretary to the health minister, and the office of the health secretary in Uttar Pradesh for comment on the financial autonomy, challenges in filling vacancies, the impact of fiscal policy changes on Union-state government relationship, and addressing horizontal inequalities. We also reached out to Pratyaya Amrit, chief executive officer of Bihar’s health ministry, Geeta Kakodkar, director of health services in Goa, and Lalremmawii, director of health services in Mizoram for comment on these issues in their respective states. We will update this story when we receive responses.

*Name changed to protect privacy

(With inputs from Nushaiba Iqbal)

This report is republished with permission from IndiaSpend.org, a data-driven, public-interest journalism non-profit. It has been lightly edited for style and clarity.

Small teams can do great things. All it takes is a subscription. Subscribe now and power Newslaundry’s work.