Moratorium on new subsidies to garner resources for public spending on health

Employability is fundamentally driven by human capital development, encompassing health and education. Based on analysis of data from about 100 economies, Shishir Gupta argues that in India, the lack of sufficient public spending constrains healthcare – rather than education, where the issues are different. In his view, one pragmatic way to increase public spending on healthcare is by putting a moratorium on new subsidies and rationalising existing ones.

Recognising the criticality of job creation, the Union Budget for 2024-25 focused significantly on employment and employability. The proposed initiatives seek to incentivise employment generation by offering one month's salary for first-time hires or paying part of their provident fund contributions for a few years. Employability is addressed by paying an internship stipend for 12 months so that candidates get exposure to real-life business environments. While these measures may help today’s job-seeking youth, they do not improve the employment prospects of those studying. Employability is fundamentally driven by the quality of education and health, two areas that have been perennially neglected in the country. As against the desired level of public spending of 2.5% of GDP (gross domestic product) on healthcare and 6% on education, the government (Centre plus states) spends around 1.2% of GDP on healthcare (Ministry of Health and Family Welfare, 2017) and between 4%-4.5% on education (Ministry of Human Resource Development, 2020, World Bank World Development Indicators). This year’s Budget has also kept the allocation on these two areas at similar levels.

Increasing public spending to its desired level would mean shelling out an additional 3% of GDP. The ask becomes more onerous since the fiscal deficit of Government of India is still hovering in the range of 5%, significantly higher than the Fiscal Responsibility and Budget Management (FRBM) target of less than 3% (Ministry of Finance, 2024). It is in this context that the clamour for increasing the tax-to-GDP ratio, by plugging leakages and broadening the tax base, gains momentum so that enhanced resources could then be spent on health and education. This begs the question: if we understand the challenge and know the solution, why has the scenario not improved for so many years, or dare I say, decades? Part of the reason is that we have been looking at these issues largely from where we are currently relative to where we aspire to be. A more pragmatic approach would be to compare where we stand vis-à-vis the global trend. This comparison of different countries’ budgetary allocations and tax collections would give a realistic assessment of whether we are truly underperforming (or not). It would also allow us to understand where we are faring poorly, and what may be the way out.

Analysing public spending on health and education, tax revenues, and subsidies (and transfers) of about 100 countries with per capita GDP ranging from US$1000 to US$100,000, reveals a couple of clear conclusions¹. First, healthcare requires an urgent and significant increase in public spending; and second, we may not see a big increase in tax-GDP ratio to finance this additional spending since that is in line with our income levels. The incremental expense, however, could be financed through subsidy rationalisation, since India spends disproportionately more on subsidies compared to its peers. I briefly elaborate on each of these below.

Healthcare spending needs to increase urgently and significantly

We come pretty close to the bottom in terms of public spending on healthcare, with only a handful of countries faring worse than India. Equally worrisome, the spending share has remained steady at this level for the last two to three decades. The same is reflected in our health infrastructure. One of the most visible indicators is the severe lack of hospital beds at 0.6 per 1,000 population – something that became apparent to all Indians during Covid times – compared to 0.8 for Bangladesh and Cambodia (World Bank World Development Indicators) and significantly lower than the generally accepted benchmark of 3 beds per 1,000 population. The challenge becomes even more acute from a public policy perspective since a majority of the existing bed capacity is located in towns and cities where patients have better paying capacity. Figure 1 shows per capita GDP and public health expenditure as a share of GDP for the selected sample of about 100 countries.

Figure 1. Health expenditure to GDP ratio, 2015

Hence, healthcare requires a big push, particularly in rural areas. There is an additional benefit to prioritising healthcare; it may also help in improving the learning outcomes of our younger generation, as argued by Dr Rakesh Mohan, President Emeritus and Distinguished Fellow, CSEP (Centre for Social and Economic Progress). A stunted and wasted child’s learning outcomes are likely to be inferior.

Improve learning outcomes through better mentoring, monitoring, and autonomy

India’s public spending on education of around 4-4.5% of GDP, though lower than the 6% target, is in line with countries at the same level of income (Figure 2) and has increased from around 3% in 2005. This is reflected in the impressive strides made in enrolment at all levels. India has achieved 100% enrolment in primary education, secondary enrolment stands at 75% (up from around 50% in the mid-2000s), whereas enrolment in higher education is at 30-32% (up from around 10%) (World Bank World Development Indicators).

Figure 2. Education expenditure to GDP ratio, 2015

The pressing issue in India’s education sector for some time now is poor learning outcomes. Almost 60% of students of grade 5 fail to achieve the learning outcomes expected of a grade 2 student, and this learning gap persists even amongst adolescents (Pratham, 2023). We need to urgently focus on improving learning outcomes to make the most of our demographic dividend. Arguably, this requires better mentoring, monitoring, and autonomy, rather than significantly more resources.

Subsidy rationalisation, with a moratorium on new subsidies

Tax-to-GDP captures taxes collected by both the Centre and the states through direct and indirect taxes. As a country’s per capita income increases, this ratio increases as well. The same has happened in India as well. Tax-to-GDP was around 15% in 2005, which has increased to 17% - in correspondence with income levels (World Bank World Development Indicators). Thus, even though there is still significant scope for broadening the tax base and plugging leakages, the global trend reveals that there are not too many countries at India’s level of income that have managed to raise significantly more tax as a share of GDP.

Figure 3. Tax-to-GDP ratio, 2015

A potential way out to increase spending on healthcare is to rationalise the existing subsidies and transfers, which, at about 40% of the total expenditure of the government, are almost twice as large as peer economies. It is worth mentioning here that the subsidy burden was coming down steadily between 2015 and 2020, significantly aided by favourable global commodity prices, before the Covid-19 pandemic required substantial government intervention, expanding the subsidy bill in recent years.

Figure 4. Subsidy-to-GDP ratio, 2015

With the pandemic well and truly behind us, at a minimum, the government should put a moratorium on the introduction of new subsidy schemes for the next 3-5 years. It is simpler to do politically, sends a strong signal towards commitment to economic reforms, and generates significant additional resources for the exchequer, which can then be utilised for pushing critical areas like healthcare. For example, the relatively newly introduced PM-Kisan scheme which pays Rs. 6,000 annually to all land-holding farmer families alone costs about 0.2% of GDP.

The current Finance Minister holds an impressive record in moving the needle of public spending towards capital investment – building highways, roads, airports, and ports, among others – which rose from about 1.8% of GDP in 2016-17 to an estimated 3.4% by 2024-25 (Ministry of Finance, 2024). If she makes improving human capital a priority, not only will it improve the quality of life, it will also improve employability in the medium and long run.

The views expressed in this post are solely those of the author, and do not necessarily reflect those of the I4I Editorial Board.

Note:

I chose 2015 as the year for the analysis since it gives good data coverage across all the selected World Development Indicators (World Bank) for a broad set of countries. Also, it does not suffer from any major global shocks like the financial crisis of 2008, or the Covid-19 pandemic between 2020-22.