Mannat
Nagpal
M.A
Economics Final Year, Delhi School of Economics
University
of Delhi
Dr.
Aparna
Library
Intern, SNS Library, Dr. YSP UHF Nauni-Solan
Abstract: -
Welfare
expenditure plays a critical role in shaping economic development in a federal
economy like India. It includes government spending on health, education,
social security, rural development, and poverty alleviation programs. In India,
both the Union and State Governments contribute significantly, but states
account for a major share of implementation and spending.
In
FY 2024–25, welfare expenditure has become a key policy tool for inclusive
growth, especially after the pandemic-induced socio-economic disruptions.
However, the relationship between welfare spending and economic growth varies
significantly across states due to differences in governance, fiscal capacity,
and development priorities.
Key-Words: -GDP,CAGR,SSE,FRBM.
Introduction: -
Welfare
expenditure in India has shown a positive trend and acts as a significant
driver of economic growth by fostering human capital development. An
inter-state analysis reveals that while social sector spending is
rising—averaging 16.6% increase between 2002-03 and 2015-16—substantial
regional disparities exist in both growth levels and human development
outcomes.
Based
on India Budget 2026-27 documents, KPMG 2026 insights, IBEF 2026
analysis, and recent studies, here is an analysis of welfare economy in India:
Trends
in Welfare Expenditure and Economic Growth (2025-2026):-
- Rising Social Sector Spend: Social
sector spending as a percentage of total expenditure has risen from 23.3%
in FY21 to over 26% in FY25 (BE). By 2025-26, spending on social welfare
schemes by the top 18 states is expected to remain high at roughly 2% of
their GSDP, totaling approximately ₹6.4 lakh crore.
- Fiscal Concentration on Welfare: As
of 2026, social welfare expenses are being driven by significant direct
benefit transfers (DBT) to women, with nearly ₹1 lakh crore of the
increase aimed at election commitments in various states.
- Growth Impact: Empirical
evidence suggests that social sector spending, particularly on health and
education, has a positive impact on economic development. Studies indicate
that a ₹1 crore increase in education outlay is associated with a ~₹24
crore rise in GDP.
- Declining % of GDP: Despite
higher absolute spending, the share of social sector spending as a
percentage of total GDP fell to 2.5% in 2025-26, the lowest in over a
decade.
Inter-State
Analysis of Welfare Economy:-
- Regional Disparities: There
is significant variation in per capita social sector expenditure across
Indian states, with special category states often having higher per capita
expenditure compared to other states.
- High vs. Low Income States: High-income
states tend to have a higher capacity for social spending, leading to
better human development outcomes (higher literacy, lower IMR), which
further reinforces their economic growth, creating a positive feedback
loop.
- Efficiency Variations: The
impact of welfare expenditure is not just a function of the amount spent,
but also the efficiency of spending. Studies show that
states with better educational and health infrastructure management yield
higher returns on their investments.
- Rural-Urban Divide: Welfare
schemes like Jal Jeevan Mission and PMAY-G are designed to bridge the
rural-urban gap, but in 2025-26, many infrastructure-heavy social sector
schemes have faced low utilization and high opening balances at the state
level, particularly in infrastructure-intensive sectors.
Key
Welfare Sectors:-
- Health and Nutrition: Spending
on Medical and Public Health has a significant positive impact on economic
development, according to studies. Ayushman Bharat and related health
initiatives have reduced out-of-pocket expenses for citizens.
- Education and Skill Development: Education
receives the highest share of social sector spending (approx. 14% of
social spending). However, it remains below the recommended 6% of GDP,
limiting potential long-term productivity gains.
- Social Security & Welfare: This
sector has witnessed high growth in expenditure in recent years,
particularly in cash transfers, aimed at mitigating poverty and enhancing
income security.
Challenges
for Future Welfare Growth:-
- Revenue Deficit: Elevated
spending on social welfare, often funded through borrowed money, has
resulted in high revenue deficits in many states, limiting their
flexibility to undertake necessary capital outlays.
- Sustainability: The
high reliance on DBT for election commitments, coupled with slow growth in
revenue receipts (roughly 6.6% compared to higher spending growth), may
create fiscal sustainability issues.
- Infrastructure Gaps: Many
infrastructure-heavy social sector projects under the Union and State
budgets face slow implementation and underutilization.
Trends
in Welfare Expenditure (India 2024–25):-
- Social sector expenditure has grown
at a CAGR of ~15% (FY21–FY25)
- Total social sector spending reached
₹26.5 lakh crore in 2025 (states combined)
- Welfare spending by states remains
around ~2% of GSDP (₹6.4 lakh crore)
However:
- Social sector share declined to ~17%
of total Union expenditure in 2024–25
- Indicates a shift toward capital
expenditure and fiscal consolidation
Table:-1
State-wise Welfare Expenditure (Illustrative Table 2024–25)
|
State |
Welfare
Expenditure (% of GSDP) |
GSDP
Growth (%) |
Remarks |
|
Tamil
Nadu |
2.5–3.0% |
12–16% |
Strong
welfare + industrial growth |
|
Karnataka |
~2.0% |
8–9% |
High
social cost challenges |
|
Uttar
Pradesh |
~1.8% |
7–8% |
Focus
on infrastructure + welfare |
|
Bihar |
~2.2% |
8–9% |
High
social spending, low base |
|
Maharashtra |
~1.5–2.0% |
9–10% |
Balanced
fiscal strategy |
|
Kerala |
~3.0% |
6–7% |
High
welfare, moderate growth |
Observation:
- States like Tamil Nadu & Kerala
have higher welfare spending
- States like Maharashtra & Gujarat
emphasize capital expenditure
Comparative Analysis
Table:-2
Welfare vs Growth Pattern
|
Category |
States |
Outcome |
|
High
Welfare + High Growth |
Tamil
Nadu, Karnataka |
Ideal
model |
|
High
Welfare + Moderate Growth |
Kerala |
Social
success, economic constraint |
|
Moderate
Welfare + High Growth |
Maharashtra,
Gujarat |
Balanced
model |
|
High
Welfare + Low Base Growth |
Bihar,
UP |
Catch-up
growth |
Table: 3 Trends in Total Expenditure 2011-2025
(Rs. In Crore)
|
Total Expenditure |
|
|
|
|
|
States |
2011-16 |
2016-22 |
2022-25 |
CAGR (2011-25) |
|
High Income States |
30969 |
62404 |
117528 |
0.131 |
|
Gujarat |
30311 |
57522 |
117470 |
0.108341 |
|
Haryana |
12477 |
29139 |
63952 |
0.150413 |
|
Maharashtra |
55714 |
108577 |
212098 |
0.125059 |
|
Punjab |
18153 |
31130 |
64159 |
0.138537 |
|
Andhra Pradesh |
38190 |
85653 |
129962 |
0.131 |
|
Middle Income States |
23995 |
51010 |
108778 |
0.102343 |
|
Karnataka |
27360 |
61134 |
129538 |
0.144032 |
|
Kerala |
17401 |
35799 |
82614 |
0.142375 |
|
Tamil Nadu |
32283 |
74616 |
159214 |
0.145304 |
|
West Bengal |
32506 |
62284 |
126160 |
0.11936 |
|
Assam |
10424 |
21217 |
46365 |
0.149 |
|
Low Income States |
25846 |
56109 |
131717 |
0.152293 |
|
Bihar |
18554 |
41595 |
101494 |
0.146407 |
|
Madhya Pradesh |
22530 |
49376 |
114250 |
0.151484 |
|
Odisha |
13929 |
30156 |
68541 |
0.143636 |
|
Rajasthan |
23338 |
46735 |
126137 |
0.152389 |
|
Uttar Pradesh |
50879 |
112683 |
248162 |
0.14783 |
Source: Handbook of Statistics on State Government Finances (2025) & Various
Issues of State Finances: A Study of State Budgets, Reserve Bank of India
The above table-3 presents data of the state government's total
expenditures for the 15 main States over the period from 2011 to 2025, their
total spending, revenue, and capital components improved.
Among the States,
low-income States had an increasing GSDP ratio by 0.11 per cent
over the 17 year study period, with the GSDP
expenditure increased from Rs. 25,846 crore in 2011-16 to Rs. 56,109
crore in 2017-22 and Rs. 131,717 crore in 2013-17. In relation, in the middle
income states the expenditure was lower in 2011-16
with Rs. 23995 crore at Rs. 51010 crore during the years 2017-22 and Rs. 108778 crore in
2022-25 with a growth rate of 0.1 per cent. Total expenditure growth was also
lower by 0.13 per
cent in high-income states with a
share of GSDP of Rs. 30,969 crore in 2011-16 and Rs. 62,404 crores in 2017-2022
as well as Rs. 117,528 crores in 2022-2025.
It is clear that the total GSDP expenditure of the major states of the Indian Union
shows resistance to low-income states because
the more public investment is needed. In the low-income
Member States, Bihar spent 0.14
per cent of its growth rate at
higher levels than other
Members.
The other states in this category have spent relatively more on
GSDP, especially Madhya Pradesh and Uttar Pradesh. The share of total spending
in GSDP in middle and high-income states is comparatively smaller, as can be
seen in the above table. However, Rajasthan has reported the highest economic
growth of 0.152 per cent, led by Assam of 0.152 per cent, Madhya
Pradesh of 0.151 per cent, Uttar Pradesh
of 0.147 per cent and Bihar
of 0.146 per cent. In Andhra Pradesh, the lowest overall spending growth
rate is 0.102
per cent, Gujarat 0.108 per cent, and West Bengal 0.119 per cent. Thus, though
spending in the various states of India has differed considerably, both in
terms of quantity and growth rates, it can be concluded that, with the State's lower earnings, public
expenditure is higher.
Furthermore,
there is evidence that the low-income States spend more on all fields than the
high-income States. Andhra Pradesh, Gujarat, and West Bengal had a low growth
rate of 0.102 per cent, 0.108 per cent, and 0.119 per cent, respectively, among
high-income States. Only Haryana has a better growth rate in this group with
0.15 per cent.
The
share of public spending in medium-income states is moderate, but it is higher
than the national average. Tamil Nadu and Karnataka, among the middle-income
states, achieved an increasing expenditure trend of 0.145 per cent and 0.144 per
cent during the course of the study,
respectively. For low-income States where three States had a greater
share of development expenditure than all categories of States, the average share of development expenses
is higher. In the high- and middle-income states, however, two states have an
average share that is higher than all major states' development expenditure.
Key
Trends (2025–2026):-
- Rising Social Sector Expenditure
(SSE): The general government’s
(Centre + States) SSE has seen a consistent upward trend. As a percentage
of GDP, social services expenditure rose from 7.0% in 2023-24 to 7.9%
of GDP in FY 2025-26 (BE).
- CAGR of Spending: Between
FY21 and FY25 (BE), SSE grew at a Compound Annual Growth Rate (CAGR) of
15%.
- Shift in Focus: Welfare
is shifting towards Direct Benefit Transfers (DBT) and
infrastructure-heavy schemes (Jal Jeevan Mission, PMAY), aimed at both
short-term relief and long-term asset creation.
- Declining Inequality: The
Gini coefficient for rural areas declined to 0.237 (2023–24) and urban
areas to 0.284, indicating reduced consumption inequality.
Impact
on Economic Growth (Inter-State Analysis):-
- Long-Run Positive Correlation: Empirical
studies using ARDL models (1990–2020) confirm a long-term beneficial
impact of social spending—particularly education, medical/public health,
and social security—on Gross State Domestic Product (GSDP).
- Multiplier Effect: Investments
in education have a high multiplier, with studies estimating that a ₹1
crore increase in education outlay associates with a ₹24 crore rise in
GDP.
- Health as a Growth Driver: Ayushman
Bharat (PM-JAY) has reduced out-of-pocket expenses and improved financial
stability, with a 3.7–4.0 percentage-point decline in microfinance NPAs in
implementing districts.
- Inter-State Disparity: While
states like Uttar Pradesh have seen a ~1600% increase in social spending
(2004-05 to 2024-25), the proportion of budgets devoted to social sectors
has declined in some high-performer states like Karnataka.
- Low Utilization Issues: Many
large infrastructure-heavy social schemes (water, housing) reported poor
utilization, with states holding unspent balances in 2025-26.
Challenges
in the Welfare Economy (2025-26 Outlook):-
- Fiscal Pressure: Elevated
social welfare spending—particularly on DBT election commitments—has
increased the revenue deficit of states.
- Declining Capital Outlay: To
manage revenue deficits, some states are reducing capital outlay, which
may hurt long-term growth.
- High Interest Payments: With
interest payments taking up nearly 25% of the total Union government
expenditure, fiscal space for new welfare initiatives is narrowing.
Policy
Recommendations from Latest Research:-
- Shift to Quality Expenditure: Focus
should move from mere expenditure volume to the quality of
spending, particularly on healthcare and education, to ensure long-term
workforce productivity.
- Rationalize CSS: Successive
Finance Commissions recommend rationalizing Centrally Sponsored Schemes
(CSS) to reduce fragmentation and improve flexibility at the state level.
- Balance Welfare with Capex: States
must balance direct transfers with growth-enhancing investments in
infrastructure.
Welfare
expenditure in India has increasingly become a pivotal driver of economic
growth, shifting from a pure "safety net" approach to a "human
capital development" model. As of the 2025-26 Budget Estimates
(BE), general government social services expenditure (SSE) has shown a
consistent upward trend, reaching 7.9% of GDP, rising from 7% in
2023-24.
An
inter-state analysis reveals that while absolute welfare spending has surged
nationwide, significant disparities persist in efficiency, implementation, and
per capita allocation, which directly impact the uneven regional economic
growth.
Key
Trends in Welfare Economy (2025-2026)
- Rising Social Sector
Expenditure: The SSE of the Centre and State governments increased to
₹25.7 lakh crore in 2025-26 (BE), growing at a Compound Annual Growth Rate
(CAGR) of 15% between FY21 and FY25.
- Shift Towards Infrastructure-Heavy
Welfare: Recent trends indicate a shift in focus toward
infrastructure-linked social sector schemes, including the Jal Jeevan
Mission, Pradhan Mantri Awas Yojana (PMAY), and sanitation, which received
increased allocations in 2025-26.
- Declining Inequality: Social
sector initiatives have helped reduce inequality, with the Gini
coefficient for consumption expenditure declining in both rural (0.237)
and urban (0.284) areas as of 2023-24.
- Targeted Cash Transfers: To
enhance income and consumption, the government is prioritizing direct
income transfer schemes (e.g., PM-KISAN, 2026 Assembly election-related
cash transfers) to boost rural demand.
Inter-State
Analysis: Disparities and Performance
The
impact of social sector expenditure varies widely across Indian states, often
leading to a "path-dependent" developmental gap, where higher-income
states spend more, enhancing their growth further.
- High-Performing States (High
Expenditure/High Growth):
·
Kerala & Himachal
Pradesh: Historically, these states have topped per capita social sector
spending, focusing on education and healthcare, leading to high human
development indices.
·
Tamil Nadu, Maharashtra, &
Gujarat: These states have seen high economic growth alongside significant
social sector spending on human capital development.
- Low-Performing States (Low
Expenditure/Low Growth):
·
Bihar & Odisha: These states
often feature as laggards in social sector spending, characterized by lower per
capita spending and higher poverty rates compared to the national average,
though they have recently increased allocations.
·
North-Eastern States: These show
substantial heterogeneity, with some showing low per capita expenditure but
high efficiency in specific welfare initiatives, notes.
- The "High-Focus" States
Initiative:
·
To combat disparities, the National Rural
Health Mission (NRHM) and subsequent policies have pushed increased funding to
high-focus states like Assam, Bihar, Uttar Pradesh, and Rajasthan, aiming for
convergence in health outcomes.
Relationship
Between Welfare Expenditure and Growth
- Long-Run Positive
Impact: Empirical studies show that long-term investments in
education, health, and urban development have a positive effect on Gross
State Domestic Product (GSDP) and per capita income (PCI).
- "Crowding Out"
Effect: The Fiscal Responsibility and Budget Management (FRBM) Act,
2003, limits state borrowing (3–4% of GSDP). High revenue expenditure on
untargeted subsidies in some states can "crowd out" capital
expenditure on infrastructure, stalling long-term growth.
- Efficiency Issues: The Economic
Survey indicates that increased spending alone is not enough. The
efficiency of public spending (using inputs vs. obtaining outputs)
determines whether states move from a vicious to a virtuous cycle of
development.
Challenges
and Future Direction
- Implementation Gaps: Many states
face challenges with low utilization of funds, particularly in
infrastructure-heavy projects, leading to unspent balances (e.g., in
PMAY-U).
- Fiscal Space Constraints: With
high interest payments consuming a significant portion of revenues, states
face limited flexibility to expand welfare without compromising on capital
expenditure.
- Focus on Outcomes: Future policy
is shifting towards "last-mile service delivery," using
technology (e-Shram portal) to ensure benefits reach the unorganized
sector efficiently.
Conclusion:
-
Welfare
expenditure in India plays a dual role—it supports inclusive growth while
posing fiscal challenges. The inter-state analysis for 2024–25 reveals that:
- States with balanced welfare and
capital expenditure perform better economically
- Excessive welfare without productive
investment can slow growth
- Efficient governance and targeted
spending are more important than the volume of expenditure
Thus,
the optimal strategy is “productive welfare”, where social spending enhances
human capital and complements economic growth.
References: -
- Economic Survey 2024–25
- Union Budget 2024–25
- PRS State Finances Report
- CRISIL State Welfare Analysis
- PIB Government Data
- NHRD (2011), “National Human
Development Report 2001”, New Delhi, Government of India Planning
Commission.
- NHRD (2021), “National Human
Development Report 2011”, New Delhi, Government of India Planning
Commission.
- UNDP (2011) Human Development Report.
Oxford University Press, Delhi: UNDP.
- UNDP (2022) Human Development Report.
Oxford University Press, Delhi: UNDP.
- World Bank (2021), “World Development
Indicators”, World Bank.
