Welfare Spending Is Increasingly State-Funded While Programme Priorities Remain Nationally Shaped

India’s welfare system is developing an important fiscal contradiction.

The Union government continues to determine many of the country’s major welfare priorities, establish programme frameworks and set national standards. Yet a growing proportion of the expenditure required to deliver welfare is being borne by State governments.

That creates a question that is larger than the size of any individual scheme: when one level of government increasingly finances welfare while another continues to shape its broad direction, where does the real policy discretion lie?

The answer cannot be reduced to either centralisation or State dependence. The more important issue is that the government that carries the expenditure burden does not always have equivalent freedom to determine the priorities that expenditure serves.

THE FINANCING RELATIONSHIP HAS BECOME MORE COMPLEX

India’s fiscal structure has always contained an imbalance between revenue-raising capacity and expenditure responsibilities. The Union has greater taxation capacity, while States undertake a large share of spending on services such as health, education and social welfare.

Transfers between the two levels of government are intended to bridge this gap. But welfare programmes have added another layer because many national priorities are pursued through schemes in which States participate financially as well as administratively.

The change became particularly significant after the 14th Finance Commission. The States’ share of the divisible pool rose to 42%, subsequently becoming 41% after the reorganisation of Jammu and Kashmir. At the same time, the earlier arrangement for financing Centrally Sponsored Schemes was altered.

This produced an unusual fiscal combination. States received a larger share of tax devolution while also having to shoulder a greater share of the expenditure associated with programmes whose broad objectives were established at the national level.

The two developments are not contradictory, but they have different implications.

An untied transfer increases the resources over which a State can exercise its own priorities. A cost-sharing obligation does something different: it requires the State to commit part of its budget to an objective already incorporated into a national programme.

That distinction is central to understanding welfare federalism.

THE SCALE OF STATE-FINANCED WELFARE

The shift becomes clearer when welfare is examined across governments rather than programme by programme.

For selected welfare schemes and social sectors, combined Union and State allocations for 2025-26 were estimated at ₹24.20 lakh crore, equivalent to 6.77% of GDP. The Union contribution in that calculation was 1.89% of GDP, compared with 4.88% for the States.

The same pattern appears in individual sectors. States account for an estimated 75.2% of school-education expenditure. Health spending is also substantially State-funded. The 16th Finance Commission estimated State expenditure on unconditional transfers at ₹4.14 lakh crore in the 2025-26 Budget Estimates.

These numbers do not indicate that the Union has withdrawn from welfare. National schemes, transfers and programme design remain important parts of the system.

What they show instead is that the welfare system experienced by citizens is increasingly dependent on State-level expenditure capacity.

A programme may originate at the national level, carry common national rules and pursue a nationally defined objective, while a State government still has to find a significant part of the money needed to deliver it.

That expenditure then competes with salaries, pensions, subsidies, debt servicing, infrastructure and programmes designed by the State itself.

The question therefore moves beyond who administers a scheme.

It becomes a question of how much room remains in the State budget for choices that are genuinely its own.

COST-SHARING CHANGES THE NATURE OF THE CHOICE

Centrally Sponsored Schemes illustrate this problem particularly clearly.

The Union can identify a national objective — whether in drinking water, housing, nutrition, education or social protection — and finance part of the programme. The State contributes its share and participates in implementation.

This arrangement serves an important purpose. National governments can establish minimum standards and channel resources toward States with weaker fiscal capacity.

But the arrangement also affects State priorities.

When participation requires a State contribution, the State must decide whether to commit scarce resources to the national programme or use those resources elsewhere. The decision is formally available to the State, but its practical freedom depends on the fiscal room within its budget.

This is why the headline amount of a central allocation can sometimes be misleading.

A ₹100-crore Union allocation does not necessarily translate into ₹100 crore of additional spending unless the State is able and willing to provide whatever contribution the programme requires.

The financing formula therefore matters as much as the headline allocation. The cost-sharing structure determines how a nationally selected priority is translated into a State-level budget commitment.

THE DIVISIBLE POOL DOES NOT TELL THE WHOLE STORY

The other side of the equation is the money that States can use without being tied to a particular programme.

The Constitution provides for sharing Union tax revenues with States. The 16th Finance Commission retained the States’ vertical share at 41% of the divisible pool for 2026-31. But cesses and surcharges are excluded from that pool.

The Finance Commission has also noted that cesses and surcharges have reduced the proportion of gross tax revenue entering the divisible pool. During the 15th Finance Commission award period, the share of gross tax revenue entering the divisible pool was roughly 74% to 80% in the years for which actuals were available.

This distinction matters because the amount transferred and the freedom attached to that transfer are not the same thing.

Untied tax devolution gives a State greater discretion over expenditure. A tied transfer or Centrally Sponsored Scheme carries a defined purpose, conditions and, often, a requirement that the State provide matching funds.

Consequently, two States can receive substantial fiscal transfers while having very different amounts of money available for genuinely independent policy choices.

At the same time, the broader fiscal picture does not support the idea that States simply function as passive recipients of centrally controlled resources. Between 2015-16 and 2023-24, States’ share in total tax revenues averaged 57.5%, and the 16th Finance Commission noted that, after transfers, States spend more than two-thirds of the country’s non-debt revenue resources.

The relevant question is therefore more precise than whether States receive enough money from the Union.

It is how much of the resources available to them remains flexible after existing commitments and programme conditions have been accounted for.

STATE FISCAL PRESSURE HAS MULTIPLE SOURCES

It would also be misleading to attribute every increase in State welfare expenditure to the Centre.

States themselves have expanded their welfare commitments. Some have introduced or enlarged cash-transfer programmes. Others have increased subsidies, pensions or State-funded social programmes. Such decisions may arise from developmental priorities, demographic conditions, redistribution objectives or political commitments.

State budgets must also accommodate salaries, pensions, debt servicing, power-sector obligations and other established expenditures.

The fiscal pressure on States is therefore cumulative.

A State may have to finance its own welfare programmes, contribute to centrally designed schemes, maintain existing public services, service debt and undertake capital expenditure — all from the same budget.

The resulting constraint cannot be explained by any single programme.

FISCAL SPACE IS DIFFERENT FROM TOTAL SPENDING

Governments do not begin each budget cycle with all expenditure available for fresh allocation.

Salaries create continuing commitments. Pensions have to be serviced. Existing subsidies generate obligations. Debt requires repayment and interest payments. Welfare programmes already in operation create expectations among beneficiaries.

A State can therefore have a large budget while possessing comparatively little money that can be redirected freely.

This is the difference between total fiscal resources and effective fiscal space.

When a new centrally designed programme requires a State contribution, the State is not choosing between that programme and no expenditure at all. It is deciding whether that programme should receive resources that could otherwise support another priority.

That makes fiscal space a question of choice, not merely of money.

It is the portion of available public resources that remains genuinely available for policy decisions after existing obligations have been met.

WHY THE UNION CONTINUES TO SHAPE WELFARE

There is also a reason national governments continue to play a major role.

India’s States differ significantly in fiscal capacity and development outcomes. If essential welfare were left entirely to individual State budgets, access to important services could vary substantially.

National programmes can establish common objectives, redistribute fiscal resources and help States with weaker revenue bases provide services that they might otherwise struggle to finance.

Centrally Sponsored Schemes therefore have a legitimate federal purpose.

The issue is not whether the Union should establish national priorities.

The issue is whether the financing arrangement leaves sufficient room for States to accommodate those priorities alongside their own responsibilities.

The tension emerges when the scale of nationally defined objectives grows faster than the discretionary resources available to the governments responsible for implementation.

A BUDGET ALLOCATION IS NOT THE SAME AS ACTUAL SPENDING

There is another complication in understanding the financing relationship.

A Union budget allocation represents an intention to spend; it does not automatically guarantee that the entire amount will ultimately be spent.

The Jal Jeevan Mission, for example, received a ₹67,000-crore allocation in the 2025-26 Budget Estimate. The Union government’s outcome framework linked the programme to specific implementation targets while also noting that outcomes were dependent on the availability of funds and other constraints.

For States, this matters because national schemes often require administrative preparation and State-level financial commitments.

A State that assigns personnel, administrative capacity and its own resources to a programme is making a decision that can extend beyond a single budget year.

Changes in the availability or predictability of central funding can therefore affect State planning even if the programme itself continues to exist.

The important issue is consequently not just the size of an annual allocation but how predictable the resources supporting a national priority are over time.

THE QUESTION IS POLICY SPACE, NOT JUST TRANSFERS

Fiscal federalism is often reduced to a question of how much money moves from the Union to the States.

Welfare federalism requires another question:

Once the money reaches the State, how much discretion remains over its use?

A State may have considerable expenditure responsibilities and substantial transfers while still having limited room to redirect resources. It may participate in national schemes, fulfil matching requirements and maintain its own programmes simultaneously.

That does not make States powerless.

States continue to raise their own revenues, design programmes and make significant expenditure decisions.

Nor does the existence of national programmes automatically imply poorer welfare outcomes.

It means that fiscal responsibility and policy autonomy are separate dimensions of federalism.

THE FEDERAL BARGAIN IS BEING TESTED

The original fiscal logic of Indian federalism assumed that different levels of government would perform different functions, with transfers helping to align resources and responsibilities.

Welfare has complicated that relationship.

The Union increasingly establishes national objectives and programme frameworks. States remain major spending and implementation governments in social sectors. Their room for independent action, meanwhile, depends on their own revenues, tax devolution, the size of the divisible pool and the commitments attached to national schemes.

The resulting relationship is therefore not simply a movement of power from the Union to the States or from the States to the Union.

It is a situation in which the level that establishes a priority, the level that implements it and the level that ultimately finances it may not be the same.

That matters because citizens encounter welfare through institutions that are usually much closer to the State government: a school, a health facility, a pension system, a food subsidy or a locally administered service.

The national policy framework may establish the objective, but the State budget is often where that objective encounters local conditions.

THE DEEPER CHANGE IN WELFARE FEDERALISM

The emerging welfare structure therefore contains two simultaneous movements.

One is toward greater national shaping of welfare priorities through legislation, programme frameworks, standards and cost-sharing arrangements.

The other is toward greater State responsibility for the expenditure required to implement those priorities.

Neither development by itself determines whether welfare will improve or deteriorate.

But together they create a question that is increasingly important for fiscal federalism:

when the financial responsibility for welfare moves toward the States while the broad priorities continue to be shaped nationally, how much room remains for States to decide what their welfare systems should become?

That is the deeper issue behind the changing pattern of welfare expenditure.

India’s welfare state is not simply becoming more centralised or more decentralised. It is becoming more layered.

National governments define many of the objectives. State governments finance and implement much of the resulting expenditure. State governments also continue to build programmes of their own.

The future of this arrangement will therefore depend not only on how much India spends on welfare, but on whether the governments carrying the expenditure burden retain enough fiscal space to shape the welfare priorities that matter in their own jurisdictions.