Spending on social welfare schemes by the top 11 Indian states¹ - accounting for 75-80% of aggregate gross state domestic product (GSDP) - is expected to reach a decadal high of over 1.7% of GSDP, or ~Rs 4 lakh crore, according to the budget estimates (BE) of these states for fiscal 2024.

These spends have risen consistently in the past few years, from 1.2-1.3% of GSDP on average before fiscal 2018 to 1.6% in fiscal 2023, according to revised estimates (refer to annexure 1).

Going by the taxonomy of state government budgets, revenue expenditure for ‘social welfare’ refers primarily to disbursements which take place in the form of direct transfers, cash incentives and distribution of personal or household goods. However, these do not include spending on education, agriculture, public health and other key sectors, which are budgeted separately.

The revenue expenditure of states can be broadly divided into committed and non-committed.

Committed expenditure, which states have limited flexibility in managing - including salaries, pension, and interest payments, accounting for 45-47% of revenue expenditure - is estimated to log a compound annual growth rate (CAGR) of ~9% between fiscals 2018 and 2024.

Non-committed expenditure includes outlays on education (10-11% of revenue expenditure), power sector (6-7%), agriculture (6-7%), public health (4-5%), and social welfare schemes (13%).

Says Anuj Sethi, Senior Director, CRISIL Ratings, “Expenditure on social welfare schemes is estimated to clock ~16% CAGR between fiscals 2018 and 2024, much faster than ~11% growth in overall revenue expenditure. The higher growth on social welfare schemes is due to states prioritising financial assistance to certain target demographics in the form of direct transfers, pensions and cash incentives, and, in some instances, to honour election commitments.”

Among other components of non-committed revenue expenditure, public health spending is estimated to clock a robust 12-13% CAGR over the six-year period owing to increased allocations amid Covid-19 and continuing focus post-pandemic as well. Growth in allocation towards education and agriculture would be in single digit, at 7-9% (refer to annexure 2).

Thus, social welfare spending is expected to log the fastest growth in the period analysed, taking its share in overall revenue expenditure by state governments up to ~13% this fiscal from ~10% in fiscal 2018.

This increased allocation, however, has coincided with moderate growth in revenue receipts - 10-11% CAGR between fiscals 2018 and 2024 - resulting in continuing revenue deficits for the states.

Says Aditya Jhaver, Director, CRISIL Ratings, “The higher allocation towards welfare schemes has come during a period when capital expenditure (capex) is estimated to log a CAGR of ~11%, keeping it range-bound at ~2.0% of GSDP. Higher allocation for capex or towards education and health has a relatively higher impact on uplifting revenue and productivity for states in the near to medium term”.

While allocation towards social welfare schemes is seen essential considering India’s demography, a steady increase in the same without commensurate increase in revenues may have an impact the credit profiles of the states in the longer run.

¹ States analysed: Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh and Kerala