Factors Influencing State Financing of Health Care

Healthcare financing in India is a complex interplay between states and the central government. While health is primarily a state responsibility under India’s federal structure, states vary significantly in their ability to fund healthcare services. This creates disparities in healthcare access and quality across the country. Understanding the factors that influence a state’s ability to finance healthcare is essential for nursing professionals and healthcare administrators who work within this system daily.

How India’s federal structure affects healthcare financing 🔗

In India’s federal system, responsibility for governance, financing, and operation of the health system is divided between the central and state governments. States bear the major share of healthcare delivery, accounting for approximately 68.6% of government health expenditure, while the central government contributes about 31.4%. This division means each state’s fiscal health directly impacts the quality of healthcare it can provide to its citizens.

The challenge arises because states’ own revenue as a share of total government revenue amounts to only 38%, while their share in expenditure amounts to 58%. This vertical imbalance creates a fundamental gap between what states need to spend and what they can generate on their own. Healthcare, being a resource-intensive sector, suffers significantly from this structural constraint.

Revenue generation capacity of states 🔗

A state’s ability to finance healthcare depends heavily on its capacity to raise revenue through assigned taxes. States generate revenue primarily through state-level taxes including property taxes, professional taxes, excise duties, and their share of the Goods and Services Tax (GST).

However, not all states can generate revenue equally. A NITI Aayog report noted that low-income states with low revenue capacity spend significantly lower on social services like health. The state’s per capita income strongly influences its ability to spend on healthcare, leading to pronounced disparities in provision across the country.

The revenue capacity gap 🔗

States like Gujarat, Maharashtra, and Karnataka have stronger economic bases that allow them to generate more tax revenue. In contrast, states like Bihar, Jharkhand, and Odisha face constraints due to lower industrial activity and smaller tax bases. The inadequate revenue generation capacity of states compared to the Union level and the differences in capacity to generate revenue between states has resulted in inequalities in primary healthcare spending.

Research indicates that mobilizing tax revenue has a positive impact on healthcare allocation in the long run, while excessive borrowing negatively affects health financing. States that rely heavily on borrowing rather than building robust tax systems face fiscal stress that ultimately reduces their ability to prioritize healthcare spending.

Share in central taxes through the Finance Commission 🔗

The Finance Commission plays a critical role in determining how central taxes are distributed among states. Constituted every five years, it recommends the share of central taxes that should flow to states and the criteria for distribution.

The 15th Finance Commission recommended that states receive 41% of central taxes for the 2021-26 period. The distribution among states is determined by criteria including income distance (45% weightage), population based on 2011 census (15%), demographic performance (12.5%), area (15%), forest and ecology (10%), and tax effort (2.5%).

Income distance criterion 🔗

The income distance criterion is particularly important for healthcare equity. Income distance measures the gap between a state’s per capita income and that of the highest-income state. States with lower per capita income receive a higher share to promote equity. This mechanism attempts to compensate for the inherent disadvantage poorer states face in generating their own revenues.

Central government grants for health 🔗

Beyond the share in central taxes, states receive specific grants from the central government for healthcare. The National Health Mission, India’s flagship health program, operates on a shared funding model.

The National Health Mission is funded through a financing mechanism between the Union and State governments in a 60:40 ratio. For northeastern and hill states, this ratio is more favorable at 90:10, recognizing their unique challenges. These funds support programs covering maternal and child health, immunization, communicable and non-communicable diseases, and health system strengthening.

Finance Commission health grants 🔗

The 15th Finance Commission recommended grants of Rs 70,051 crore over five years (2021-2026) through local governments for strengthening primary healthcare. These grants support conversion of rural sub-centres and primary healthcare centres to Health and Wellness Centres, diagnostic infrastructure development, and urban primary healthcare facilities.

Additionally, the Commission recommended that states should increase spending on health to more than 8% of their budget by 2022. However, most states fall short of this target. Currently, only Meghalaya meets this benchmark, with the average state spending only about 5.6% of their budgets on health.

Disparities between richer and poorer states 🔗

The combination of varying revenue capacities and different economic bases creates significant healthcare disparities. Poorer states face a double disadvantage-they have greater healthcare needs due to higher disease burdens but fewer resources to address them.

Central transfers cannot entirely offset the fiscal imbalances across states, meaning states’ own revenue capacity must be enhanced. Historical factors, including different land revenue systems during British rule, have contributed to these persistent disparities. Research shows that regions with lower administrative capacity historically now face continuing challenges in healthcare delivery.

Healthcare infrastructure gaps 🔗

The disparities manifest in concrete ways. Rural areas continue to lack essential services, with a doctor-population ratio of 1:2,000 in many states, far from the WHO-recommended 1:1,000. Poorer states often have lower numbers of primary healthcare centres, community health centres, and specialist doctors per capita compared to wealthier states.

The limited impact of foreign aid 🔗

Foreign aid has historically contributed to India’s healthcare development, but its overall impact on state healthcare spending remains minimal. Foreign sources of revenue account for less than 1% of India’s total health expenditure.

India’s association with USAID began in 1951 and has evolved from food aid to infrastructure and capacity building. In 2024, USAID allocated approximately USD 79.3 million to India’s health initiatives. While these contributions support specific programs like TB control, HIV/AIDS prevention, and maternal health, they represent a small fraction of total healthcare spending.

Domestic savings drive investment 🔗

India’s national health investments are primarily funded through internal savings rather than external assistance. Foreign aid in general has been shown to reduce or crowd out domestic investment directly in South Asian countries, though it can promote investment indirectly through complementary factors like trade, human development, and foreign direct investment.

Aid only provides a fraction of resource requirements, and the rest must be borne at the domestic level. This reality underscores why strengthening domestic revenue generation and efficient utilization of central transfers remains more crucial than relying on foreign assistance for sustainable healthcare financing.

The case for central government intervention 🔗

Given these challenges, significant central government intervention becomes necessary in essential health programs and infrastructure development. India’s current primary healthcare spending per capita is USD 28, among the lowest in the WHO Southeast Asian region. Domestic government spending on primary healthcare is only about USD 11 per capita.

The Ayushman Bharat program represents one such intervention, aiming to provide comprehensive primary healthcare through Health and Wellness Centres across the country. Varying state capacity to bridge financing gaps poses significant challenges to achieving Universal Health Coverage goals. Insufficient funding, underutilization of allocated funds, and weak institutional mechanisms continue to undermine progress.

Moving forward 🔗

Experts suggest several approaches to improve state healthcare financing. These include better utilization of Finance Commission grants, exploring additional revenue sources such as health taxes on tobacco and sugar-sweetened beverages, improving public financial management at state level, and strengthening the capacity of local bodies to plan and implement health programs effectively.

The National Health Policy 2017 proposes increasing public health expenditure to 2.5% of GDP by 2025. Achieving this target requires coordinated efforts at both central and state levels, with particular attention to building revenue capacity in poorer states while ensuring efficient utilization of available resources.

What do you think? How can India balance the need for state autonomy in healthcare delivery with the reality that some states simply cannot generate enough revenue to meet their populations’ health needs? What role should the central government play in ensuring healthcare equity across states with vastly different fiscal capacities?

References

1. https://www.commonwealthfund.org/international-health-policy-center/countries/india
2. https://onlinelibrary.wiley.com/doi/10.1002/pa.2943
3. https://www.prsindia.org/theprsblog/healthcare-financing-who-paying
4. https://pmc.ncbi.nlm.nih.gov/articles/PMC11088227/
5. https://www.sciencedirect.com/science/article/abs/pii/S0038012118300041
6. https://prsindia.org/policy/report-summaries/report-15th-finance-commission-2021-26
7. https://prsindia.org/theprsblog/central-transfers-to-states-role-of-the-finance-commission?page=30&per-page=1
8. https://prsindia.org/budgets/parliament/demand-for-grants-2022-23-analysis-health-and-family-welfare
9. https://pmc.ncbi.nlm.nih.gov/articles/PMC9795522/
10. https://www.pmfias.com/healthcare-expenditure-in-india/
11. https://www.lshtm.ac.uk/media/59791
12. https://www.drishtiias.com/daily-updates/daily-news-analysis/foreign-aid-and-india
13. https://www.nature.com/articles/s41599-024-02709-y
14. https://www.buffalo.edu/globalhealthequity/student-work/student-projects/student-commentaries-survey-global-health-topics/domestic-investment-and-commitment-crucial-to-improve-healthcare-with-foreign-aid.html
15. https://csep.org/working-paper/opportunities-and-challenges-in-health-financing-in-india/
16. https://prsindia.org/budgets/parliament/demand-for-grants-2023-24-analysis-health-and-family-welfare