States’ spending on social welfare to hit decadal high of 1.7% of GSDP in FY24

Spending on social welfare schemes by top 11 Indian states, including Karnataka, Tamil Nadu and Maharashtra that account for 75-80 per cent of aggregate gross state domestic product (GSDP) of the country, is expected to hit Rs 4 lakh crore or 1.7 per cent of GSDP of these states in the fiscal year 2023-24, the highest in 10 years.

These states’ expenditure on social welfare schemes is estimated to clock a compound annual growth rate (CAGR) of 16 per cent between fiscal 2018 and 2024, much faster than 11 per cent growth in overall revenue expenditure.

As a result, the proportion of spending on social welfare by these states have risen significantly in recent years. It rose from 1.2-1.3 per cent of GSDP on average before fiscal 2018 to 1.6 per cent in fiscal 2023 and is estimated to touch 1.7 per cent in the current financial year, a research report by CRISIL Ratings showed.

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,” said Anuj Sethi, Senior Director, CRISIL Ratings.

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.

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

CRISIL report is based on budgetary data of 11 states – Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh and Kerala

Social welfare schemes accounted for nearly 13 per cent of states’ total revenue expenditure in 2022-23, up from 10 per cent in 2017-18. States spend around 45-47 per cent of total revenue expenditure on salaries, pension, and interest payments. These are categorised as committed expenditure where states have limited flexibility in managing.

The largest proportion of states’ non-committed goes on social welfare schemes at 13 per cent followed by education (10-11 per cent), power sector (6-7 per cent), agriculture (6-7 per cent) and public health (4-5 per cent).

The higher allocation towards welfare schemes has come during a period when capital expenditure (capex) is estimated to log a CAGR of 11 per cent, keeping it range-bound at 2 per cent of GSDP, said Aditya Jhaver, Director, CRISIL Ratings.

“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,” Jhaver added.