Focus on social sector allocations

Prioritising social sector programmes is crucial for addressing persistent inequality, uncertain employment, and low wages in marginalised communities. To achieve this, governments should focus on allocating resources to programmes that bolster education, healthcare, sanitation, and other essential services. This approach will enable the poor to access basic necessities, promote productivity, and foster socio-economic growth. While capital investment has been the conventional approach to development, it’s essential to recognise the value of social sector expenditure in creating a more equitable society. By prioritising social welfare, governments can ensure that the benefits of growth reach all segments of the population, leading to more inclusive and sustainable development.

The prevailing development strategy among official/policy circles tends to favour capital investment and its promotion, aligned with the trickle down theory of development. The government provides various tax breaks, lower bank lending rates, and incentives for production, such as the production-linked incentive scheme, enabling the retention of profits. The criterion of ‘quality of expenditure’ has often been framed as an increase in capital expenditure as against the revenue expenditure. However, the outcome has been slow and declining growth in standard employment and skilling programmes, with a persistent mismatch between available and needed skills. Furthermore, this incentive framework has led to increasing returns for entrepreneurs and capital investors while offering proportionately low returns to labour. This phenomenon of ‘job-loss’ growth, combined with ‘jobless growth’ has only deepened inequality. Meanwhile, social sector requirements have been neglected, overshadowed by the simplistic notion that users must pay for the goods and services they consume—an idea that appeals to the middle and aspirational classes.

Conventional thinking classifies expenditure on education, health, housing, drinking water, and sanitation for the poor as revenue, not capital, expenditure. In contrast, spending on railways, railway platform and airport beautification, highways and tunnels (even in unstable mountainous regions), reservoirs for irrigation and power, and in pilgrim centres—a top-down approach to development—is considered capital expenditure. These projects generated income and taxes for the government, contractors, and entrepreneurs, often accompanied by mechanisation, outsourcing, and labour-saving practices. This systemic bias against labour absorption, coupled with laissez-faire policies, has resulted in low employment and stagnant rural demand. This low demand contributes to skewed sectoral growth and a lack of distributive justice.

While considering social sector allocations, it is important to acknowledge the growing emphasis on reducing fiscal deficit (the gap between government income and expenditure), which enables conventional capital expenditure. This focus is guided by the Fiscal Responsibility and Budget Management (FRBM) Act, which mandates a progressive reduction of this gap as a proportion of government expenditure. The fiscal deficit has reduced from 6.4% in 2022-2023 to 4.9% in 2024-2025 (budget estimate), with further reductions planned. Notably, the total Union budget expenditure as a proportion of gross domestic product (GDP) has declined from 22.9% in 2022-2023 to 21.3% in 2024-2025 (BE). And this reduction has been facilitated by deprioritising social sector expenditure since 2014. According to the Reserve Bank of India data, social services expenditure averaged 8.48% of total expenditure between 2004-2014 and declined to 5.34% during 2014-2024. Furthermore, the share of children’s welfare in this expenditure has fallen from 4.5% to 2.3% in the same periods, reflecting the neglect of the social sector.

Strengthening social sector institutions will enhance the wellbeing, productivity, and security of the poor. A well-functioning social sector can create quality employment opportunities in villages and small towns, leading to increased demand and higher tax revenues, which in turn will contribute to general economic development even in urban centres. Ultimately, strengthening village economies can alleviate the pressures on over-crowded cities and advance India’s hinterlands.

(The writer is a retired professor, Maharaja’s College, University of Mysore)