Why India should focus on health and education to achieve Viksit Bharat status

Prioritizing health and education expenditure is crucial to harness India's demographic dividend and sustain growth.

In brief

• In India’s journey towards a Viksit Bharat, government spending on education and health needs to rise to 6.5% and 4% of GDP by FY2048.
• Increasing the revenue-to-GDP ratio from 21% to 29% can fund these critical expenditures while ensuring fiscal sustainability.
• Equalization transfers are essential to support low-income states in boosting their education and healthcare spending. 

As India strives towards a Viksit Bharat (developed India), sustaining growth near its potential will depend on productively employing its large working-age population. This critically depends on higher investment in human capital, requiring significant augmentation of education and health expenditures, particularly by the government.

This prioritization in government expenditure covers the fourth dimension of India’s fiscal framework following the first three, namely: 

• Achieving the right size of government,
• Recasting fiscal responsibility framework, and
• Realigning transfers from the GoI to states

These were discussed in the November 2024 to January 2025 issues of the EY Economy Watch¹. This will ensure that India’s unfolding demographic dividend is leveraged well while maintaining macroeconomic stability and sustainability of fiscal deficit.

In this article, we provide our estimates of the needed allocation for general government health and education spending in India. We also consider how the implied increase in these two sectors can be effectively financed.

Why India needs to increase education expenditures relative to GDP 

Table 1 shows that India’s government education expenditure was 4.64% of GDP in 2021 (FY22 for India), the latest year for which cross-country data is available from World Bank. This needs to be raised to 4.8% to reach the average level of high-income countries. Some peer countries allocate an even higher share, with government education spending ranging from 5.05% of GDP in the Euro area to 6.55% in South Africa.

The required level of per capita government expenditure on education, with reference to a Viksit status, can be considered in relation to the relevant per capita GDP. For this purpose, we consider a cross-country framework in which per capita GDP (log terms) and per capita general government expenditure (PCGE) on education (current US$ terms) are plotted together (Chart 1). At a per capita GDP of US$1,994, India’s PCGE on education appears to be on the trendline. Here, the per capita GDP and PCGE levels are considered as the averages over 2017-19.

However, the level of PCGE on education, consistent with a developed country status defined as having a per capita GDP level of US$14,005² or higher, is estimated at US$600. This calls for increasing India’s PCGE on education by more than seven times from US$83.2 to US$600. 

In the context of education, we require to also factor in the share of the young population that needs to be educated and trained. For this purpose, we consider the share of population up to the age of 20 years. The higher the share of this young population, the higher is the requirement of expenditure on education. As per our estimates, by FY2048, that is, by the time India reaches a developed country status, the general government spending on education may require to be increased to 6.5% of GDP³ from the current level of 4.6%.

Why India needs to increase government health spending relative to GDP

Table 1 (Col 4) shows that in 2021 (FY22 for India), India’s government health spending was 1.1% of GDP.  This is 1.7% points lower than the corresponding average for middle-income countries and about 3.5% points below that of the average of BRICS countries (excluding India).

Chart 2 shows that given India’s per capita GDP level at US$1,994 (average over 2017-19), the trendline indicates India’s current PCGE on health at US$20 (average over 2017-19) is below the representative level of US$34.6. The corresponding levels relative to GDP are 1% and 1.7% respectively. As India reaches a developed economy status, its per capita government health spending may have to be increased to close to US$534, equivalent to about 3.8% of GDP. Thus, the actual government health spending may need to be initially uplifted from 1% of GDP to its current representative level of 1.7%, and further to 3.8% by the time India reaches the developed country status.

How equalization transfers can help cope with state-specific fiscal capacity differentials

While the overall government expenditure on education and health needs to be increased, there is also an inter-state dimension to the allocation of this incremental expenditure. 

In fact, many of the lower per capita income states with a relatively higher share of the young population may need to increase their per capita expenditures on education to a much larger extent than some of the more developed states. This re-distributive dimension should be attempted through an exercise of equalization transfers for health and education⁴. As shown by Chart 3, the states of Bihar, Uttar Pradesh, Jharkhand and Madhya Pradesh require special attention while simultaneously increasing the average per capita expenditure on education with respect to all states.