Mentor’s Comment

There is a clear shift in India’s welfare system. Budget 2026-27 shows that States are being made more responsible for welfare spending, while the Union government continues to set rules and standards. It raises concerns about reduced social-sector spending, limited fiscal capacity of States, and unequal governance. The issue is important for GS-II and GS-III as it links fiscal federalism, social justice, public finance, and welfare delivery.

Why in the News?

Budget 2026-27 reflects an unusual pattern: despite the absence of new flagship schemes, allocations for core welfare sectors remain low and, in several cases, under-spent. For the first time in recent years, there is a clear shift of welfare burden towards States, while the Centre retains control through legislation and standards. This contrast between decentralised spending responsibility and centralised policy authority marks a significant departure from earlier centrally driven welfare expansion.

Has social-sector spending lost priority in Budget 2026-27?

1. Unchanged Social Sector Share: Maintains the same proportion of total expenditure as previous years, despite rising welfare needs.
2. Health and Education Allocation: Registers a marginal increase of 4% in 2026-27 BE, which translates to only 2.3% growth in real terms after inflation.
3. Below-Minimum Requirement: Requires at least 7% annual growth to sustain existing service levels, indicating effective stagnation.
4. Under-Spending Trend: Budget Estimates (BE) consistently exceed Revised Estimates (RE), showing that even allocated funds remain unspent.

Which welfare schemes are witnessing the sharpest decline?

1. Urban Livelihoods (DAY-NULM): Allocation reduced by 41%, reflecting declining focus on urban poor employment.
2. Rural Development: Faces a 20% reduction, weakening livelihood and asset-creation programmes.
3. North-East Development: Allocation falls by 24%, affecting regional equity.
4. Social Welfare Programmes: Experience broad-based contraction across sectors.
5. Jal Jeevan Mission: Allocation drops from ₹67,000 crore in 2025-26 BE to ₹35,000 crore in 2026-27 BE.
6. PMAY-Urban: Reduced from ₹54,832 crore (RE) to ₹45,482 crore (BE).
7. PMAY-Rural: Declines from ₹79,794 crore to ₹54,832 crore.
8. Education Schemes (CSS): Fall from ₹5,41,850 crore in 2025-26 BE to ₹4,20,078 crore in 2026-27 BE.
9. Health Schemes: Reduced from ₹5,48,798 crore to ₹4,57,498 crore.

Is the emphasis on capital expenditure displacing welfare priorities?

1. Capex Bias: Prioritises infrastructure spending over social consumption.
2. Demand Constraint: Weak purchasing power limits the multiplier effect of capex.
3. Employment Impact: Fails to generate sufficient jobs, particularly for educated youth.
4. Private Investment Response: Remains muted, questioning capex-led growth assumptions.
5. Economic Slackness: Over ₹12 lakh crore remains unspent or underutilised in the economy.

How is the welfare burden shifting towards the States?

1. Budget Consolidation: Budget 2026-27 formalises the transfer of welfare responsibility to States.
2. Centre’s Role: Continues norm-setting through legislation, while reducing direct spending.
3. Increased State Share: States now bear a larger proportion of social-sector expenditure.
4. Revenue Constraint: States receive only around 34% of net tax revenues.
5. Finance Commission Signal: Recommends reduced cesses and surcharges, yet these continue.
6. Vertical Imbalance: Centre’s tax dominance contrasts with States’ spending obligations.

Do States have the fiscal capacity to absorb this shift?

1. Limited Revenue Autonomy: States remain dependent on Central transfers.
2. Declining Share: States’ share in Central taxes has fallen from ₹1,32,767 crore (2025-26 BE) to ₹1,29,397 crore (2026-27 BE).
3. Expenditure Pressure: Welfare responsibilities expand without commensurate fiscal space.
4. Governance Risk: Uneven capacity among States risks regional disparities in welfare outcomes.

What governance challenges persist in welfare delivery?

1. Demand-Side Weakness: Poor purchasing power suppresses welfare impact.
2. Supply-Side Gaps: Inadequate public provisioning persists.
3. Human Capital Stress: Education and health underinvestment affects long-term productivity.
4. Structural Unemployment: Skills mismatch remains unresolved.
5. Income Stagnation: Low wages constrain inclusive growth.

Conclusion

As the Centre withdraws from direct welfare spending while retaining legislative authority, States are left managing rising social obligations with constrained fiscal capacity. Without correcting this imbalance, welfare delivery risks becoming uneven, under-funded, and ineffective.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now