Shifting the Focus: Welfare Spending Moves to States

Examining how state-level welfare spending is influenced by centralized legislation and declining social sector allocations.

Gopi

•February 2, 2026•6 mins read

A Budget that reinforces stability over spectacle

Not Started

1. Absence of New Flagship Schemes: Signalling vs. Substantive Support

Recent Budgets have typically introduced flagship schemes to signal reform intent, especially in the social sector. Budget 2026–27 breaks this trend, offering no major new initiatives. This marks a shift from headline-grabbing announcements to incremental adjustments within existing schemes. While this stabilises policy, it raises concerns about whether persistent welfare gaps are being addressed.

The lack of new schemes is particularly significant given continuing vulnerabilities among children, women, the elderly, and persons with disabilities. Without fresh interventions, longstanding deficiencies in nutrition, social security, and basic services may persist. Moreover, absence of new schemes could reflect a policy choice prioritising fiscal consolidation over welfare expansion.

This subdued approach also occurs in a context of economic challenges such as low employment elasticity and weak purchasing power. Without renewed thrust in human capital development, supply-side reforms may not translate into inclusive growth. The Budget’s silence may therefore have substantive implications for social outcomes.

In governance terms, the absence of new schemes reduces administrative fragmentation but risks stagnation in welfare enhancement; without periodic recalibration, structural deficits in human development may persist and compound.

2. Low Allocations and Underspending in Core Welfare Schemes

Persistent underfunding continues across schemes supporting the most vulnerable. Programmes such as NSAP, SAMARTHYA, PALNA, PM POSHAN, and Saksham Anganwadi receive only marginal nominal increases of 0.2% to 5.2%, insufficient to offset inflation. This indicates a stagnation of real expenditures on nutrition, maternity support, and child development. Such trends may weaken gains in early childhood outcomes and social protection coverage.

Revised Estimates (RE) for 2025–26 fall below Budget Estimates (BE) across all these schemes, demonstrating chronic underspending. This gap suggests implementation challenges or deliberate fiscal compression. As allocations are not fully used, service delivery risks deterioration despite formally unchanged schemes.

Health and education—critical for human capital—likewise see modest BE increases of 6.4% and 8.3% for 2026–27. Yet RE for 2025–26 in both sectors fall short by 3.7% and 5.2%, showing resource tightening during the year. This constrains long-term quality improvements in public health systems and learning outcomes.

Underspending weakens welfare impact, as budgets lose credibility without execution; when annual RE consistently trail BE, frontline delivery suffers, jeopardising long-term human development.

Key Underspending Trends:

NSAP: +0.2% nominal allocation increase
Saksham Anganwadi: +5.2%
Health BE 2026–27: +6.4%
Education BE 2026–27: +8.3%
CSS allocations fall from ₹5.41 lakh crore (BE) → ₹4.20 lakh crore (RE)

3. Steep RE Cuts in Major Schemes and Sectors

Several social and infrastructure-linked sectors have seen significant reductions in Revised Estimates. Urban Development faces a sharp 41% decline, while Rural Development falls by 20%. Allocations to Social Welfare decrease by 17% and the Development of the North-East by 24%. These reductions indicate that resource utilisation is substantially lower than planned, affecting service delivery and regional development.

Flagship programmes launched with high visibility also exhibit steep RE cuts. For example, Jal Jeevan Mission drops dramatically from ₹67,000 crore (BE) to ₹17,000 crore (RE). Housing programmes show similar contractions: PMAY-Grameen falls from ₹54,832 crore (BE) to ₹32,500 crore (RE), and PMAY-Urban drops from ₹19,794 crore to ₹7,500 crore. Yet, allocations in Budget 2026–27 revert to earlier BE levels, raising concerns about the realism of allocations versus ability to spend.

This pattern risks a cycle where schemes are increasingly funded on paper but not fully realised on ground. Low RE may reflect bottlenecks in implementation capacity or a reprioritisation of expenditure away from welfare-heavy schemes.

When RE consistently fall short of BE, it signals planning-execution mismatch; such gaps reduce trust in fiscal commitments and weaken the developmental outcomes expected from major schemes.

Major RE Reductions:

Urban Development: –41%
Rural Development: –20%
North-East Development: –24%
Social Welfare: –17%
Jal Jeevan Mission: ₹67,000 cr → ₹17,000 cr

4. Prioritisation of Capex Amid Weak Employment and Demand Conditions

The Budget continues its strong emphasis on capital expenditure, allocating over ₹12 lakh crore to stimulate growth. This approach seeks to boost infrastructure creation and crowd in private investment. However, empirical clarity on capex’s ability to generate broad-based employment or significantly accelerate private investment is limited.

The domestic economy continues to face structural issues: low wage growth, insufficient employment generation—especially for educated youth—and restrained household purchasing power. In such conditions, supply-side interventions alone may not create a robust demand recovery. Welfare spending on health, nutrition, education, and social security becomes critical for improving human capital and expanding productive capacity.

Despite this, the Budget’s orientation remains heavily skewed toward physical capital, with inadequate acknowledgement of the economic role of social sector investments. Weak social spending risks constraining demographic dividend utilisation and perpetuating low productivity in the workforce.

Focusing solely on capex without parallel investment in human capital creates an imbalance; long-term growth becomes vulnerable as infrastructure cannot compensate for weak labour productivity and low human development.

Key Challenges:

Low employment elasticity
Stagnant structural transformation
Low wages and productivity
Weak household purchasing power

5. Shift of Welfare Burden to States Amid Declining Fiscal Support

Post-2015 reforms altered cost-sharing ratios in Centrally Sponsored Schemes (CSS), shifting greater financial responsibility to States. Budget 2026–27 consolidates this trend. With the repeal of MGNREGA and introduction of VB-G RAM G, States must now contribute heavily. The scheme’s ₹96,000 crore central allocation requires States to provide about ₹56,000 crore (60:40 ratio). This raises questions about States’ fiscal capacity to sustain welfare spending.

Despite increased responsibilities, States’ share in total tax revenue remains around 34%, lower than the 41% recommended by the Finance Commission. This results from the Centre’s rising use of cesses and surcharges that are not shared with States. Additionally, Finance Commission grants have marginally declined from ₹1,32,767 crore (2025–26 BE) to ₹1,29,397 crore (2026–27 BE).

This creates a structural imbalance: the Centre sets norms and designs schemes, but States shoulder the costs. States must also align their own priorities with central mandates, potentially crowding out region-specific needs. Ultimately, people’s access to welfare services may hinge increasingly on the fiscal health of their State.

Shifting welfare burdens to financially constrained States undermines equity across regions; without adequate fiscal transfers, welfare access becomes uneven, challenging cooperative federalism.

Key Intergovernmental Fiscal Trends:

States’ share of taxes: 34% vs. 41% recommended
Central cesses/surcharges rising
FC grants fall from ₹1.32 lakh cr → ₹1.29 lakh cr
VB-G RAM G: ₹96,000 cr (Centre) + ₹56,000 cr (States)

Conclusion

Budget 2026–27 maintains a stable framework but reveals critical gaps in social sector prioritisation. Low real allocations, persistent underspending, and growing fiscal burdens on States may constrain welfare delivery and human capital formation. For sustainable and inclusive growth, public finance must balance capital expenditure with robust, predictable investment in nutrition, health, education, and social protection. Strengthening cooperative federalism and ensuring credible execution will be essential for improving long-term development outcomes.

Quick Q&A

Everything you need to know

Low growth in allocations:
Budget 2026-27 shows a continuation of historically low allocations to social sector schemes. Programs targeted at vulnerable populations, such as children, pregnant women, the aged, single women, and the disabled, receive only marginal nominal increases. For instance, the National Social Assistance Programme (NSAP) increases by just 0.2% while Saksham Anganwadi increases by 5.2%. Moreover, revised estimates (RE) for 2025-26 across schemes indicate underspending, often lower than the budget estimates (BE).

Health and education:
Allocations for these critical sectors see only moderate increases of 6.4% and 8.3% respectively over the previous year’s BE. Even these gains are somewhat illusory as 2025-26 RE for both sectors were lower than BE, reflecting persistent underutilization of funds.

Centrally Sponsored Schemes (CSS):
Overall CSS allocations also reflect a mixed picture: from ₹5,41,850 crore in 2025-26 BE to ₹4,20,078 crore in RE, while the 2026-27 BE is at ₹5,48,798 crore. This shows both chronic underspending and the persistence of funding gaps in social welfare programs.

Economic rationale:
The Budget emphasises capital expenditure, with over ₹12 lakh crore allocated, to stimulate growth through infrastructure creation. Policymakers are relying on supply-side interventions to generate economic activity and crowd in private investment, reflecting a belief that these measures can indirectly benefit employment and income levels.

Challenges:
While infrastructure spending can boost economic activity, the neglect of direct social sector interventions risks perpetuating structural inequities. Vulnerable populations continue to face inadequate support in health, nutrition, education, and social security. The low priority given to social welfare in allocations suggests an underlying assumption that market-driven growth will eventually trickle down to improve welfare, which may not materialize without targeted interventions.

Implications:
The focus on capex without corresponding social investment can widen inequality and limit human capital development. It raises concerns about the government’s approach to inclusive growth, especially in a period marked by rising unemployment and low productivity in certain sectors.

Shift in cost-sharing norms:
Post-2015 reforms, the Centre has increased the cost-sharing burden on States for most Centrally Sponsored Schemes (CSS). Budget 2026-27 consolidates this trend, requiring States to contribute a larger share for schemes such as the VB-G RAM G, which has an allocation of over ₹96,000 crore, with States expected to provide around ₹56,000 crore (60:40 sharing ratio).

Implications for States:
With declining central support, States face a greater challenge in balancing their own budget priorities against the mandated expenditure on central schemes. The share of total tax revenue accruing to States remains around 34%, below the Finance Commission recommended 41%, further constraining their fiscal capacity.

Impact on welfare delivery:
The shift of financial responsibility to States raises questions about the uniformity and effectiveness of welfare service delivery. States with weaker fiscal positions may struggle to meet these obligations, potentially affecting the accessibility and quality of social services for citizens.

Administrative and implementation challenges:
Chronic underspending in social sector schemes arises from delays in fund release, inadequate planning, and bureaucratic bottlenecks. Even when allocations are made, utilization depends on the capacity of implementing agencies and timely execution at both central and state levels.

Mismatch between allocations and absorptive capacity:
Many schemes, such as Jal Jeevan Mission and PMAY, have seen large differences between budget estimates and revised estimates, reflecting systemic limitations in executing large-scale programs within the fiscal year.

Policy priorities:
The focus on capital expenditure and infrastructure projects over social sector schemes means that administrative attention, monitoring, and capacity-building resources are directed elsewhere. Without policy emphasis and rigorous oversight, allocations alone cannot ensure effective spending and desired social outcomes.

Impact on vulnerable populations:
Low allocations to programs targeting children, women, the elderly, and persons with disabilities threaten the social safety net and reduce access to essential services such as health, nutrition, and education. This can exacerbate existing inequalities and limit opportunities for human capital development.

Economic consequences:
Neglecting social spending may undermine aggregate demand, as low-income households have limited purchasing power. This may, in turn, reduce the effectiveness of capital expenditure-led growth strategies, as private investment and consumption are constrained.

Policy mismatch:
Budget 2026-27 prioritises supply-side measures and infrastructure over human development, signaling a disconnect between macroeconomic growth objectives and social equity goals. For inclusive growth, balanced investment in both economic expansion and social welfare is essential. Failure to do so risks leaving large sections of the population behind while macroeconomic aggregates appear healthy.

National Social Assistance Programme (NSAP): Provides pensions to the elderly, widows, and disabled, with only a 0.2% increase in allocations for 2026-27.

Saksham Anganwadi and PALNA: Programs for early childhood care and creches have received only marginal increases despite critical needs.

PM POSHAN: Mid-day meal scheme allocations remain low relative to requirements, affecting nutrition outcomes.

Urban and rural housing schemes: PMAY-Urban and PMAY-Grameen see allocations similar to prior years, despite lower revised spending in 2025-26, demonstrating chronic underutilisation.

These examples highlight persistent underfunding and execution gaps across social welfare programs.

Case study – VB-G RAM G:
Budget 2026-27 allocates over ₹96,000 crore for VB-G RAM G, but the scheme relies on States contributing around ₹56,000 crore. States with limited fiscal capacity may struggle to meet this contribution, affecting the rollout of benefits.

Implications for service delivery:
This shift can lead to unequal implementation, where wealthier states are able to fully deliver services, while poorer states fall short, affecting equitable access to welfare programs. The true measure of social sector commitment now depends on state budgets and fiscal capacity.

Policy lesson:
While decentralisation can empower States, the central government must ensure adequate fiscal transfers, monitoring, and technical support to prevent disparities in welfare delivery. Otherwise, citizens’ access to critical social services may be compromised, undermining national human development objectives.