Cyclicality of Social Sector Expenditures: Evidence from Indian States

This paper attempts to study the cyclical behaviour of social sector spending including that on education and health for the 17 non-special category states covering the period 2000-01 to 2012-13. It finds that while overall social spending is acyclical in India at the state level, education spending is pro-cyclical, with the pro-cyclicality being more pronounced during upturns than it is during downturns. Further, the pro-cyclicality is more significant for bigger states (in terms of income) than it is for low income states. This possibly hints at the combined impact of political economy factors, pro-cyclical state revenues and the role of discretionary transfers. Fiscal deficit is observed to impact social sector expenditures negatively, providing support to the fiscal voracity effect hypothesis. In order to ensure that the low growth does not hamper human capital formation, states are expected to increase their social sector spending during difficult times. This would, however, require the building of adequate fiscal space during good times to enable them to spend more when required on human capital investments, which is the key to achieving long-term inclusive and sustainable development.