Cyclicality of public health expenditure in India: role of fiscal transfer and domestic revenue mobilization

Abstract

The motivation for the exploration of the cyclical behaviour in public health expenditure is derived from the level of heterogeneity in public health services associated with a low level of fiscal space among the Indian states. The fiscal space for health literature argues that the growth of public health expenditure is influenced by the conducive macroeconomic environment such as sustained economic growth and increases in overall government revenue. Examining the role of fiscal space components on the cyclical behaviour of public health expenditure has remained unnoticed in the earlier literature, especially in the Indian context. Therefore, the study attempts to examine the cyclical behaviour in public health expenditure with respect to both output and revenue fluctuation by controlling fiscal transfer and lagged fiscal deficit, using system generalized method of moment regression approach. The cyclicality of public health expenditure is examined for all 28 states, general category states, and special category states separately for the period 2000–2016. The empirical results show that public health expenditure is pro-cyclical in both boom and recession period in India. The results find that economic growth, tax revenue, and central transfers have a positive and significant effect on public health expenditure among the Indian states. It also confirms that health is a necessity in India. It finds that central fiscal transfers play a significant role in the special category states than the general category states in order to finance the health sector. This study suggests that more focus should be given for the enhancement of fiscal space for health sector through revenue mobilization and smooth flow of central fiscal transfers among the Indian states.